Tiwai Point smelter's earnings plunge   30 May 2016

Monday 30 May 2016 03:18 PM

Tiwai Point smelter's earnings plunge in second half of financial year

By Pattrick Smellie

May 30 (BusinessDesk) - The Tiwai Point aluminium smelter made an underlying profit after tax of $54 million in the year to Dec. 31, just $2 million less than the previous year's profit, although only $4 million of that was made in the second half of the financial year.

Rio Tinto-controlled New Zealand Aluminium Smelters will decide by the end of July whether to sign a new electricity contract for 172 Megawatts of its total 572MW load at a new, higher price and warned in today's statement that the smelter is "facing even tougher conditions in 2016" than it did last year.

The international benchmark price of aluminium averaged US$1,661 a tonne in 2015, down 12 percent on 2014, and was quoted on the London Metals Exchange today at US$1,550 a tonne.

Still, the reduced metal price was "offset by higher premiums and a weaker New Zealand dollar" which contributed to a $34 million improvement in metal revenues. Total production of 335,291 tonnes was 2.1 percent higher than the previous year.

"Higher volumes, improved energy efficiency and reduced anode consumption has helped to offset the increased cost pressure in 2015 from weaker exchange rate and higher maintenance spend," the company said in notes to its statutory accounts.

If the smelter were to reduce its electricity demand to 400MW, industry-watchers expect it would close down one of its four aluminium production pot-lines.

While the smelter would be the single largest beneficiary among industrial electricity users of proposed changes to national grid costs, NZAS argues it still faces "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."

NZAS was to have decided before now whether to take up its 172MW tranche of electricity at a higher price than was negotiated in 2013, when the smelter played hardball with Meridian Energy for a cut to its power prices just ahead of Meridian's partial privatisation, securing a $30 million government one-off payment in the process. Meridian is the main supplier to the smelter, which uses around one-seventh of the electricity produced in New Zealand.

However, delays to the Electricity Authority's final recommendations on grid charging saw the decision pushed out to July. The electricity regulator had originally proposed grid reforms that could have saved NZAS as much as $60 million a year, but those were toned down.

South Island major industrial electricity users and generators, including Meridian, are the primary beneficiaries of the proposed changes, which would not take effect until 2019.

The smelter's 2015 result was achieved on total revenues from operations of $745.1 million, up from $710.8 million in 2014, which was further boosted by a $165.4 million unrealised gain on the fair value of derivatives, up from $23.9 million the year before. However, a net $119.1 million of derivatives gains is backed out for the calculation of underlying profit, which gives a truer picture of the smelter's commercial performance.

Spending on raw materials and consumables, at $577.7 million, employees at $66.6 million, and operations at $43.8 million, were all roughly in line with the previous year's earnings.

(BusinessDesk)

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