Is the planned closure of the Tiwai Point aluminium smelter in 2024 likely to be revoked?

Rio Tinto initially announced in 2020 that it would close its Tiwai Point smelter with 330kt capacity by August 2021, which is located in Southland, New Zealand, due to high energy and transmission costs. However, a new agreement between Meridian Energy and Rio Tinto was reached between the parties in 2021 allowing the smelter to continue operating until the end of 2024. The smelter has significant sway in the power market since it is the single largest electricity user in the country. As the dominant party in the negotiations, Rio Tinto was provided a well below market price that is fixed and insulates the smelter from market fluctuations. The new agreement ensures the economic viability of the Tiwai Point smelter by the end of 2024.

Furthermore, the extension is particularly important as it not only safeguards 933 direct jobs and approximately 1,600 indirect jobs in the southern region but also allows the government, Rio Tinto and the local community to sit down to plan for the future of the smelter. The deal also means that the workforce will remain largely unchanged as the smelter will need to continue to produce at full capacity until its planned closure date of 2024.

As of February 2024, the Southland Business Chamber has been proactively addressing the possible extension of Tiwai Point smelter operations beyond the tentative closure date. Concurrently, the government and Southland stakeholders are crafting a strategic transition plan, exploring alternative industries and leveraging Manapouri Power Station's excess capacity. Initiatives like green hydrogen production and data centre development, these energy-intensive industries, are considered. The Chamber's establishment of the Southlands Engineering and Manufacturing Cluster, backed by five-year government funding, is central to this economic diversification strategy. However, that is not easy to develop alternative industries in such short-term period, the Chamber said they remained hopeful the Tiwai Point smelter would be a part of the region's economy and community for many years.

In February, Contact Energy's application for the new project of the 55-turbine wind farm at Slopedown in Southland was published by the Environmental Protection Authority. The new power plant construction project in the Southland improves the possibility of continued smelter operations beyond 2024. Contact Energy said the large wind farm was set to produce between 250-330MW, enough power for 110,000-150,000 houses. However, the new project is still in the consent process. It would only be built if the developers see the potential to earn a return on their investment in that location. While by generating more power locally, the region could become more self-sufficient and rely less on electricity from distant sources, improving energy efficiency and potentially reducing costs. But on the other hand, the construction of the new wind farm also much depends on the future of Tiwai Point smelter as it accounts for about 13% of New Zealand’s electricity consumption. If the smelter closes, there will be a significant surplus of electricity generation in Southland. Investors may not see the necessity to invest in new wind farms without other alternative energy-intensive industries. The continuation of the new power plant project is therefore dependent on the smelter continuing to operate. The power market situation in New Zealand could improve Rio Tinto’s negotiation power for the new electricity contract for 2024 beyond. Negotiating a mutually acceptable solution would be a win-win situation. That is, the smelter would continue to be operated and sell green aluminium produced by using renewable energy at a good price in the markets, while the Contact Energy could have a stable revenue from the new wind farms project. We also assume that Southland government would assist in facilitating this negotiation to stabilize employment. SMM believes it is highly likely for the smelter to reach a new power agreement before the closure.