Government intervenes after Rio Tinto pressure on smelter power contracts

Thursday 28th March 2013

The New Zealand government is offering unspecified assistance to keep the Bluff aluminium smelter open in the short term, a move which could save next month's float of MightyRiverPower, but blows away its hands-off policy on state-owned companies' commercial affairs.

In a statement this morning, State-Owned Enterprises Minister Tony Ryall said the government became involved in direct negotiations with the smelter's majority owners, Rio Tinto, within the last few days, which have not involved the smelter's state-owned power supplier, Meridian Energy.

Ryall also cited the fact that Rio's Australasian subsidiary, Pacific Aluminium, had been pressuring electricity suppliers to other, similarly aged smelters in Australia, where state governments have capitulated to demands for lower power prices.

"The positions of Meridian and Pacific Aluminium are reasonably close in terms of the short-to-medium-term electricity price, but they remain well apart in the longer term," Ryall said.

"With this in mind, the government has been in contact with Pacific Aluminium's international parent company Rio Tinto this week to discuss helping to bridge the gap in their positions over the short to medium term, if this could be of assistance in concluding an agreement.

"In the meantime, we understand Meridian's existing contract with Pacific Aluminium remains in place at least until 1 January 2016 with significant financial and other obligations beyond that."

"As we've said previously, all relevant information - including about the smelter electricity contract - will be reflected in the Mighty River Power offer document which is currently being finalised," Ryall said.

The MRP partial privatisation is a flagship political initiative for the government, which has battled public opposition and Maori-led court action to get to the point where the 49 percent float could occur in mid-May.

Rio's hard-ball tactics on its smelter contracts, which constitute around one-seventh of total New Zealand electricity consumption, have placed maximum pressure on the government, which until now has refused to get involved, saying the issue is a commercial one between Meridian and the smelter.

New Zealand Energy Data file records from the Ministry of Business, Innovation and Employment suggest the smelter pays around $48 per Megawatt hour for electricity at present, well below prevailing fixed contract rates for short-to-medium-term supply of between $60 and $70 per MWh.

For longer-term supply, such as the new 18-year contract that began running just two and a half months ago, prices in excess of $80 per MWh might be justified.

However, industry analysts believe that a three or four year orderly wind-down at the smelter, one of Southland's biggest employers and industries, would give the local market time to adjust to the excess of new supply.

State-owned Genesis Energy and NZX-listed Contact Energy, for example, might be expected to close the Huntly and Otahuhu coal and gas-fired power stations respectively. Contact has in recent months expressed no concern that it has little gas up its sleeve to run thermal plant beyond 2015.

The impact of the news on listed company energy share prices was muted this morning. Contact shares slipped 2.7 percent in early NZX trading today, to $5.52 from what had been their highest point since November 2011, while TrustPower shares were off 1.3 percent at $7.75.

Ryall's statement was the latest in a dramatic morning of events, which saw Meridian chief executive Mark Binns announce a new contract was "unlikely", which then saw Pacific Aluminium contradict that, saying it regarded a deal as still possible.

Binns is due to appear before the commerce select committee this morning for Meridian's routine annual financial review.

BusinessDesk.co.nz

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