It’s not the global demand (or lack of it) that is behind Rio Tinto’s decision to ramp up the production capacity at its Tiawi Point aluminium smelter, it’s the power the plant needs to use.

Last week, Rio Tinto confirmed that the Southland smelter, in which it has a 79% stake and is operated by New Zealand Aluminium Smelters (NZAS), would be restored to 89% capacity after months of reduced production due to a transmission failure.

But with global demand for the pure aluminium that the smelter produces showing little signs of picking up after months of low prices, the capacity increase has little to do with any optimism the mining giant may have for a return to stronger prices.

Instead, capacity is being increased only to the point where it will cover the price of the power it must use under the agreement NZAS has with Merdian energy.

Under the deal, which lasts until 2012, the Tiwai Point project must pay for 544MW of the 850MW produced by the Lake Manapouri power station every year, even if that power is not used.

After 2012, a second deal, which increases the minimum used to 572MW, is due to run through to 2030.

NZAS estimate that it lost about $10 million in the difference between the power it was required to pay for and the actual amount used in the first two months of the reduced capacity.

Rio Tinto spokeswoman Diane Collier tells NBR that the capacity is only being restored to the exact point where that power will be used.

“We have certain contractual take or pay obligations for electricity upon restoration, and we have to factor those into our assessment of the best capacity level to which to restore production. The existing fixed costs for the smelter are also relevant as are the current economic conditions, and we are currently undertaking analysis on these elements.”

The Southland smelter is now progressively re-powering more than a quarter of its capacity, which was lost after a major transformer failed in November.

Ms Collier says the capacity restart was only taking place “slowly and surely”, to ensure transformer problems are not repeated.

Industry speculation that the smelter may change its production mix to cope with reduced global demand for the high purity aluminium it produced could not be further from the truth, according to Ms Collier.

“That was pure rumour and we are committed to continuing with the high quality aluminium that the plant is known for.”