Smelter owner misses point

Rio Tinto Alcan, the world's largest aluminium producer and owner of the Tiwai Point smelter, took only a few moments before parliament on May 12 to destroy its corporate credibility.

The Emissions Trading Bill "if passed, would most likely put the smelter on a path to closure", Paul Hemburrow, its general manager, told MPs. To reinforce the gravity of the situation, he was flanked by high-powered colleagues led by Xiaoling Liu, Rio Tinto's Pacific region president of primary metal, who flew in for the occasion.

Yet, this threat of economic mayhem, such as the loss of $1 billion of exports a year and 3000 jobs, flies in the face of the facts about the smelter, the minimal impact of the ETS on it and the central role the smelter plays in Rio Tinto's global strategy.

Such scare tactics, replicated by many other corporate submitters, are part of a concerted and deeply misleading campaign by New Zealand business to kill off sensible energy and climate legislation.

Tiwai Point is the jewel in Rio Tinto's crown. Thanks to practices pioneered by its New Zealand management, starting under the leadership of Kerry McDonald in the 1990s, it is one of the most efficient and environmentally sound smelters in the world.

It's in the top 5% of more than 200 smelters in the global industry, Rio Tinto boasted last December, when it won the 2007 Kensington Swan Ethical Governance prize for its commitment to climate change "from the board to the smelter floor" in the Deloitte/Management magazine Top 200 Awards.

The smelter's achievements are numerous and highly creditable. Since the mid-1990s, it has increased its output by more than 60%, reduced its greenhouse gas emissions per tonne by almost 60% and made big energy savings. People come from around the world to learn how it works. Last week, it hosted five Canadians from Alcan.

Best of all, Tiwai Point has showed the world how to produce the purest grade of aluminium possible in one pass through the smelter, thus saving energy and emissions along the way.

Thanks to the exceptionally high quality of the metal, Rio Tinto sells it at a small premium over commodity prices. Only two other smelters in the world have followed suit. Both use Tiwai Point's management systems but can't match its performance.

The global aluminium industry takes climate change seriously. It has set itself demanding emissions and energy reduction targets and put in place ambitious research and development programmes to crack its technological challenges.

These efforts are pursued through the likes of the International Aluminium Institute, whose members account for 80% of world production, and through the corporate strategies of Rio Tinto and its competitors.

Their climate change challenge comes in two parts: emissions from generating electricity to smelt alumina; and from the smelting process itself. The carbon anodes conducting electricity into the alumina combines with oxygen in the alumina to create CO2. Devising a non-carbon anode is the industry's key technology target. The process also throws up trace quantities of much more highly damaging greenhouse gases such as perfluorocarbons.

Tiwai Point is in a very sweet spot on the first point. Since its 1971 start-up, it has been powered by hydro-electricity, which generates no greenhouse gases.

Nonetheless, Rio Tinto complains the electricity price it pays Meridian is tied in part to the market's wholesale price. That will rise a bit when the electricity sector joins the ETS and the sector's fossil fuels face the cost of carbon. Also, the price is driven at peak times by costly to run, fossil fuel-burning, greenhouse gas emitting power plants.

But a simple, economically sound solution is under way. Generators are investing heavily in renewable sources to take the country back to 90% renewables, the advantageous place we last occupied in the early 1980s.

In due course, increasingly expensive fossil fuels will have very little influence on our electricity market. Renewable energy will be one of our big competitive advantages. Until then, the government is offering trade- exposed companies like Rio Tinto a very, very easy ride in the ETS.

On the second climate change issue, Tiwai Point is also one of the best placed in the world. Its greenhouse gas emissions from the smelting process are running at 1.9 tonnes of CO2 equivalent per tonne of aluminium and it is constantly nudging them lower. World best practice is considered two tonnes and the worst smelters run at four.

Thanks to this outstanding performance, the Emissions Trading Scheme would have minimal direct impact on Tiwai Point. When it comes into the scheme in 2011, the smelter will get free credits for 90% of its 2005 emissions. The credits will gradually phase out from 2018 to 2030 when it will face the full cost of its emissions.

But the cost is minimal. If you take a high cost of carbon, say $US50 a tonne, then Tiwai Point's maximum direct liability in 2030 would be $US95 per tonne of metal. But the cost of aluminium today on the London Metal Exchange is $US3000 per tonne. Thus the direct cost of the ETS on the smelter would be only 3% - even assuming the smelter makes no further improvements in its performance over the next 22 years.

Those facts demolish Rio Tinto's argument. Moreover, the IAI forecasts world demand for aluminium will have doubled from 31 million tonnes a year in 2005 to 62 million by 2020. Rio Tinto will continue to make good profits from Tiwai Point for decades.

Worse, Rio Tinto's argument ignores the opportunities the ETS would create.

The company, along with its global colleagues, knows it is on to a climate change winner with aluminium. The metal is infinitely recyclable, needing only 5% of the energy each time it is reprocessed compared to the energy needed for the first smelting. Some 30% of global aluminium demand is met by recycled metal.

Even better, products made from aluminium are lighter and more energy efficient compared to ones made from other metals.

Moreover, the industry believes sustainability-conscious users will pay a small premium for carbon- neutral aluminium. All the carbon generated in its production would be offset by carbon sinks such as forests.

For example, the aluminium industry will be carbon neutral by 2017, according to a forecast Alcoa, the largest US producer, made at the 2005 Conference Board's Business & Sustainability conference in the US.

That's dead-easy for Tiwai Point to achieve, given its very low emissions profile. In contrast, many other smelters don't stand a chance.

The best smelters need 15MW/h of electricity to produce one tonne of metal. For even the best coal- fired electricity plants, that turns into 14 tonnes of CO2 per tonne of aluminium. Offsets at $US50 a tonne of carbon would cost $700 per tonne of metal, against a zero emissions cost for Tiwai Point's hydro-electricity.

Rio Tinto understands the point exactly. Last July it paid $US38b for Alcan, the world leader in hydro- powered smelting.

It's a great shame for the sake of its credibility that Rio Tinto failed to tell MPs that the government's ETS and renewable energy strategy would give Tiwai Point a significant competitive advantage. The smelter could offset its minimal emissions with New Zealand forest credits. It would become Rio Tinto's world source of the highest purity, greenest and highest priced aluminium.

Green aluminium from a green country: a great message to take to the world.

- © Fairfax NZ News