NZ power market devalued $2bn on announcement of possible smelter closure

New Zealand Aluminium Smelter Ltd has announced the possibility of closure, which coincided with a drop in value for local energy suppliers.

A review of the aluminium smelter in Bluff, which led to the announcement of a possible closure, has coincided with a reduction in the value of local power companies of more than NZ$2bn. The smelter could face closure in the wake of falling aluminium prices, placing 900 jobs at risk.

New Zealand Aluminium Smelter Ltd (NZAS), a subsidiary of Rio Tinto, owns the smelter and is now conducting a strategic review of the Tiwai Point Aluminium Smelter (TPAS). TPAS showed earnings of $22mn for 2018, which was a decrease of the $53mn made in 2017.

TPAS has enjoyed low-cost electricity from the Manapouri hydro plant since 1971, being responsible for consuming 13% of the plant’s power supply, according to the Electric Authority. The closure could have a wider impact if a surplus of cheap electricity floods the local market.

Shares in Meridian Energy, which owns the hydro plant, dipped by more than 8% on the NXZ during the afternoon trading following the announcement. Contact, Mercury, Genesis and Trustpower also saw a decline in stock prices, with share values falling between 3% and 8%, wiping off $1bn from their combined values.

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Stew Hamilton, NZAS Chief Executive has said, "This is quite serious, the financial position of the smelter is serious.” He added, "It's the first time Rio Tinto has announced a strategic review for the site and that means they are actually going to formally go through the process of assessing all the options including curtailment and closure."

The options available to the smelter are operating with ‘business-as-usual’ which would require cheaper power, tax payer assistance for the smelter, which has been ruled out by Energy Minister Megan Woods or alternatively, the closure of TPAS.

The price of aluminium currently sits at $2742 a ton, a decrease from its peak of $3905 per ton in April last year. This represents a drop of almost 30%, which Stew Hamilton, NZAS Chief Executive, has said is responsible for the company’s financial situation. It should be noted that NZAS reported a $220mn profit for the year until December before the significant price drop in aluminium.

Hamilton said in a statement: “we are losing money and have been for the last 12 months, so the financial security of the smelter is difficult. We really need to be making something significant, so in the future we are viable for the long term."