Tiwai Point smelter nearing break-even amid global aluminium glut

The future of Tiwai Point aluminium smelter looks healthier. Amid falling alumina prices, global aluminium glut, and a weakening New Zealand dollar, this phenomenon indeed stands out as a milestone for the smelter owner, observe researchers in a recently published assessment note on the prospects for the New Zealand electricity sector this year.

"Tiwai remains an uncertainty for the industry," the note says, with options to cancel existing electricity contracts triggering in April and January next year ahead of possible closure in early 2018 or a staged reduction in output. "Surprisingly perhaps, we think the risk of an early 2018 exit remains low despite bombed out aluminium prices," the note added.

The smelter uses 13% of all the electricity generated in New Zealand. Its closure would create potential for over-supply and the early closure of more fossil fuel-fired power stations than has already been announced.

Referring to the comments made by Rio's head of aluminium, Alf Barrios, in last December that he would not support running smelters that were running at a loss, the researchers say in the assessment note that they believe there is "wiggle room from low alumina prices and a softer New Zealand dollar," and the potential to defer capital expenditure from usual levels of about $US90 per tonne to around $US60 per tonne.

"Our figures suggest it's possible Tiwai is operating at a cash neutral margin. Significant New Zealand dollar appreciation and even lower aluminium prices will need to transpire before we become more concerned about exit risk. At present, both seem unlikely," they added.

Credit Suisse economists have lowered their forecast for premium aluminium prices to an average $US1660 a tonne this year, rising gradually to $US1970 per tonne by 2019, against an assumed cost of production per tonne at Tiwai of $US1650 per tonne, including $US60 per tonne of annual capex.

While the world's most efficient smelters are believed to be producing metal at about $US1450 per tonne, "more than half the world's smelters output is thought to be losing cash at current prices."

While positive cashflows at Tiwai Point don't necessarily indicate toward a profitable operation, other factors are also in play in its owners' considerations, including the $225 million cost of returning the smelter site to its original condition if it closed and the potential for cuts to its electricity transmission charges of up to $60 million, based on controversial proposals from the Electricity Authority which may conclude early this year.

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