Tomago settles on 11-year contract with state-owned generator

HYDRO ALUMINIUM'S negotiations with Delta Electricity for power supplies to its Kurri Kurri smelter may be in limbo, but rival Tomago Aluminium has finalised a new long-term contract with Macquarie Generation.

By InvestSMART · 13 Nov 2010

By InvestSMART ·
13 Nov 2010

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The deal comes days before the close on Monday of bids to acquire NSW power industry assets.

The new contract runs for 11 years, from 2017 to 2028.

Tomago is one of the largest single electricity users in NSW, and the contract is one of Macquarie Generation's largest single sales contracts.

Hydro Aluminium, which owns the Kurri Kurri aluminium smelter that is near Tomago's smelter, is locked in a legal dispute with the state government over plans to publish details of its contracts to prospective bidders for government-owned power assets.

Its contract talks with Delta Electricity - which, like Macquarie Generation, is owned by the NSW government - have been suspended for a similar contract to the one finalised by Tomago.

While no pricing details have been disclosed of the Tomago contract, it is believed to again include elements of London Metals Exchange contract prices for aluminium. It is also believed to contain a bonus whereby a higher international price for aluminium may result in a higher price paid for the electricity.

Steep falls in aluminium prices in 2008 caused heavy losses for Macquarie Generation on its power supply contract with Tomago.

The new Tomago contract also includes interruptibility clauses, allowing the supply of up to 900 megawatts of electricity to be suspended for a time if Macquarie Generation is facing severe generation disruptions.

Finalisation of the contract now opens the door for Tomago to proceed with talks with Midal Cables International, of Bahrain, which is studying plans to source aluminium from Tomago for a $30 million aluminium conductor and rod factory on land next to the smelter. These talks were suspended this year as the Tomago contract talks stalled.

Midal's plans could lead to the creation of a further 290 jobs.

Both Tomago and Macquarie Generation have undertaken to work together on unspecified carbon emissions reduction projects.

Tomago produces 528,000 tonnes of aluminium a year, equal to a quarter of Australia's primary aluminium production. It is owned by a consortium of Rio Tinto, CSR, AMP and Hydro Aluminium of Norway, which owns the Kurri Kurri smelter.

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Frequently Asked Questions about this Article…

What is the Tomago Aluminium contract with Macquarie Generation?

Tomago finalised an 11-year electricity supply contract with Macquarie Generation, the NSW state-owned generator. The deal runs from 2017 to 2028 and is described as one of Macquarie Generation's largest single sales contracts with one of the biggest electricity users in NSW.

How does the Tomago electricity supply contract handle pricing and links to aluminium markets?

While pricing details were not disclosed, the contract is believed to include elements tied to London Metals Exchange (LME) aluminium contract prices and a bonus mechanism where higher international aluminium prices may increase the price Tomago pays for electricity.

What are the interruptibility clauses in the Tomago–Macquarie Generation contract?

The contract includes interruptibility clauses that allow Macquarie Generation to suspend supply of up to 900 megawatts of electricity for a time if the generator is facing severe generation disruptions, giving the generator flexibility in stressed conditions.

Why does this new contract matter for Tomago Aluminium's growth plans and talks with Midal Cables International?

Finalising the Macquarie Generation contract re‑opens the way for Tomago to resume talks with Midal Cables International (of Bahrain), which is studying plans for a $30 million aluminium conductor and rod factory next to the smelter. Those Midal talks were suspended while Tomago's contract negotiations were stalled; the factory could create about 290 jobs.

How have past aluminium price movements affected electricity suppliers like Macquarie Generation?

The article notes that steep falls in aluminium prices in 2008 caused heavy losses for Macquarie Generation on its previous power supply contract with Tomago, illustrating the risk when electricity pricing is linked to volatile commodity prices.

What is the situation between Hydro Aluminium and the NSW government mentioned in the article?

Hydro Aluminium, owner of the Kurri Kurri smelter near Tomago, is in a legal dispute with the NSW government over plans to publish details of its contracts to prospective bidders for government-owned power assets. Because of this, Hydro's similar contract talks with Delta Electricity have been suspended.

Who owns Tomago Aluminium and how much aluminium does it produce?

Tomago is owned by a consortium including Rio Tinto, CSR, AMP and Hydro Aluminium of Norway. It produces 528,000 tonnes of aluminium a year, equivalent to about a quarter of Australia's primary aluminium production.

Are there any environmental or carbon commitments tied to the Tomago–Macquarie Generation deal?

Yes. Both Tomago and Macquarie Generation have undertaken to work together on unspecified carbon emissions reduction projects as part of their broader commercial relationship, though the article does not detail specific projects.