Jul 08 2020
The announced closure of Rio Tinto’s Tiwai Point aluminium smelter by August 2021 will likely reduce electricity prices for consumers, but also devastate the economy in the Southland region of New Zealand. The smelter’s financial viability has come under increasing scrutiny in recent months, following a sustained period of low aluminium prices and high energy costs.
The plant’s closure will likely lead to lower electricity prices for consumers. However, significant upgrades to the electricity transmission network would need to be completed before this benefit is passed on to households and businesses.
Factors affecting the Tiwai Point smelter
Aluminium smelting is an energy-intensive process. Extremely high temperatures are necessary to produce pure aluminium at the Tiwai Point smelter. The smelter accounts for close to 13% of New Zealand’s total power consumption each year. Lower aluminium prices and rising energy costs have presented a growing threat to the smelter over the past decade. The Central Government (Te Kawanatanga o Aotearoa) provided a $30 million support package to the smelter in August 2013 to guarantee the smelter remained operational until January 2017.
‘A decline in the price of aluminium caused by the COVID-19 global recession has been the final straw for Rio Tinto, ultimately sealing the fate of the smelter as unviable,’ said IBISWorld Senior Industry Analyst, James Caldwell.
Rio Tinto made a NZ$46 million underlying loss from the smelter in 2019.
Electricity price relief
The smelter’s closure would exert downward pressure on electricity prices, which have risen significantly over the past five years. Prices have risen due to a supply shortage from the Hydro-Electricity Generation industry, and reduced natural gas supply to operators in the Fossil Fuel Electricity Generation industry. In addition, inefficiencies in electricity market competition have also contributed to price growth over the past five years.
‘Energy market reforms are anticipated to reduce some of the upward pressure on electricity prices going forward, with the Tiwai Point smelter’s closure further reducing these pressures. Lower electricity prices would benefit all consumers and particularly other industries with high power usage requirements,’ said Mr Caldwell.
However, lower prices will likely take several years to be passed on to the wider New Zealand electricity market.
‘A lack of transmission infrastructure in the area means that power generated at the Manapōuri power station, which currently supplies the smelter, cannot yet enter the wider grid in any significant capacity,’ said Mr Caldwell.
Transpower, the largest player in the Electricity Transmission and Distribution industry, announced plans to integrate the Manapōuri station with the rest of the electricity network in December 2019. This work is anticipated to take up to three years.
Local economic effects
The smelter employs almost 1,000 staff and indirectly supports a further 1,600 jobs in the region. The Tiwai Point smelter is estimated to make up as much as 10% of the Southland region’s economy. Any closure would therefore have a significant effect locally, as many local industries would lose a major source of demand.
In any case, the smelter’s closure will have a significant effect on New Zealand’s economy, and present a major headache to the Ardern Government.
IBISWorld reports used to develop this release:
- Fossil Fuel Electricity Generation in New Zealand
- Electricity Transmission and Distribution in New Zealand
- Electricity Retailing in New Zealand
- Hydro-Electricity Generation in New Zealand
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647
Mobile: 0467 500 550