The head of the Tiwai Pt smelter says the operation needs "tens of millions" of dollars a year in relief to be viable and warned the Government not to wait if it is to consider intervening.
Stew Hamilton, the chief executive of New Zealand Aluminium Smelters, said that while the smelter had lobbied for relief in the past, Rio Tinto's announcement of a strategic review meant the situation was more serious than in the past.
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On Wednesday Rio Tinto announced the strategic review of its New Zealand business, a smelter in Southland which has been operating since 1971.
Options included maintaining operations, closing part of the smelter or full closure, Hamilton said.
The episode is prompted comparisons to threats which led Meridian to cut electricity prices and the Government to write a one-off $30 million cheque.
But Hamilton said the strategic review was different.
"Rio Tinto are a large global mining company and they don't tend to initiate strategic reviews very often, and when they do it's a fairly detailed process that triggers a lot of internal investment reviews, and so it is more serious this time and different to previous times," Hamilton said.
"Part of the process is to go about how we could get a reset in our power and energy costs."
According to Hamilton the Electricity Authority's (EA) review of transmission pricing - which ultimately collapsed - had proposed that it should pay around $20m a year in annual transmission costs.
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Instead it was paying $60m-$70m a year, which saw it pay a hefty share of upgrade in the North Island for which it saw no real benefit.
While the interim recommendations of the current review of transmission pricing would cut Tiwai Pt's costs by around $11m a year, the savings would only accrue from 2024.
Hamilton said this was "too little, and it's certainly too late" for the smelter to be viable, suggesting a major cut was needed to make the smelter viable in the long term.
"It's going to take tens of millions of dollars [a year]," Hamilton.
While the Government has specifically ruled out another taxpayer payment, Hamilton said the aim of the review was not to extract a payment, but a change in input costs to ensure it was viable in the longer term.
"We don't want a subsidy, a one-off payment. The $30m payment [in 2013], we pay that back twice a year in transmission payments and electricity prices mean we're probably paying that back every month," Hamilton said.
"We're paying $450m a year into New Zealand, of which a lot of that is electricity costs. That would need to have a significant reduction for the smelter to be set up so its going to be commercially sustainable."
As well as ruling out a direct payment, Energy Minister Megan Woods has indicated that the Government will allow EA's review to play out. Final decisions on the EA review are not expected until some time in the first half of 2020.
This does not rule out the possibility that after the review is complete, there could be intervention.
But Hamilton warned if the Government waited until 2020 to consider intervening in the process "that'll be too late. The strategic review will take place over the next three to six months and the decision will be made over that time."
An indication that it would consider giving direction to the EA to give relief may be considered by Rio Tinto, but the indication would need to be clear.
"I guess through the strategic review, if [the Government] indicates that there's something that could be potential that would be considered, but it would have to be pretty strongly indicated through the strategic review, because the decision will be made through that process."
In a statement, Woods said that when she met NZAS recently, the company had raised the issue of transmission costs. She had noted that the costs faced by the smelter would fall by around $20m in the coming years.
"I told NZAS the Government will let the Transmission Pricing Methodology review process play out," Woods said.
"This is an independent process that has been almost a decade in the making and is currently at the cross submission phase following widespread public consultation. The EA expects to be in a position to make final decisions on its methodology next year."
Rio Tinto 'modus operandi'
News of the review has prompted a number of responses with Meridian Energy, the principal supplier of electricity to Tiwai indicating that Rio Tinto faced a number of "headwinds" including the cost of cleaning up the site and fallout from its claims to be wanting to reduce its emissions profile.
Energy analyst John Kidd of Enerlytica wrote in a note to clients that the announcement was an "opportunistic, disruptive, modus operandi Rio [Tinto] power play" which appeared designed to cause maximum alarm to extract financial or economic concessions.
"NZAS's move has been carefully timed to apply maximum leverage to exploit a cocktail of processes and uncertainties," Kidd wrote, including questions over how much new generation needed to be built, the EA review, uncertainties in the gas sector "and election year".