The Tiwai Pt aluminium smelter has received a stay of execution, with the news last week that Meridian Energy and the smelter’s majority owner, Rio Tinto, reached agreement on 13^th January to amend their existing agreement so that its termination date is now 31^st December 2024, and not August 2021.

By Greg Sise, 19^th Jan 2021

I’ve written about the future of Tiwai, and thought about the various possibilities so many times, I think I am suffering from “Tiwai fatigue”, a mysterious and poorly documented ailment that has similarities to chronic fatigue syndrome (CFS).  A symptom is ‘problems thinking, remembering or concentrating’, which I have experienced recently:  when was it that Tiwai was supposed to close?  When the subject of Tiwai comes up these days, my attention starts to wander.

Now it’s all very well for me to be flippant, but my livelihood doesn’t depend on the presence or otherwise of the smelter, and I really feel for the employees and the many contractors and suppliers that rely on Tiwai for theirs.  It must be a massive relief to have it around for another four years, giving time to plan for ‘what next’.  I say, well done to all parties in reaching an agreement to stay a bit longer.

But questions remain.  Will the smelter really close on 31^st December 2024?  How will it stage a close-down if it does close?  Or could it remain longer?

Everyone seems to have an opinion, but I feel compelled to offer my two cents worth on the subject.

If we rewind to the reason Rio Tinto stated for terminating the current agreement, back in July of last year, it was about electricity costs being too high, and aluminium prices too low and uncertain.  Aluminium prices have recovered substantially so that now they sit at around USD $2,000 per tonne, which is higher than at the start of 2020.  So that must have helped the negotiations. 

Electricity costs include energy and transmission, but the agreement with Meridian only covers the former:  negotiations are still in progress on transmission costs, and it is likely that these are being played off against the costs of tidying up the site at Tiwai Pt when the smelter does finally close.

No deal on transmission, must mean a pretty sweet deal on energy, to convince Rio Tinto to stay another four years without finalising transmission.  So sweet, in fact, that Meridian’s CEO Neal Barclay says the prices are not sustainable on Meridian’s side.  Various figures get mentioned by commentators, up to $100 million per annum savings, which would equate to a price $20/MWh lower than what Tiwai currently paid last year.  When Meridian and Rio signed a hedge agreement to cover pot-line four back in 2018, its price was disclosed as $55/MWh, under rules contained in the electricity Code.  Could the new price be $35/MWh?  We don’t know.

I doubt we will see the latest price disclosed, because the new agreement is an amendment to the current agreement, with a new termination data of 31 December 2024, but a total term of more than 10 years, which means the parties are exempt from the price disclosure rules.  We should, however, expect a new price disclosure on the support hedge agreement between Meridian and Contact Energy.  (Since writing this post a couple of days ago, what appears to be this contract, was disclosed and the price shown is $34.86/MWh).

Thinking ahead, the latest termination by Rio may ultimately work against the smelter.  Having now seriously contemplated life without Tiwai, and particularly if you believe the various quotes from Meridian, one can imagine that Meridian and Contact have now seriously looked at alternative loads when Tiwai eventually goes.  Here’s the scenario:  Rio comes back to Meridian in 2023 and asks for a new price beyond 2024.  But Meridian says well, we have 100 MW of new datacentre load which looks likely to turn into 200 MW, another 100 MW of new load as South Is industry moves away from coal for process heat, a similar amount in the North Is, and an agreement to set up a pilot green hydrogen plant in Southland which could turn into 100s of MW.  Yes, we can give you a price, but it will be $40/MWh higher than what you currently pay.

At that point, Rio has to decide if the new energy price, combined with a new transmission price, the aluminium price outlook, and the full cost of site remediation if it actually decides to close the plant, is worth it.

Maybe.  Maybe not.

I’m sure it’s not just me that has Tiwai fatigue.  However, while Meridian and Contact may also suffer from this malady, and they may be successful in replacing 5,000 GWh of smelter load by the end of 2024, we shouldn’t discount the attraction of keeping 5,000 GWh of load in the market beyond 2024.

5,000 GWh per annum is a lot of ‘juice’, as they say in the industry.

We’ll be watching and listening for signals either way, but right now, I don’t think we can discount the possibility of Tiwai staying well beyond 2024, if conditions are right.  After all, up until late 2019 almost everyone in this country was actually confident that it would be around until 2030, and beyond, and not much has changed in the intervening period, pandemic notwithstanding.

What Meridian and Contact want is to be better prepared for a ‘real exit’ when the possibility next rears its head.  Which means that ‘X’ remains a number likely to lie between 4 and 40.  Maybe likely closer to 4, but don’t discount it being a much bigger number.

In the meantime, I’m going to keep fit, eat healthily, keep my alcohol consumption down, and hopefully get rid of the dreaded Tiwai fatigue.  If you’re a fellow sufferer, I hope you do too.  Good luck!