COMMENT: Even before the Tiwai Point aluminium smelter opened in 1972, it was the subject of the same controversy now playing out. Right from the word go, governments have capitulated to hard-ball Aussie corporates
COMMENT
Even before the Tiwai Point aluminium smelter opened in 1972, it was the subject of the same controversy now playing out.
Right from the word go, governments have capitulated to hard-ball Aussie corporates - first Comalco, now Rio Tinto - who only ever invested in converting Aussie bauxite to metal because we promised them cheap electricity.
That power is nominally sourced from Lake Manapouri and was one of Rob Muldoon's first Think Big projects.
For many years, just how little the smelter paid for electricity was only guessed at.
Consuming around one-seventh of all electricity generated in New Zealand, the smelter has also, from Day One, had "too big to fail" written all over it. For all of its 41 years, sheer size has given the smelter extraordinary political leverage, and its owners have never been shy to use it.
In the past two decades, pricing transparency did slowly improve. We know the price can change in response to world metal prices and exchange rates, and the smelter has long bought a small amount of its total supply from the wholesale electricity market.
Since April last year, it has already cut production by 15 percent, reflecting weak world prices high and, more recently, high wholesale spot market prices caused by the drought.
Over the years, the smelter has played ball during winter power shortages, sometimes at considerable cost.
The kit has been kept up to date, the quality of its output is high by global standards and more valuable because of it. But newer kit has been steadily pushing Tiwai Point up the cost curve. Electricity price is the primary lever of its competitiveness, and it's been slipping.
The smelter owners have also always had institutional memory on their side, compared with the inter-generational parade of government officials and Meridian executives who've dealt with the issue.
And in Australia, state governments have buckled willingly to keep old smelters like Bell Bay and Boyne open, leaving Rio baffled by the economic purity in Wellington, where the government has regarded the smelter issue as a commercial matter for Meridian. Or it did, until entering the fray earlier this week.
As someone said today: "These guys always win."
Or, as Meridian chief executive Mark Binns put it to the commerce select committee today: "We're not dealing with grandma."
All the same, it could be that four decades has taught the kiwi side a few tricks too. There is an elegance about the glide path to closure that is built into the smelter contracts, which would give lots of time for adjustment, particularly for the electricity sector.
As a multi-national, Anglo-Australian mining and metals giant, whose aluminium segment is run out of Toronto and whose performance was one reason Rio's long-time CEO Tom Albanese lost his job earlier this year, Rio doesn't care about New Zealand.
It just wants a deal, and it's known ever since the government announced partial privatisation of the electricity sector that it would get a chance to force that deal. It's now playing that card.
By forcing the issue today and making a public statement ahead of the MightyRiverPower float in May, Meridian has crystallised the threat.
Yet the government's maintaining its game face over the way the latest developments mesh with the MRP part privatisation. In part, that's because it's decided it will pay a sum of money - it has yet to be seen how much, but it may not be as much as the $60 million for The Hobbit - to "bridge the gap" in the short term between what Rio wants and what Meridian can tolerate.
That will buy three to four years. That's plenty of time for Meridian and Rio to keep talking, for global aluminium market conditions to improve, or for closure to be announced, planned for and undertaken.
Rio is on the hook for power on a virtual take-or-pay basis until 2016. From there, even if it decides to close the plant, the current contracts stipulate a wind-down phase of about two and a half years.
And there's a sting in the tail. The sooner Rio leaves, the sooner it faces multi-million dollar remediation costs at the smelter site. The sums are not trivial, and Rio could delay them for years by keeping the smelter open, if it can just make a bean at it.
Most elegant about the contract structure is that it builds in time for the electricity sector to do what it's been saying it will do anyway if there's a big cut in demand for electricity - close old gas and coal-fired plant, upgrade the grid connections from Manapouri, and smoothly move to a new future without the smelter.
While that's still tough for Southland, it looks eminently manageable from the power companies' perspective. Meridian might even be more profitable without the lead of the low-priced smelter contracts in its saddlebag.
In that scenario, power prices stay roughly where they are now as old plant closes, meaning MRP remains on a similar earnings trajectory to today. If you believe that, or if the smelter survives and demand holds up, then there's no reason to can the MRP float.
Of course, that's a very complicated argument to win.
Far easier and still justified are the Opposition claims the government is simply paying Rio Tinto to keep its ragged flagship asset sales policy alive. The Opposition, too, has its challenges. Closing the smelter would move New Zealand closer to its renewable electricity goal, at potentially huge cost to the people of Southland. That's not much an advertisement for green growth.
And finally, if the government failed to try and smooth the pillow if the smelter is to leave, while creating the hope that market conditions for aluminium might improve and the plant goes a bit longer, what would the Opposition say then?
(BusinessDesk)
