Tiwai Pt smelter safe to Jan 2017 under new Meridian deal

The Tiwai Pt smelter at Bluff
Mark Binns

Meridian Energy has had to give up previously negotiated price increases and the government has chipped in with a $30 million "incentive payment" to keep the Tiwai Pt aluminium smelter open until at least January 2017.

Meridian chief executive Mark Binns announced the deal in a statement to the NZX, saying the renegotiated contract would "see a reduction in the current electricity charge from July 1, 2013, and allows for price increases should the New Zealand dollar value of aluminium rise above agreed levels".

Finance and State-Owned Enterprises Ministers Bill English and Tony Ryall described the new deal as "returning the price of power paid by NZAS to around pre-2013 levels, in exchange for guarantees on the contract from or on behalf of New Zealand Aluminium Smelter's parent companies".

The contract renewal looks likely to see a writedown in the value of Meridian ahead of government plans to sell up to 49 percent of the shares in its largest electricity company by September 30, which was independently valued at $6.5 billion in 2011.

The new contract will run to 2030, as did the contract it replaces, but appears to include a faster exit clause for the smelter, which is owned majority-owned by Pacific Aluminium, a subsidiary of the global metals giant Rio Tinto.

The new deal allows NZAS to terminate the contract after January 2017, with 15 months' notice, and will give the smelter greater flexibility about how much or little of its contracted load it has to take. It will now be able to reduce its contracted volume from from 572 Megawatts to 400 MW from 2015.

PacAl is attempting to quit holdings in seven aluminium assets in Australasia, although has yet to find a buyer.

The smelter began paying new, higher prices on January 1, based on a contract that was negotiated and signed in 2007, before the global financial crisis, a collapse in the global price of aluminium, and before the construction of major new capacity, especially in China.

"Meridian is delighted that the parties could find a mutually acceptable position and trusts the new pricing framework and associated arrangements assist NZAS in establishing a competitive cost position for the future," Mr Binns says.

Messrs English and Ryall say the $30 million sweetener from the taxpayer was a "one-off incentive payment to help secure agreement on the revised contract because of the importance of the smelter to the stability of the electricity market".

"It provides medium-term certainty for Southland and New Zealand."

A similar offer, made out of the blue when it appeared the talks might fail earlier this year, was turned by PacAl.

The smelter accounts for around 10 percent of the economic activity in Southland and produces more than $600 million in export receipts annually, but has struggled for profitability despite making a high-grade metal that attracts price premiums and pursuing productivity improvements and cost reductions.

A further cut in smelter maintenance staff is being negotiated at present.

(BusinessDesk)

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Awesome.

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A mug if you do and a mug if you don't. How long before Labour/Greens and others call this a bad deal?

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They were scathing of it within minutes after the announcement. Labour want to tread very carefully here. They were all about 'the jobs' when news first broke that the smelter may shut down. That said, I don't believe the government should have stumped up the $30 million.

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My business has just been damaged by Fonterra's actions. Where is my handout?

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It seems to go against National's ideology of not subsidising a business.
I can see the logic in this case, but it will attract criticism from those businesses that feel they also need help but won't get it.

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You must be joking. National hugely believe in subsidising business. The current government alone provides corporate welfare of one kind or another to tourism, gaming, agriculture, telecom/internet - the list goes on and on.

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Either we have a free market or we don't. This too-big-to-fail ideology is socialism.

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And more and more are people expecting the government to be accountable for events in the private sector. Just look at this Fonterra fiasco that the opposition have tried to blame on deregulation. The free market died with the guaranteeing of finance company deposits. But you are right, we are moving more towards socialism every day.

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A little bit of history. When the smelter was being contemplated, Comalco had the water rights for power generation from Manapouri. The capital expenditure turned out to be too high for the company so the government agreed to build the power station. Comalco had planned on a station with four turbines but this was upgraded to seven turbines so New Zealand consumers could gets very low cost power from water that would otherwise have been spilled.

As I understand it, the original contract provided electricity at its total cost. Muldoon unilaterally renegotiated this contract.

Subsequently, the price was increased further until it was not much cheaper than bulk electricity supplied to other users. It can be argued that this failed to recognise that, if the smelter shut down, about 30% of the power would not be available from Manapouri because of transmission restrictions in the bottom of the South Island and across the DC link. New Zealand Inc did extremely well out of this contract.

I tend to regard the $30 million as compensation for past high power costs.

We should all be pleased that this deal has been signed. The costs to New Zealand of a smelter shutdown would have been much higher.

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A deal that had to be done.

Look at real materials flows today and in next 10 years - Tiwai is an old meat works or dairy factory in waiting!

China is now pulling its minerals out of Africa and will generate power to process. This is a slide-the-problem-out deal that really is just an Australia Inc subsidy in drag.

What happens in 2017 when problem is worse?

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So was the $30 million "incentive" a bribe, a blackmail, a fee, a surcharge, a tax deduction ... or more like a one-off hardship grant for corporate welfare beneficiaries?

Whatever it was, it doesn't look good. At least keep some semblance that you are running a nation of laws, not a shake-down, wheeling-dealing 'operation'.

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This is a zero rate financing help to allow a depreciated asset to the point of diminishing returns...and sectorial environment disaster waiting to happen to distort electricity industry supply output.

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Let's say the government called Rio Tinto's bluff. They fold up Tiwai Point and leave.

That's 800 direct jobs and maybe another 2200 indirect job losses. $30 million goes a long ways towards retraining, relocating, and otherwise assisting those.

Manapouri power flows across the country - possibly with some further investment in T&D, as Bryan Leyland points out. Power prices in general drop. Major economic gain to companies, who could reinvest in their businesses and create more jobs. Major gains to consumers, who could spend more of their income on other things.

Of course all this would be offset a little bit by a decrease in the valuation of Meridien and maybe other power companies.

NZ Inc makes big gains, power gen sector loses a little. Sounds good to me.

Oh, I forgot. The Dealer wants to carry through a lame political promise to sell part of a power gen company. So that justifies screwing NZ Inc and also a subsidy of $30 million to keep a dinosaur plant operating for a few more years. Terrific.

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