North and South Article on Rio Tinto

Smelter

The Power of One

As the country emerges from another winter with threatened power blackouts, Mike White investigates why one factory, the Tiwai Pt aluminium smelter, is allowed to swallow nearly 15 per cent of the country’s precious electricity and asks whether it’s time they shut up.


He wore a serious suit and a whiff of hair product. She wore black, and the rimless glasses of generations of librarians.
Paul Hemburrow and Xiaoling Liu had come to Parliament’s finance select committee with dark dress and a grave message from their employer, aluminium colossus Rio Tinto Alcan (formerly Comalco): Carry on with your climate change legislation and we’ll have to close our aluminium smelter at Tiwai Point near Bluff.
Ms Liu, Rio Tinto Alcan’s Asia Pacific president of primary metal had jetted in, in a show of strength from the world’s biggest aluminium company.
But the most telling line was left to Paul Hemburrow, the 38-year-old Australian who heads the company in New Zealand and is the smelter’s general manager.
“What we are saying is that if the bill proceeds as it’s currently written, it is likely to put us on the pathway to closure.”
In the velvet-gloved world of political lobbying and PR, this bore all the subtlety of cudgelling MPs with a fencepost.
Hemburrow’s argument was that being asked to share a portion of the country’s greenhouse gas responsibility was a financial bridge too far, leaving it so cash strapped, so marginal, it would have to shift elsewhere.
What may not have been understood by many, as Rio Tinto Alcan offered this scenario of gloom and grief back in May, was the company’s obligations would be heavily subsidised, only having to pay 10 per cent of its 2005 greenhouse gas emissions until 2019 - it wouldn’t have to pay its full dues until 2030. Moreover there would be two reviews of the scheme to ensure it wasn’t an unfair imposition.
Nor would many have been aware that Rio Tinto Alcan New Zealand, which owns nearly 80 per cent of New Zealand Aluminium Smelters (the remainder owned by Sumitomo Chemical Company of Japan), is hardly on the verge of collapse – with aluminium prices soaring to over US$3000 a tonne (having nearly doubled since 2004), last year it had revenue of $1.1 billion and profits of $204 million. Its parent company, Rio Tinto, is scarcely an international sprat either, last year having paid US$38.1 billion for Alcan to dominate world aluminium production. It’s the world’s third largest minerals company, has operations in 61 countries, 25 other smelters and its 2007 profit was US$7.4 billion.
Fewer still would have bothered to do the sums, as economist Rod Oram did, that suggest even with an extremely high price of carbon the eventual cost to the company would actually be minimal – around 3 per cent.
And as people shivered at the thought of Southland’s second largest employer disappearing after nearly four decades, it’s a fair guess that most wouldn’t have realised Hemburrow’s tactless threat was an echo of one made by successive smelter chiefs: Push us, squeeze us and we’ll piss off.
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This is how aluminium is made:
Bauxite, a pebbly red material, is mined and refined into a white powder, alumina. This is then dumped into a chemical bath, simmering at nearly 1000 degrees C, through which huge amounts of electricity are passed causing a reaction that creates aluminium and spills off CO2. It’s clever, but it ain’t new – the technique that nearly all the world’s 260 smelters still use was invented in 1886, has changed little and simply relies on enormous quantities of electricity – in Tiwai’s case close to 15 per cent of everything used in New Zealand or the amount used by 625,000 homes.
This is how a smelter is made:
In 1956, Australian company Consolidated Zinc approached the New Zealand government about constructing a smelter, indicating it would come here if guaranteed a large source of electricity.
Serendipitously, as early as 1904 the government had considered the hydroelectric potential of Lake Manapouri, buried in the Fiordland heartland, so the two ideas were meshed and the parties became industrial dancing partners. Initially Consolidated Zinc (which soon became Comalco) was going to build both the Manapouri power station and a smelter at Tiwai but by 1961 said it didn’t have enough money so the government built the power station.
However a special Act was passed in 1963 giving the company rights to the station’s power for 100 years.
In 1969 the first electricity was generated from Manapouri and in April 1971 the first aluminium smelted at Tiwai.
Today the fruit of that coupling can be seen south of Invercargill, where the Southern Ocean finally beaches itself after journeying from Antarctica.
