Economic Recovery

Why is Labour letting Tiwai Pt shut now?

Why isn't the Government spending $30m to extend Tiwai Point's 2,600 jobs until after the Covid-19 recession, after Manapouri's power can be transmitted elsewhere, and after there's a hydrogen plan for the smelter site, Bernard Hickey asks.

The sense of shock and foreboding about the future was clear in Invercargill Mayor Tim Shadbolt's voice on Thursday morning shortly after hearing Rio Tinto, Meridian Energy and the Labour-led Government had given up on trying to find a deal to keep Tiwai Point open beyond August next year.

"We expected to have tough negotiations, but we never thought it would come to this. We just can't believe it," Shadbolt said.

"It's gone beyond the argy-bargy of negotiations. This is the real thing. We're just absolutely shattered by the news," he said.

Finance Minister Grant Robertson seemed much more philosophical and accepting of the news when he spoke a couple of hours later. It became clear that both the Government and Rio Tinto had called each others' bluffs, leaving Southlanders incredulous. 

"This is a blow for the people of Southland and I feel for them, but we need to look to the future," Robertson said.

"There is a certain sense of inevitability about today’s announcement. Rio Tinto have been trying to sell Tiwai Point for about 10 years now," he said.

But why was it inevitable?

National Finance Minister Bill English certainly didn't think it was in 2013 he agreed a $30m payment to Rio Tinto to keep the smelter going until 2017. He needed to avoid a wholesale electricity price shock ahead of the floats of Meridian Energy (which is most exposed through its Manapouri plant) and Genesis Energy before the 2014 election.

The New Zealand dollar price of aluminium is now actually higher than it was in 2013 when Rio Tinto last warned that low aluminium prices and high transmission charges made the smelter unprofitable. Since then, the New Zealand dollar has fallen, the likely increase in global emissions from a smelter closure was clearer and Covid-19 has happened, creating a much less welcoming economy for Tiwai Point's 2,600 workers to stumble out into over the next two years.

Yes, English said that payment would be the last 'ransom' to be paid by a National Government, but Labour didn't have to sign up to the same National policy. It certainly hasn't adopted all of National's policies. Yet that's how Robertson framed Labour's decision, neatly snookering Todd Muller, who floundered with a vague complaint about the Government not having a plan, even though the new National leader would not commit to ongoing subsidies either.

"We as a Government have backed what Bill English and John Key have previously said to them," Robertson said.

But hasn't Covid changed things?

No one likes to be backed into a corner by a multi-national with decades worth of experience globally in extracting subsidies, tax breaks, and sweetheart power deals, using its monopsony status as the only buyer of labour and power in a 'captured' market where the competition is also subsidised, especially in China.

Treasury recommended against paying Rio Tinto that subsidy in 2013, arguing the Government would be better using scarce resources to pay down debt. That even made sense up until Covid-19 when the current Labour Government was committed to keeping net debt at 20-30 percent of GDP.

But Covid-19 changed everything, and there was a case for the Government to look at buying time for the workers to keep their jobs through the worst of the Covid-19 recession of 2020/21 and to give Transpower time over the next three summers to build the $97m Clutha Upper Waitaki Lines Project and for Transpower to bring forward its building of a fourth HVDC line across the Cook Strait from next decade. 

That would allow consumers throughout the country to get the potential benefits of 10-15 percent reductions in wholesale power prices when the smelter does eventually close. The current plan to let Tiwai Point close in 2021 means those benefits can't all be accessed, except by those in the South Island. An early closure also makes it much harder to close the Huntly power plant or gas-fired plants in Taranaki -- nullifying the apparent emissions benefits for New Zealand of closing Tiwai Point.

It would also allow the Government to further develop plans to convert that Manapouri power into hydrogen, possibly at the smelter site, or find other uses such as data centres.

No shortage of subsidies elsewhere

The Government is spending $62b to cushion the impact of Covid-19 on the rest of the economy, including handing out over $12 billion to small to medium enterprises to keep often near-minimum wage jobs going for a few weeks.

But it appears unwilling to consider spending a few tens of millions to keep at least 2,600 highly paid jobs going in a region with few other alternatives for such high-wage jobs.

Robertson talked airily on Thursday about the prospects for agriculture and aquaculture, but in reality those jobs will be much lower wage and have yet to be invented.

He has talked repeatedly about his personal desire to avoid the mistakes made during the 1990-91 recession when manufacturing jobs were gutted in the regions and little was done to soften the blow.

The risk for the Government and those remaining high-wage jobs in the regions in the next three months is that the announcement of closures of Tiwai Point (2,600 jobs), Marsden Point (3,500 jobs) and the Glenbrook Steel Mill (3,900 jobs) could potentially all come in the next six months. 

The worst recession since 1990-91 could easily be just as damaging for the regions as that one. 

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