A startling slump in the price of aluminium on global markets is more than offsetting a 20 per cent fall in the New Zealand dollar against the greenback, pushing the Tiwai Pt aluminium smelter into negative cashflow, according to estimates by Wellington investment firm Woodward Partners.
Woodward senior analyst John Kidd has begun producing a monthly "Tiwai-o-meter" to track the smelter's commercial viability as power companies and major energy users assess the outlook for electricity supply towards the end of the decade, following the announced removal of more than 1000 megawatts of coal and gas-fired generation between now and 2018.
Tiwai Pt, near Bluff, uses one-seventh of all electricity generated in New Zealand, has forced reductions in the price it pays for electricity in response to low global metal prices, and continues to operate on electricity contracts that could be abandoned as early as January 2018.
The smelter is for sale as part of the Pacific Aluminium suite of aluminium assets controlled by Anglo-Australian mining giant Rio Tinto.
"On an operating free cashflow basis ... we map Tiwai as yielding an annualised free cashflow of negative $10 million on a spot basis," Kidd wrote in a note on September 17 and released to BusinessDesk.
"August marks the fourth consecutive month that Tiwai has, on our numbers, been free cashflow negative on a spot basis."
Taking into account its backward and forward-looking projections, Woodward believes the smelter is likely only to break even this calendar year.
"The deterioration in aluminium market conditions since the second quarter of 2015 has been startling," the note says, with London Metal Exchange prices for aluminium falling to a six-year low of US$1496 a tonne, and forward projections suggesting recovery more slowly and to lower levels than previous assumed, reaching US$1800 a tonne in 2018.
"On this trajectory, we expect viability at Tiwai will remain under significant pressure as the next round of stop/go decision-making approaches in 2016/17."
New Zealand Aluminium Smelters can decide to close the 44-year-old plant with 12 months' notice from January 1, 2017, with two less significant decision points due through 2016.
"With the first of these three decision points only just over six months from now, the question of viability of NZAS's smelting operation at Tiwai Pt will remain a major overhang on the domestic energy sector for the foreseeable future," says the Woodward note. Also key to the smelter's future would be the outcome of Electricity Authority recommendations that could cut annual charges for access to the national grid from around $63 million to $12 million or less.
"In our view, such is the magnitude of the impact of transmission pricing methodology outcomes to NZAS's ongoing viability that progress achieved towards implementing changes may turn out to be critical to NZAS's stop/go decision-making leading into 2017."
The EA process on transmission pricing is expected to be resolved next year, although its proposals have excited a range of criticisms from across the electricity sector, as well as political opposition because they would raise the price of power in under-performing regions such as the West Coast, Northland and Auckland.
The future of Tiwai Pt was "fundamental to forward medium-term balances" of electricity supply, said Kidd.
"If Tiwai isn't in the market then everything changes. Tiwai's demand profile is not only the largest, but also among the flattest in the market," he said.
"If Tiwai isn't there the entire system exhales."