Twin columns of pylons carrying Manapouri’s energy loom from the landscape, straddle the road to the smelter in a quietly hissing colonnade, then swing off across flax fringed swampland, tiptoe across Awarua Bay and sling their wires for a further kilometre to the smelter, tucked in the curl of Tiwai peninsula across from Bluff.
It essentially takes the entire output of Manapouri, our country’s largest hydroelectric power station, and pays roughly a quarter of what you pay for your power.
For something that consumes so much of the country’s electricity, the smelter’s a disappointingly unremarkable destination with sulking buildings in variegated grey, as if all the colour has been leached from them after decades of industrial effort. Only a smoke stack rises from these lower case roofs, like an exclamation mark signalling the smelter’s steadfastness.
Three strands of barbed wire atop a mesh fence and several warning signs make it clear this is smelter territory – its own world at the end of the world.
Inside however some of the purest aluminium in the world is manufactured – up to 99.98 per cent unadulterated – with a third of its production used for cellphones, computers and the wings of the new Airbus A380 aircraft. (Some is also used for less exciting purposes, such as window frames and packaging foil.)
The smelter is essentially four lines of “pots” – the cells where alumina from Australia is constantly mixed with Manapouri electricity. At Tiwai, 672 pots produce about 350,000 tonnes of aluminium annually – just under one per cent of the world’s production. Nearly 90 per cent of this is shipped to predominantly Asian markets from a wharf that stretches into Bluff Harbour like a half-submerged fenceline.
Though you can stare down an entire 600m potline and see nobody, such is the quiet, almost subterranean process of aluminium smelting, the site employs 915 fulltime staff and contractors and studies estimate another 1600 Southland jobs may rely on the smelter’s existence.
Locally, it’s considered a good employer – more than 100 staff are members of its 25-year club, a handful having worked there since it started, and it paid $78 million in wages last year with its average pay higher than the area’s mean.
It contributes to the community in many other ways, from school science fairs to helping save the kakapo and you’d struggle to find opponents to it along Invercargill’s pavements.
The irony is though, the smelter was born amidst controversy, has attracted criticism throughout its life, and still, somehow, finds itself defending its right to be here. Because not only does the smelter often threaten to quit the country, others have long called for the government to show it the door.
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Deep deep beneath Lake Manapouri, the hum of the power station becomes a controlled roar the closer you get to its heart. Seven massive turbines are constantly spun with water that’s plummeted 166m from the lake’s surface and then, it’s job done, set flowing 10km through the mountains to be discharged into Doubtful Sound. It’s one of New Zealand’s great engineering feats but it came at a great cost with 16 men being killed - and almost at the price of a great lake.
Initial plans for the power station that would feed Tiwai’s smelter called for Lake Manapouri to be raised by up to 30m.
The country’s largest environmental protest, including a 265,000-strong petition, eventually saved the lake from what’s now unthinkable desecration.
Save Manapouri became a slogan for a generation and ushered in a new era of environmental awareness.
The smelter was inevitably sullied by association with the plans but it was its operation and tactics that soon became the focus.
In 1970 it was revealed preferential Comalco shares had been offered to influential New Zealanders including politicians, local councillors, judges and journalists.
Public concern rose as it emerged how cheaply Comalco was getting power and how many breaks it had been cut by a government desperate to lure foreign investment.
Its favoured status was reinforced in 1972 when electricity supply to Dunedin was disrupted so the smelter could maintain production.
Later studies showed the smelter paid minimal tax until the mid-1980s, because of depreciation allowances in its agreement with the government.
The country’s growing intolerance of such colossal projects became evident when a second smelter proposed for Aramoana near Dunedin in the 1970s was canned for economic and environmental reasons after huge protest.
Rio Tinto’s controversial involvement in international events, from dealing with Spain’s fascists in the 1930s to the mired events of Papua New Guinea’s Panguna Mine, has also tarnished the current owner’s image over the decades.
The organisation now known as Campaign Against Foreign Control of Aotearoa (CAFCA) was born largely from opposition to the smelter and how its owners were seen to be ripping off New Zealand.
More than 30 years on, spokesman Murray Horton still beats a drum calling for action against the smelter.
