The Tiwai Point aluminium smelter's future is looking more secure after announcing it will reboot its mothballed fourth potline, having secured a more than four year electricity deal with key supplier Meridian Energy Ltd (NZX: MEL; ASX: MEZ).
However, it is a deal with several break clauses.
The Rio Tinto controlled New Zealand Aluminium Smelters (NZAS) has contracted for an extra 50 megawatt (MW) of power from Meridian to reopen the 22-year-old potline four, which was closed six years ago.
Tiwai uses about 13% of the country's electricity and the additional 50 MW, contracted to December 2022 is separate to Meridian's main electricity agreement to supply 572 MW annually to Tiwai, which is contracted to 2030.
Reopening potline four will boost production by 85 tonnes of aluminium per day, or 9% per day, and employ a further 32 staff; boosting plant numbers to about 860.
Tiwai has been unsuccessfully for sale alongside several other Rio Tinto-owned refineries around Australasia for several years.
Tiwai's more immediate future was under a cloud when electricity supply agreements were being renegotiated in mid-2015; further undermined by aluminium prices in the doldrums at the time.
The previous National-led government paid a $30 million sweetener to NZAS in 2013, as speculation mounted on its potential to close.
Outgoing NZAS chief executive Greta Stephens said yesterday aluminium prices had begun to recover and following “extensive negotiation” with Meridian, the additional supply agreement until December 2022 was reached.
“NZAS makes aluminium with one of the lowest carbon footprints of a smelter anywhere in the world. Aluminium is the fastest growing input in the automotive industry as manufacturers seek greater fuel efficiency,” Ms Stephens said.
The capital expenditure cost NZAS to reopen the potline was not disclosed, but will cost several million dollars.
Craigs Investment partners broker Peter McIntyre said the deal was the first to see industrial electricity demand growth in nine years and was positive for that sector, adding about 1.1% to annual electricity demand nationally.
McIntyre said the deal included that the Electricity Agreement between Meridian and NZAS had to be amended to include potline four, and that if no electricity units had been used by potline four by December, the transaction would be terminated.
Meridian chief executive Neal Barclay said the contract with NZAS was underwritten by Meridian and supported by contracts with Contact Energy, Genesis Energy and Mercury NZ.
McIntyre said following talks with industry management, it was understood each of the four companies would contribute 12.5 MW toward the total 50 MW, with the contract price around $55 per MW.
He also noted NZAS could amend the December 2022 termination date, by giving a minimum two months’ notice.
Forsyth Barr broker Damian Foster also believed the deal was positive for the energy market, the more than 1% increase in annual demand being supportive for the market.
He understood the contract price was better than the main contract, at a bit below the market price of $60 per MW. Meridian expects the first power to be delivered to Tiwai in the next two to three months.
“This is clearly a positive for the (electricity) market. It's not just tightening up the market a little further, but should quash any lingering talk that NZAS is about to close,” Foster said.
Potline four was closed in April 2012 when aluminium prices were at historic lows and there were looming power price increases, prompting its shutdown.
Ms Stephens said: “It's never good to have a cold potline at a smelter as it represents a capital investment that isn't contributing to our economy and our community.”
She predicted potline four would contribute an additional 0.2% to export earnings for the country.
Ms Stephens said potline four could take up to six months to become fully operational and would begin with an initial planning, equipment sourcing and recruitment phase.
“NZAS is well placed to offer metal that is increasingly sought after in a low carbon global economy,” she added.
*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.