The economics of the Tiwai Point aluminium smelter continue to slide despite last week's announcement that it will be the largest single beneficiary of proposed national grid payment reforms, says Woodward Partners energy analyst John Kidd.
RioTinto-controlled New Zealand Aluminium Smelters was likely to try and plump up its approximately $21 million of savings on grid costs by applying for relief under the proposed "prudent discount policy" that could be applied to heavy industrial users pleading financial hardship.
"As it showed in 2013, Rio Tinto has a strong track record of doing exactly that," said Kidd, referring to NZAS's success in negotiating a lower power price with its primary supplier, Meridian Energy, ahead of the generator-retailer's partial privatisation.
NZAS operates New Zealand's only aluminium smelter, near Bluff in the South Island, and uses one-seventh of the country's electricity.
It must decide in July whether to pay a higher price for its electricity supply contract, starting in January 2017 and has been deferring capital expenditure as it weighs up whether to maintain the smelter at current full production, reduce operations or announce the smelter's total closure.
Despite improvements in the global price of aluminium, the New Zealand dollar had strengthened in the past month, largely negating the benefits of any price uplift, Kidd said in a note to clients issued on May 23.
"With aluminium market conditions remaining depressed, forward NZAS economics remain very marginal and with NZAS facing a material increase to the cost of its 172MW CFD (electricity contract) from 1 January 2017, we think the decisions NZAS faces over the next few months remain finely balanced," Kidd said.
Woodward Partners estimates the current value of the Japanese market premium for the high-grade metal produced at Tiwai Point to be around US$100 (NZ$148.04) per tonne, down from a recent peak of US$400 (NZ$592.15) a tonne in 2014.