After Rio Tinto’s appearance at the select committee Horton issued one of his inimically blunt press releases headlined: “Rio Tinto, Stop Crying Wolf. Just Close The Bluff Smelter & Bugger Off.”
Horton objects to both the cheap price Rio Tinto Alcan pays for such a large chunk of the country’s electricity and also how successive governments have flinched every time the corporate has flexed its muscle through heavyweight lobbyists and heavy-handed threats.
“Effectively what we’re doing is exporting electricity that they get at top secret, dirt cheap prices. And whenever that’s put under threat they threaten to walk.
“They’ve outwitted all the governments since Holyoake and when New Zealand industry was thrown open to the bracing winds of market forces and economics in the ’80s none of that affected Comalco. They’ve always been big fans of corporate welfare – ie. you and me subsidising their electricity – it’s the biggest bludger in the country.”
Back in the ’60s at a time when the smelter was being built, Horton stood shoulder to shoulder on the front lines of anti-Vietnam War protests with Tim Shadbolt.
Today, however, they face each other across the lines, Shadbolt now Invercargill’s mayor and cheerleader for the smelter.
“The thought of it closing is frightening. We’re less dependent on it now than in the ’70s and ’80s when one in four jobs was associated with the smelter – now it’s only about one in 10 – but it’s still hugely significant.”
Shadbolt has strong historical attachment to the issue – after protesting against the lake being raised he worked on the Manapouri tunnel project for a year during his university days.
“Manapouri was built for the smelter and the smelter was built for Manapouri. So they kind of have a historical right that we’re quite protective about. We built Manapouri for our own benefit really and most of the workers were from Southland or Invercargill. It was a man a mile getting killed and all the New Zealanders killed were Southlanders. So we feel we made the sacrifice, we did the work specifically for the smelter and we should have first right to the electricity.”
And he admits the council tries to keep Rio Tinto happy because the multinational “wouldn’t worry for more than two seconds whether it stays open or closes. I’ve met the directors – to us it’s a huge deal, to most New Zealanders it’s at least a recognised deal, but to Rio, well, it doesn’t really matter.”
Thus, building a new $12 million bridge to the smelter is the latest example of corporate appeasement borne by ratepayers.
“But I still respect and like guys like Murray Horton because they’re patriots in a way, they’re looking at the national interest and you need people like that. And I guess I’m paid, my job is to look after Invercargill’s interests - so I’m a mercenary and he’s an idealist in this situation, so I have to respect him.”
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But what would happen if Rio Tinto did leave, as they’ve threatened and as others are calling for them to do?
For a start, you wouldn’t be able to use half of Manapouri’s power anywhere else. Constraints on the national grid mean you couldn’t get more than about 300MW further north than Roxburgh without a significant upgrade of transmission lines.
Estimates for this work vary between $40 million and $200 million (depending on whether a new line of pylons is needed) and consents could take years to be granted. While Transpower, the state-owned company that runs the national grid, is looking at such scenarios, no upgrade is imminent.
And though Southland’s booming dairy industry could soak up some of Manapouri’s output, its demand would be tiny compared to the electricity hungry beast that is the smelter.
Secondly, even if we could get the power to places like Auckland where it’s most needed, it wouldn’t solve the country’s current shortage of electricity generation, but only delay the need for more windfarms or geothermal plants. New Zealand’s electricity needs are growing by around 150MW a year, so closing the smelter would mean we mightn’t have to build anything for about four years. But then, without significant reduction in our power use, we’d be back to where we are now, worrying if we have enough power to get us through a dry winter.
Electricity Commission chairman David Caygill says calls for the smelter to be shut down so we can claw back a large chunk of electricity are a knee jerk, not a sensible, long-term view.
“It’s almost a panic response – the only thing we can think of.”
Thirdly, smelter supporters say that if Rio Tinto left they’d simply re-establish the smelter in a country like China, where its power would probably come from a greenhouse gas emitting coal-powered station, not carbon free hydro like Manapouri. Thus, they argue, the world would be better off if they stay here.
However one obvious scenario would be that if we had Manapouri’s power to use across the rest of the country we could greatly reduce our use of coal and gas such as at the Huntly power station which produces about 12.5 per cent of the country’s power. Doing this would save the country millions in carbon credits needed to meet our Kyoto obligations and arguably balance the emissions a relocated smelter in China might create.
