THE future of the Tomago Aluminium smelter is again in the spotlight after its biggest shareholder, Rio Tinto, announced its intention to shut its Tiwai Point smelter in New Zealand in August next year because of electricity costs.
Rio Tinto has repeatedly warned of the damage that high power prices were doing to Tomago and its other Australian aluminium assets. Tomago's chief executive officer, Matt Howell, is also a regular critic of the power situation, but said yesterday that there was no direct threat to Tomago because of the New Zealand decision.
Mr Howell said, however, that Tomago's operating costs were receiving "a lot of attention" from its owners and that the cost of electricity "dwarfed" all of its other costs. He confirmed the Newcastle Herald's understanding that the smelter had cut production 10 times over the past summer in order to provide more power to the grid - seven times through its contract with power company AGL, and three times through the National Electricity Market, as revealed in a recent report by the Australian Energy Market Operator.
He said Australian energy costs were "far too high". Aluminium prices were also at 12-year lows, having fallen from $US2500 a tonne in April and May 2018 to just $US1600 recently. A lower dollar had helped cushion the price fall, but the aluminium price in domestic currency had still fallen from $3330 a tonne to $2320 presently.
Rio Tinto has 51.55 per cent of Tomago. The remaining shareholders are Gove Aluminium Finance Ltd with 36.05 per cent and Norwegian company Norsk Hydro with 12.4 per cent. Gove Aluminium is a 70/30 joint venture between CSR and AMP.
The aluminium industry is currently facing significant headwinds with historically low prices due to an over-supplied market. This means that many aluminium providers are reviewing their positionsRio Tinto Aluminium chief executive Alf Barrios, announcing the NZ smelter shutdown
Rio Tinto reported a 2019 loss of $US137 million ($198 million) from its subsidiary Pacific Aluminium, which owns the NZ smelter, Boyne Bay in Tasmania and Gladstone in Queensland as well as its share of Tomago. As a "tolling" plant, each of Tomago's shareholders accounts for its portion of production. CSR says its stake in Gove gives it an "effective 25.2 per cent" of Tomago. In its 2019 annual report published in May, CSR said its Tomago revenues were up by 11 per cent to $626.9 million , while earnings before income tax, or EBIT, were down 54 per cent to $36.6 million, "largely due" to the smelter's new electricity contract that took effect from November 2017 and "increased total electricity-related costs by $61 million".
At its annual meeting on June 24, CSR chairman John Gillam raised the Tomago situation when he said: "Despite Australia's natural competitive advantage with access to widespread electricity through fossil fuels and renewable resources, Tomago's energy costs are some of the highest in the world compared to global peers in a very competitive market. This puts Tomago at a disadvantage to competitors and vulnerable to low aluminium prices.
"Tomago must have a globally competitive energy price to be sustainable. To that end, we are working with our joint venture partners, energy providers and regulators to achieve a solution for Tomago and the wider Australian energy market."
In a statement to the stock exchange yesterday, Rio Tinto said the NZ smelter employed about 1000 people, making it a similar sized workforce to Tomago's.
Rio had announced a strategic review of the NZ smelter in October, and a corresponding review of its smelter in Iceland, which employs 500 people, was announced in February, again citing "uncompetitive" power prices as a trigger.
With the closure of Kurri Kurri aluminium smelter in 2012, and the shutting of the Newcastle steelworks in 1999 and the Pasminco zinc and lead smelter in 2001, Tomago Aluminium is the last of the big Hunter Region metal producers.
It opened in 1983 after the Wran Labor government built the Eraring power station expressly to power it and other Hunter Region industrial users. After years of successful operation, a range of 21st century factors have made it harder for Tomago, and for much of the global aluminium industry.
Changing social attitudes have led to criticism of the discounted prices that smelters had struck with their often government-owned electricity providers. Mr Howell said any commodity bought in bulk should attract "a prudent discount".
Big power users such as smelters are seen by climate activists as being associated with the big, coal-fired power stations that are needed to power them, if nuclear energy or reliable hydro-electric power is not available. Icelandic media reported that the Rio smelter had lost $US90 million in 2019, and that Rio had launched a lawsuit against the smelter's power provider, alleging it had been sold electricity "produced by coal and nuclear power, while the company purchased the energy on the grounds that it was produced using hydro power".
Tomago Aluminium is the biggest power user in NSW, and the price of its power contracts with energy company AGL have been the subject of political controversy, with environmentalists complaining about "subsidised" power and the smelter and its supporters saying that Australia risked losing its industrial base and skills if it did not find a way to bring down electricity prices.
For a variety of reasons, the NSW power grid has had increasing problems in recent years coping with peak summer demand, and the state and federal governments have begun referring to the Tomago smelter as the state's "biggest battery", a reference to arrangements in which Tomago takes a potline, or part of one, offline, to free up that electricity for other users.
Mr Howell said Tomago was paid by AEMO when the operator "curtailed" its power but not when AGL reduced supply. Which ever way the power was reduced, it ran the risk of a "catastrophic freeze" of a potline.
"It would be too expensive to ever bring a frozen potline back on line, it would be gone forever," Mr Howell said. "And the 300 jobs that go with it."
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