Power costs, dollar hurting Comalco

By BRIAN FALLOW

Aluminium producer Comalco is feeling the squeeze of rising power prices and the high dollar.

"We remain committed to the investment in New Zealand but we are hurting," Comalco chief financial officer Phillip Strachan told a media briefing yesterday.

Electricity costs for the Tiwai Point smelter had risen 50 per cent over the past three years, he said, and now represented 55 per cent of its operating (cash) costs.

The company buys 90 per cent of its power from Meridian Energy under a long-term contract which expires in 2012, and the rest on the spot market. But the contract price is also linked to the spot market price and that has been climbing.

The company does not disclose what it pays, but Ministry of Economic Development data for the year to March 2002 (the most recent in the public domain) put the average cost for the basic non-ferrous metals sector that year at just over 5c a kilowatt hour. The volumes involved make it clear that that sector's consumption is almost entirely accounted for by the smelter.

In the nearly two years since then the average spot price has continued to rise.

Strachan said that whereas five years ago Tiwai's electricity costs were among the cheapest 25 per cent of smelters worldwide, they were now among the most expensive 25 per cent.

Aluminium prices have been rising in US dollar terms, but Strachan said that last year they remained pretty flat when translated into New Zealand dollars.

As most of the smelter's costs were incurred in New Zealand or Australian dollars, the continuing appreciation of both currencies against the US dollar was having a "significant" impact on its margins when looked at, as its ultimate owners Rio Tinto Group did, in US dollar terms.

In calendar 2002 Comalco's 79.4 per cent of the Tiwai smelter (Sumitomo Chemical owns the rest) earned it a profit of $162 million, after tax of $85 million.

That year the smelter, 85 per cent of whose output is exported directly, produced $1.1 billion-worth of metal. It is of very high purity by international standards and commands a premium.

Comalco has yet to file accounts for the 2003 year with the Companies Office, but Statistics New Zealand trade data for 2003 puts exports of aluminium and aluminium articles at $931 million, down 16.4 per cent on 2002.

The spike in spot electricity prices in March last year caused the company to stop buying on the spot market and cost it 14,000 tonnes, worth $33 million, in lost output as a result. It still managed to increase production to 334,000 tonnes, up 507 tonnes on 2002.

Comalco's strategy for the smelter had switched from lifting output to optimising the efficiency with which electricity is used, Strachan said.

It has no plans to invest more capital in expanding the smelter, which at 33 years old is "middle-aged".

He said the company accepted Energy Minister Pete Hodgson's comment that no one in the Ministry of Economic Development or Treasury was aware of any national cost-benefit study of the smelter.

Strachan expressed concern about a lack of new investment in baseload electricity generation.

He said the Resource Management Act was a potential constraint on new investment, the Kyoto Protocol would put an impost on non-renewable energy sources, and the declining exploration for new natural gas fields was another worry.

Tiwai Pt smelter

* Owned by Rio Tinto subsidiary Comalco (79%) and Sumitomo Chemical (21%).

* Managed by Comalco.

* Main electricity supply: Manapouri hydro system, owned by Meridian Energy.

* Employs about 1000 people.

* Produced 334,000 tonnes of aluminium last year, worth about $1 billion.

* Product mostly exported to Japan and Southeast Asia.