(Amongst Rio Tinto’s justifications for Tiwai has been exactly this suggestion of “carbon leakage” – that if things get too tough here it might go to China where there are laxer emissions rules and this would end up harming the world’s environment more. This blunt acknowledgement that company profits supersede environmental obligations tends to undermine claims in their sustainability report that they accept responsibility to work towards climate change solutions. Claims the smelter wishes to “show leadership” in responding to climate change also appear at variance with their suggestion in 2005 they build a 600MW coal-powered station to produce their own electricity at a time when they were negotiating a new power contract.)
Fourthly, if the smelter closed, a cornerstone of Southland’s economy would be removed and with it, hundreds of jobs.
However the effect may not be as bad as the smelter’s owners and its supporters have postulated.
Southland’s economy is positively pulsating at present –farm prices have almost doubled in the last year; broadband is available in 96 per cent of the region; coffee brands jostle for supremacy on pavement sandwich boards and it’s a bugger of a place to get a park at peak times.
Large developments are slated in the dairy, forestry and oil industries, the Bluff oyster beds are resurgent and the region is desperate for workers says mayor Shadbolt.
With the lowest unemployment rate in the country (2 per cent), two recent economic reports predict it will need an extra 12,500 workers by 2016 just to maintain its current economic growth.
So if the smelter closed few workers would end up on the dole, especially given claims the smelter would seek to redeploy skilled staff to its other operations overseas. (Though just how many Invercargill workers would opt to transfer to China or the likes of Libya where Rio Tinto has planned another smelter, is untested.)
Nor is it as if Southland hasn’t suffered and survived other huge industry closures – not far from the smelter, Bluff’s Ocean Beach freezing works closed in 1991 with 900 jobs lost.
And while the closure of Fisher & Paykel’s Dunedin factory (430 jobs) and Dannevirke’s Oringi freezing works (466 jobs) made headlines for a day or two earlier this year before the nation shrugged shoulders and carried on, jobs at Tiwai are considered almost sacrosanct by the smelter’s defenders.
Steve Canny, group manager of economic development group Venture Southland, accepts the smelter may be a case of, good for Southland but crap for the rest of the country.
But he says those in the deep south get irritated with “the shallow north” wanting electricity that underpins Southland’s economy without wanting power stations built on their patch.
“I can understand how an urbanite in Auckland could be a bit nervous if the power started going out. But unless there’s substantial investment in a transmission upgrade and the not-in-my-backyard scenario is being addressed in major metros, then this discussion has no substance whatsoever.”
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So just how realistic are Rio Tinto’s threats to leave New Zealand? As mentioned, the company has a history of suggesting drastic action or departure when something upsets it.
It did it when wanting to buy the Manapouri station; when the government proposed carbon taxes; during negotiations over electricity prices and most recently over proposed greenhouse gas emissions charges.
Victoria University senior economics lecturer Geoff Bertram, who’s studied the smelter for more than 30 years, says the latest threat was lamentably predictable.
“It was an example of the bully boy tactics Rio Tinto deploys very effectively. They’re probably the best of all the corporates at this game in New Zealand.
“They have good political lobbying skills and an excellent PR machine and they’ve always played their trump card – if you’re horrible to us we’ll leave. If you have a genuine and credible threat like that you can play it as many times as the government’s prepared to cave in - political leverage is everything. And the New Zealand government is one of the weakest I’ve ever observed in this game – by international standards New Zealand’s a pushover.”
Ironically Bertram’s office, with a career’s-worth of stacked documents threatening to avalanche and bury him come the next big earthquake, looks out on the Beehive where he says successive Ministers and governments have buckled before the smelter’s owners.
“Were I the government I’d have long ago instructed officials to prepare a fully-costed contingency plan for compensating all the people that would suffer in Southland if the smelter closed. And when they came to me and said, ‘if you don’t do our will we’ll close the smelter,’ I’d be able to say, ‘all right, off you go, and I’m going to spend the necessary cash not on subsidising your operation but on making sure the ordinary New Zealanders who depend on you for a living can make a transition to a sustainable alternative – have a nice day.’”
