One of the major shareholders in the Tomago aluminium smelter, situated north of Sydney, has decided to write down the value of its investment in the facility to zero. This move raises serious concerns about the smelter's long-term viability as the largest single consumer of electricity in Australia's national grid. The future of the smelter is looking increasingly challenging, especially with rising energy costs and ongoing market uncertainties.
Hydro's share in the Tomago aluminium smelter
Norsk Hydro, which employs more than 1000 people, with the majority ownership held by Rio Tinto, have informed its investors about its challenging situation in finding renewable power which is affordable, indicating uncertainty in the near future concerning the plant.
The firm owns a 12.4 per cent share in the Tomago aluminium smelter and is now the third-largest shareholder after Rio Tinto and CSR. Hydro made this move amid a national conversation about government support for struggling industrial sectors. This situation is drawing more attention to the use of taxpayer money to help energy-intensive companies that are grappling with increasing operational and financial challenges throughout Australia.
Government investment
Earlier this month, the Albanese government announced a significant investment of USD 600 million to keep Glencore's Mount Isa copper smelter running for another three years. This move highlights their dedication to supporting Australia's vital metals processing industry, especially as it faces increasing challenges.
On Monday, Andrew Forrest, the Executive Chairman of Fortescue, called on governments to stop financially supporting outdated manufacturing assets. His comments came as he stepped into the spotlight as a prominent player in a campaign led by News Corporation, which has the backing of several well-known billionaires. This campaign is pushing for renewed investment to rebuild Australia's industrial base, keep operations running at Tomago and spark what he refers to as "a new industrial revolution."
Government officials all over Australia are being urged to lend a hand to smelters like Tomago, as energy-hungry industries face tough operational and financial challenges. In South Australia, the Whyalla steelworks have been taken over and placed under administration, while two smelters in Tasmania are being kept afloat with government-backed loans. These facilities have raised alarms about the ongoing struggle to secure stable, long-term and affordable energy supplies, warning that without timely intervention, vital manufacturing jobs could end up moving overseas.
Also read: A$2 billion green aluminium boost: What it means for Australian smelters?
Rio Tinto's stake
Rio Tinto has been engaged in lengthy talks about a possible bailout for the Tomago aluminium smelter. Still, it has been stated that any rescue deal should be drafted with the focus on securing a long-term, sustainable future viable for the firm's assets. The company warned that a quick fix just won't cut it, emphasising the importance of finding a solution that keeps the facility from "limp" along to yet another operational or financial crisis.
Rio Tinto's Chief Executive, Kellie McCarthy, stated that the ownership group of the Tomago smelter is not looking for a quick fix that would just let the facility "limp along for a few years." She highlighted how crucial it is to build long-term investment trust, ensure operational safety and maintain reliable supply commitments for customers.
Simultaneously, the company's fully owned Bell Bay aluminium smelter in Tasmania is facing some uncertainty, as its power agreement with the state's hydroelectric provider is set to run out on December 31.
In contrast, the firm's Boyne smelter in Queensland is in a stronger position, having locked in long-term power purchase agreements with local wind and solar developers that should keep operations running smoothly beyond 2030.
Gloomy outlook for Tomago after 2028
In an investor update, Hydro's CEO Eivind Kallevik painted a rather grim picture for the Tomago aluminium smelter after 2028, especially with its current power agreement with AGL Energy set to expire. Similarly, Rio Tinto has raised concerns that energy costs could skyrocket to unsustainable levels after 2028, based on the pricing signals it has received so far.
A recent presentation from Hydro, shared alongside its third-quarter results, revealed that the Tomago smelter is expected to stop using electricity after 2029. Concurrently, Rio Tinto has confirmed its commitment to running its Australian smelters beyond 2030, but only if they can shift to clean energy sources.
Eivind Kallevik, Chief Executive Officer at Norsk Hydro, stated, "We continue to work with the stakeholders to see if there are any opportunities to get renewable power ... but it is a challenging situation and we will make sure we update the market"
Additionally, the firm has cut the value of its investment in the Tomago aluminium smelter by NOK 41 million (USD 6.2 million) for the three months that ended on September 30. This adjustment brings the total impairments on this asset to NOK 157 million (USD 14.1 million) over the last nine months. The company explained that these write-downs reflect its share of ongoing maintenance costs at the facility, which it has now labelled as "fully impaired" in its financial reports.
Also read: Energy crisis fuels Senator's jab at Tomago smelter's green shift
Concerns about the future of the Tomago smelter have come to light as the firm wrapped up a new power agreement for its Alouette smelter in Quebec, Canada. This deal takes advantage of the region's plentiful low-carbon hydroelectric resources. The updated contract will keep the facility running from 2029, when the current agreement ends, all the way through to 2045, ensuring long-term energy stability for one of Hydro's key production sites.
The rescue deal
In a move that could shape the future of any potential rescue plan for Tomago, Norsk Hydro has struck a new power deal in Canada. This agreement includes a clause that allows the hydroelectricity supplier to reap greater profits when aluminium prices go up. On the other hand, the company is somewhat limited in its ability to take on more losses at Tomago, as it embarks on a global cost-cutting strategy that will see 600 jobs cut this year, with another 150 positions set to go in 2026.
The company announced on Friday that it will be cutting its capital expenditure plans by 10 per cent. It will also implement some additional cost-saving measures, which include reducing spending on consultancy services and business travel.
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