Meridian won't take one for the team in smelter contract rewrite Binns

Monday 13th August 2012 1 Comment

State-owned Meridian Energy won't "take one for the team" and accept uncommercial terms for electricity to keep the Rio Tinto-controlled Tiwai Point aluminium smelter open, says chief executive Mark Binns.

He described as "a concern" the London-listed multinational metals firm's desire to renegotiate electricity contracts representing about one-seventh of all the electricity consumed in the country.

But he dismissed "indications in the press that Meridian will 'take one for the team."

"I would reiterate that the board and management are very clear on what their obligations are" under the Companies Act to make decisions "in the best interests of the company."

The issue has the capacity to delay the planned partial privatisation of Meridian, expected next year, because the smelter contract is such a huge slab of Meridian's annual revenues.

Last year, electricity sales to New Zealand Aluminium Smelters totaled 5,073 Gigawatt hours, close to half Meridian's total output of 10,996GWh in the year to June 30.

The company today announced a 52 percent drop in net profit to $106.1 million before fair value adjustments, owing mainly to the lowest inflows into Meridian's major catchments in 79 years.

Majority-owned by Rio, the Bluff smelter is currently for sale along with other older assets in Australasia, Europe and the Americas, and Rio's chief executive Tom Albanese has spoken of "difficult decisions" ahead if any of the plant marked for sale could not be made commercially sustainable.

Global aluminium prices have plunged, partly because of new smelting capacity in China, and earnings from the sector were a major drag on Rio's profit for the June half, which fell 34 percent to US$5.2 billion.

Binns warned there would be no swift announcements. However, it would not take as long as the three years of negotiations that saw the current contract concluded in 2007 and running from next year until 2030, using a complex formula linking the electricity price to the global price of aluminium.

"We are listening to their suggestions in terms of areas of change," Binns said, and decisions on any chance would occur at board level.

"There was a freely negotiated contract in 2007," said Binns. "They weren't wrestled to the ground. We would like them to stay, but we would like them to stick to the contract."

He refused to be drawn on the implications of the Rio approach on the government's partial privatisation plans. Meridian is widely presumed to be the most likely second sale, depending on the timing and outcome of the part-sale of competitor MightyRiverPower.

In answer to a question about the threat of smelter closure, Binns said: "We are evaluating (our options) against the counter-factual, which is exactly what you said. It will take some time to complete the modeling.

If closed, the smelter would leave a huge "overhang" in the local electricity market, where demand growth has stalled now for five straight years.

It could see a plunge in the price of electricity and halt investment in new generation assets until national demand returned to levels equivalent to today's, with the smelter operating..

Binns said if the smelter closed, hydro-electricity from the Manapouri scheme, which effectively feeds the smelter, would be the cheapest available.

"It's 5,000 Gigawatt hours of New Zealand's most efficient plant, with the HVDC unleashed (with the new Cook Strait cable in place).

"There are some constraints in Southland, but those can be resolved," Binns said.

(BusinessDesk)

BusinessDesk.co.nz

Comments from our readers

On 13 August 2012 at 1:36 pm Jack said:

This looks like a Win-Win Situation. If the Smelter Stays --we win. If the smelter goes we win through cheaper electricity. But we might have to find some new jobs for smelter workers in Invercargill.