In two earlier reports, Bertram calculated the smelter had a negative economic impact on New Zealand in its first 20 years.
Now, he says, on balance it’s probably had a moderately beneficial effect through taxes, wages, port fees and buying supplies locally.
But he says its benefits are nothing compared to say the tourism sector yet the aluminium industry wields a much larger stick politically – vastly disproportionate to its actual economic contribution.
“It’s the small business stuff that makes the New Zealand economy tick, it’s the big monopoly giants that make the government crawl.”
Rio Tinto’s influence in New Zealand isn’t unique.
In his book Running From The Storm, one of Australia’s foremost climate change commentators, Clive Hamilton, notes:
“The (aluminium) industry has repeatedly managed to bully and bluff governments into giving it special concessions and has constantly retarded progress towards resolving the greenhouse issue. It has without doubt been the most self-serving, uncompromising lobby group in the climate change debate in Australia.”
Rio Tinto has a bauxite mine, two alumina refineries and two smelters in Australia.
Across Molesworth St from Geoff Bertram’s office, Climate Change Minister David Parker rejects the notion he’s unwilling to stand up to the smelter owners, insisting the government is determined to push through its emissions trading legislation and calling Rio Tinto’s claims “exaggerated” and “an idle threat”.
“I think we all know that business is about money and in the end businesses are largely motivated by effects on their profit and loss. So they try and minimise things that increase their loss. And that’s what Rio Tinto’s doing here – I wouldn’t call it improper but I see it for what it is.
“They’ve got a private interest in minimising the amount of responsibility they have to take for the cost of their emissions. Now, there’s a cost to the country for their emissions but from their perspective they’d rather the taxpayer bore the cost than them.
“And I don’t think the burden upon them is large in relation to the profitability of their business.”
Parker, who is also Energy Minister, says Rio Tinto is clearly only in New Zealand because it gets a competitive power price and the Tiwai smelter is in fact very well placed compared to other smelters that rely on electricity from coal and gas fuelled stations.
“We don’t think they’ll close. I’ve got no doubt the country would survive (if it did) but it’s not something we’d have as an objective. It’s clearly a substantial employer and a substantial contributor to the Southland economy – but that doesn’t mean we’d have it there at all costs.”
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Paul Hemburrow insists he stands by his assertion that the smelter would end up closing under current emissions trading legislation. But given such certainty, he’s strangely reluctant to say when this might happen, merely suggesting “you can do the numbers” – a bizarre statement considering how secretive the smelter is about its costs.
He stresses Rio Tinto supports emissions trading and is happy to pay its share – but just not unless all other smelters in the world face the same costs. (It should be noted the smelter has reduced CO2 emissions 42 per cent since 1990, despite upping production 27 per cent.)
Nor will Hemburrow countenance suggestions the smelter gets cheap power let alone that taxpayers and other electricity users effectively subsidise the giant multinational.
“The contract price we have is an outcome of a commercially very robust negotiation,” says Hemburrow wielding a shield of business jargon.
“I think there’s a misconception it’s a particularly cheap price, because it’s certainly not.”
Well, maybe not cheap in the hungry world of aluminium smelting – but certainly much cheaper than anyone else in New Zealand gets it would appear.
Neither power supply company Meridian Energy or Rio Tinto will disclose the price the smelter pays, predictably insisting it’s commercially sensitive.
But using industry figures and the smelter’s own accounts it’s possible to estimate roughly how much Rio Tinto pays for its electricity – somewhere between 5.2 cents and 5.9 cents a kilowatt hour.
By comparison the average price for other industrial consumers in 2007 was 9.2 cents and residential customers 18.6 cents.
The smelter’s current contract runs till 2012 but it’s already negotiated another deal from 2013 to 2030 with Meridian.
Presently it has a fixed contract for about 90 per cent of its electricity, buying the remainder from the spot market, paying a price that can fluctuate wildly.
Meridian is a state owned enterprise and returns dividends to the government so taxpayers have a legitimate interest in the smelter paying a top price for a national resource. So has Meridian done a good job on our behalf or is Rio Tinto getting fat at our expense?
Well, the latest contract took three years of bargaining and Meridian is happy with it, saying it adds significant value to the company.
