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Tiwai Point smelter profit more than halves in 2016
Weak global aluminium prices saw underlying profit more than halve to $24 million in 2016 at Pacific Aluminium's Tiwai Point aluminium smelter.
Only a consistently weaker New Zealand dollar cushioned the smelter, which made a $54 million underlying profit in the previous year when prices had already tumbled to historic lows, from "aluminium prices which languished at around US$1,605 per tonne," New Zealand Aluminium Smelters chief executive Gretta Stephens said in a statement.
Underlying profit includes the impact of non-cash movements in the value of the smelter's contracts for electricity supply with Meridian Energy. On a statutory net profit after tax basis, the profit fall was more dramatic, falling from $173 million in 2015 to $67 million in 2016.
The result was achieved on total revenues of $684 million, compared with $745 million the year before, despite producing more metal in 2016 than 2015.
Aluminium prices have improved somewhat this year, trading at around US$1,950 a tonne at present. The company declined to give an outlook for 2017 earnings.
An energy sector analyst for Woodward Partners, John Kidd, last month described the smelter as facing a "deeply favourable cocktail" of factors this year, including improved global prices, higher premiums for the Tiwai Point smelter's top quality output, low input costs because alumina costs had not risen at that time to reflect higher metal prices, and "flat" energy costs.
However, Stephens said the smelter's "modest profit" was "swamped by transmission costs", reprising the company's long-held complaint that the smelter, which uses around one-seventh of all the electricity produced in New Zealand, should not be contributing as much as it does to parts of the national grid that it does not use.
The smelter had shaved its heating and lighting bill during the year "but we can't control transmission costs which, at $67 million for the 2016 pricing year, were more than two and a half times the amount of our underlying profit".
The smelter faced "one of the highest power and transmission prices of any smelter in the world outside China", making it "harder to compete in the highly competitive aluminium market". Transmission costs would rise a further $5 million in 2017, further eroding profitability despite the smelter operating at record levels of output in the last two years, Stephens said.
The transmission pricing issue is sensitive because of the failure by the industry regulator, the Electricity Authority, to implement significant cuts initially proposed for lower South Island grid users' charges as part of its Transmission Pricing Methodology review. The cuts had already been wound back when the authority was forced back to the drawing board after discovering some of its analytical work had been botched.
The Tiwai Point smelter is one of five aging Australasian smelters that its majority shareholder, Rio Tinto, earlier this decade placed into a separate vehicle, Pacific Aluminium, with a view to their sale. Buyers did not emerge.
While it has been customary for Rio and the smelter's past owners to protest at the price of New Zealand electricity, disruption and power price spikes in the Australian electricity industry have been Pacific Aluminium's greater problem in recent months, with 100 workers laid off at the Boyne Island smelter in Queensland earlier and spot price spikes this month that saw Rio calling for state government intervention.