Tomago - familiar playbook

Argus yesterday ran a story in their petcoke newsletter that suggested that Tomago smelter in Australia would close by 2017.

The article quotes AGL Energy’s Chief Financial Officer, Greg Redman. AGL owns the Liddell power station, one of the generators that provides electricity to the plant. He is quoted as saying that the price rise that would come into effect at the end of the present electricity contract would be so steep that the power station. The article adds that the price rise would add $230 to the cost of making aluminium, and that this would be intolerable.

Ho hum - this reads for all the world like a direct lift from a “Power Price Negotiator’s Handbook.”

First up, a declaration of bias. Regular readers will know that I spent 4 years working at Tomago, and I reported to the guy who negotiated the power contracts (hello Ian if you are reading.) Admittedly my information is 10 years old, but here goes.

Tomago draws power from at least 2 power stations, if I remember correctly. In fact, Tomago uses about 8% of all the electricity used in New South Wales, so it is probably AGL’s largest customer, and certainly very important to the State Government.

From memory there is more than one power contract. Certainly a new contract was drawn up when the plant converted to AP22 mid last decade, and I believe that contract runs to 2028, not 2017.

If AGL are expecting a price increase which will push the cost of making aluminium up by $230 (US$210), then AGL are being super optimistic. I put that as somewhere above 25% increase. I get that by doing the following calculation: Assume $28 per MWH now, and 13,500KWH/t.AL and 500,000 tonnes per year production. That gives an approximate cost of electricity at $750, so a rise of $230 is a pretty steep rise. Readers with better knowledge of the plant’s cost structure can correct me, but if AGL achieve that sort of sire, then it’s time to buy shares in AGL.

But of course, they won’t achieve that rise, because they are already saying the plant will close rather than pay that sort of rate increase. So what’s the point of putting out a press release that warns that your most important customer is likely to close?

Cue the State Government, former owners of the power stations, and benefactors of the wealth generated by the plant, its approximately 1000 workers and 5000 ancillary jobs.

The article says that Tomago declined to comment on the AGL statement, but I would rather hear what the State Government has to say. Do they see through this press release? If it was me, I would be telling AGL to get a new playbook.