And when one customer accounts for 40 per cent of your sales and is the biggest customer in the country by far, you’re going to give them a reasonable discount whether you’re selling spuds from a corner store or electricity from the deep south.
However the fact Rio Tinto knows Meridian can’t sell much of Manapouri’s power to anyone else because of transmission constraints undoubtedly strengthens its hand in negotiations.
For Rio Tinto, for whom electricity is 40 per cent of the smelter’s costs, it’s all about the bottom line.
When predictions of power blackouts were swirling throughout autumn, Rio Tinto agreed to cut five per cent – and then another five per cent of its electricity consumption.
While this was couched in terms of a generous gesture to help the country’s power situation the reality was it was primarily economic rather than altruistic. With spot prices leaping to over 30 cents a kWh, the smelter was keen to cut an unsustainable cost. When Meridian (who was running short of power to provide its other customers and being forced to buy extra on the expensive spot market) asked it to go a little bit further, it’s understood Rio Tinto was compensated for shutting down more pots.
Reports that the cuts have cost the company millions of dollars should be seen in this light.
As economist Rod Oram puts it, Rio Tinto gets “a hugely sweet deal”.
He says the Tiwai smelter is in a fantastic position to market its aluminium as a green product, because its electricity doesn’t come from a coal gobbling power plant, and was amazed when it claimed the government’s emissions trading scheme could force the smelter’s closure.
“Some particulars may need to be worked out but to leap from the particulars to the cataclysmic is incredibly bad strategy on their part.”
Oram says just what economic benefit the smelter has brought to New Zealand has never been resolved because some of the numbers required for a full analysis remain secret.
(Rio Tinto is currently preparing its own study to quantify the smelter’s value to the country and community, expected to be released shortly.)
Many, including Geoff Bertram, suggest we must be able to use 15 per cent of the country’s electricity more efficiently and more profitably than in a single aluminium smelter that produces 4.5 per cent of New Zealand’s export earnings, employs just 0.06 of the country’s workers and sees all the profits go overseas.
But Oram says it’s impossible to know whether this would be the case unless you could compare it with another economic activity that would use the power the smelter currently swallows.
“On balance, I’m saying, well, it’s here, so we might as well make the most of it.”
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So while it might be an economic dinosaur, a harbinger of the country’s misjudged Think Big projects; while it might throw its weight about and expect privileged status; while its economic benefit is arguable, there seems little likelihood the smelter will waltz off in the near future.
The reason why attention has again been focused on it this year is inarguably due to talk of tepid showers and blackouts. If the hydro lakes had been full and power plentiful, everyone would have happily ignored the enormous amount of electricity this one factory uses.
But the hydro lakes weren’t full – in fact the inflow for the three months to mid-June was the lowest since 1947.
Adding to the fact less power could be generated from hydro stations, another power station packed up and other plants were forced to reduce generation.
To stave off power cuts it was necessary to kickstart an expensive diesel-fired emergency generator at Whirinaki and restart part of an asbestos-riddled plant in New Plymouth. For a country with a wealth of generation resources – rivers, strong winds and geothermal steam – our electricity system looked like a bogged up Lada limping through winter.
And it’s hardly a new situation – there have been four winter shortages in the last eight years that led the smelter to cut production.
But Energy Minister David Parker says that given it was such a dry year and given there were unforeseen plant failures, the fact we survived without blackouts shows how resilient the system actually is.
Electricity Commissioner David Caygill, whose job it is to ensure a secure power supply, agrees, saying talk of a power crisis were largely a media beat up.
“The words challenge or problem sound much less interesting.”
Caygill who sits in a harbour-view Wellington office, ironically a few floors below the offices of Rio Tinto Alcan and Sumitomo Chemicals, says 4000MW of potential electricity generation is being built, consented or applied for – an enormous wave of power he’s confident will satisfy the country’s electricity demands into the future.
Thus, talk of shutting down the smelter to save the lights going out is naïve and pointless, he says.
And that’s possibly the final reality – if more generation comes on stream soon and talk of blackouts disappears, everyone will forget about the smelter and its arguably inefficient use of so much power.
It may be a relic, it may even be a rip off, but maybe we just have to accept it’s here to stay.