Thursday, 8 August 2013

The Tiwai industrial bailout (updated)

Over at the TVHE blog Matt Nolan writes on what he calls The Tiwai industrial subsidy. He points us to two articles from Infometrics that are relevant to the topic:  Tiwai and electricity and on the Southland workforce and a managed exit. These are well worth reading.

I would like to make an additional point about the opportunity cost of the bailout. Let us assume, for no good reason, that the bailout actually works and 800 jobs are "saved". Does this mean that the government has spent your money wisely? May be not, the government could have used the $30m in some other way and these alternative uses could have generated more than 800 jobs. The bailout will stop or at least delay what is most likely a necessary reallocation of resources within the New Zealand economy. Aluminium smelting is an industry that New Zealand doesn't now, if it ever did, have a comparative advantage in. Reallocating resources and people from the smelter closure will in the short term be painful but beneficial over the longer term. This is why Matt's point about the government helping the plant wind-down in an orderly fashion has merit. Thus to show that this particular bailout is a good use of taxpayer's money the government not only has to show that it will work but it also has to show that the bailout is the best use of taxpayer money. What's the bet it can't do either?!

I do, also, find myself wondering - and not in a good way - about the relationship between this deal and the forthcoming partial sale of Meridian.

Update: Seamus Hogan comments here on the politics of all of this.


Tim Worstall said...

I don't know the details of this particular set up but there's more to aluminium smelting than just the smelter.

The traditional set up is that you look for somewhere where you can get cheap energy. Say, where you might build a hydroelectric plant.

Then you build the smelter next to that cheap energy plant. There's around $900 (at normal prices) of electricity in a tonne of aluminium metal.

So, in regards to competitive (or comparative) advantage, that's actually what it is for aluminium smelting. Cheap electricity. This is why there are smelters in Iceland (cheap geo and hydro power), Quebec, Siberia. It's cheaper to move the alumina (the raw material) to where the energy is cheap than anything else.

Where the problem comes in about the economics of it all is that you really need to look at the smelter and the power plant as one unit, not as two separate ones. The very large and steady demand for electricity from the smelter is what justifies the capital costs of the power pant. The low price of electricity produced is what justifies the smelter.

As I say, I don't know the specifics of this particular tale. But Al smelters are a complex business. For example, is there sufficient demand in Southland for that electricity if the smelter closes? If not, does that mean that the absence of the smelter then undermines the costs of having the hydro plant?

Neil Williams said...
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