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Arrium hit by solar, wind energy prices

A good example of how to destroy a state economy's manufacturing base.

Arrium
Photos: Arrium
The Australian Financial Review June 28, 2016 South Australia

Election 2016: High South Australia energy prices hit Arrium hard

By Ben Potter

Rising energy prices fuelled by South Australia's ambitious renewable energy target have helped send stricken Whyalla steelmaker Arrium cap in hand to governments seeking $150 million-plus in taxpayer aid.

Higher energy prices may have added as much as $12 million to Arrium's annual costs, with rising gas prices and South Australia's wind and solar power among the main culprits.

South Australia's Labor government has pledged $50 million, federal Labor leader Bill Shorten has offered $100 million if he wins and Prime Minister Malcolm Turnbull has countered with a $49 million loan.

Arrium's former board blamed its problems on global overcapacity in steelmaking - which has sparked a trade war. The company called in administrators in April after it failed to refinance its $2.8 billion debts.

But surging energy prices, fuelled by South Australia's 40 per cent share of renewables, have also had a role.

On Tuesday, Mr Shorten declined to guarantee that federal Labor's target for 50 per cent renewables in 2030 would not send the rest of Australia down the path followed by South Australia, which has the highest and most variable energy prices in the national electricity grid.

Mr Shorten also declined to say whether Labor would formally expand the Renewable Energy Target in order to increase renewables to 50 per cent of the energy mix.

"When you look at how else we can improve renewable energy as a mix, we do it by creating investment certainty," he told reporters in Canberra.

Arrium's administrator Mark Mentha said the steelmaker paid an average $71 a megawatt hour for electricity on the spot market in South Australia last year, spending $29 million on electricity for iron mining and steelmaking at Whyalla, South Middleback Ranges and Iron Knob.

That's about $8 million more than the same amount of electricity would cost in Victoria and NSW, or would have cost a couple of years ago in South Australia. As well, the price Arrium pays for natural gas at Whyalla has surged from just under $5 a gigajoule to just under $6 a gigajoule, lifting its annual gas bill to about $24 million from about $20 million.

The problem is worsening. Since the closure of South Australia's last two coal-fired power stations in May, Arrium has been paying $115-120 a megawatt hour for electricity on the spot market. Gas prices are also set to rise to $7.30 a gigajoule by October.

If maintained, these prices could add $13-15 million to the annual energy bill, further impairing the steelmaker's competitiveness just as Mr Mentha prepares it for sale.

"The cost of electricity in South Australia is a real issue. The cost of energy inputs is a real issue," Mr Mentha told The Australian Financial Review.

It was a problem not just for Arrium but for other big energy users like BHP Billiton's giant Olympic Dam copper and uranium mine, Port Pirie smelter owner Nyrstar, Oz Minerals and the Iron Road consortium building a new $4 billion mine on the Eyre Peninsula.

Mr Mentha, of corporate advisers Korda Mentha, is working on a rescue plan using pledges of taxpayer aid to help fund a plant upgrade as a carrot for bidders. He hopes to sell the company by the end of the year.

But managing the business is tricky. Electricity prices spike about 50 to 60 times a year, sometimes to the National Electricity Market cap of $13,800 a megawatt hour, but typically to between $2500 and $4000 a megawatt hour.

You can send a load of iron over to the blast furnace and "the price can spike" - and you can't be sure you're going to make a profit turning it into steel, Mr Mentha said.