Rio Tinto's NZ aluminium smelter

Rio's loss-making smelter must stand on its own feet-New Zealand

• Rio Tinto smelter must stand on its own feet after rejecting subsidy offer-NZ

• Rio believes it can reach a electricity price cut with local power company

• NZ electricity supply glut looms if smelter shuts
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Reuters,

2 April, 2013

Rio Tinto's loss-making aluminium smelter in New Zealand, which wants a government break on its electricity bill to stay afloat, must learn to "stand on its own two feet," New Zealand Prime Minister John Key said after the firm rejected a short-term subsidy offer.

The 350,000-tonnes-per-year smelter in Tiwai Point in southern New Zealand is a victim of dire market conditions caused by weak demand and high Chinese production that's sent world aluminium prices into free fall since mid-February.

Commodities analysts say it could be years before conditions for producers improve and only after hundreds of thousands of tonnes of excess capacity is eliminated.

The New Zealand smelter falls under the recently formed Pacific Aluminium unit of Rio Tinto, designed to bundle 13 underperforming aluminium assets for closure, sale or spin off into a separate entity for an in-specie distribution to Rio Tinto shareholders.

Rio Tinto took an $11 billion writedown in 2012 because of losses in aluminium.

Key said Rio Tinto rejected the government's offer for help for the Tiwai smelter because the company was seeking a longer term price break than the government subsidy would provide.

"We have no interest in a long-term subsidy. If it can't stand on its own two feet, it shouldn't be there," Key told a New Zealand television network.

Pacific Aluminium has been holding talks directly with the state-owned electric company that supplies the smelter, Meridian Ltd, and said it believed a new deal could eventually be struck.

"We are of the view that a commercial agreement can be reached in relation to the NZAS (New Zealand Aluminium Smelters Ltd) electricity supply contract," Pacific Aluminium said in a statement emailed to Reuters."Our electricity contract negotiations with Meridian have progressed more in the past two weeks than in the previous nine months."

The 41-year-old smelter at the bottom of the South Island is the country's biggest power consumer, using around 15 percent of national output, and exports around NZ$1 billion ($837 million) worth of aluminium a year.

London Metal Exchange three-month aluminium prices stood at $1,900 a tonne on Tuesday, down 13 percent from its 2013 peak of $2,174 on Feb. 15.

A 17-year contract was signed by the smelter in 2007 and came into effect in January.

Meridian said last week there was a major gap between the two sides, and it doubted a new agreement could be reached.

Rio countered that they believed a deal was still possible. The company has previously raised the prospect the plant could be closed.

Last month, Pacific Aluminium's Gove alumina refinery in Australia narrowly averted closure with the loss of 1,400 jobs after reaching an 11th-hour deal over cheap gas supplies for 10 years.

"We know Rio can be a ruthless negotiator, but it's important the government remains involved in the smelter's negotiations with Meridian," Ged O'Connell, assistant secretary of the Engineering, Printing and Manufacturing Union, said.

"Whether the Government likes it or not, these negotiations are political and that means the buck stops with the Prime Minister," O'Connell said.

Power suppliers fear if the smelter closes it would create a glut of electricity and drive down power prices nationwide.

That in turn could jeopardise Key's plans to partially privatise Meridian and two other state-owned power companies: Mighty River Power Ltd and Genesis Energy, which is slated over the next three years.

Meridian says smelter firm

must make concessions

New Zealand's largest electricity company says it has gone as far as it can to save the Tiwai Point aluminium smelter from closure.

Radio NZ,

3 April, 2013

The Southland smelter company's majority owner has rejected the Government's offer of a short-term subsidy and is continuing negotiations with state-owned Meridian Energy for a deal on cheaper power prices. The parties have been in talks on electricity prices since August last year.

Meridian says keeping the Southland plant open will now require concessions from the company that operates it.

The New Zealand Aluminium Smelters (NZAS) plant is New Zealand's sole aluminium smelter. Rio Tinto subsidiary Pacific Aluminium owns most of the company and about 20% is owned by Japan's Sumitomo Chemical Company.

Pacific Aluminium says the smelter is losing money and it needs to get cheaper electricity to keep it running. It says it is confident an agreement can be reached.

But Meridian says it has made as many concessions as it can and the ball is now in Pacific Aluminium's court.

Meridian Energy chief executive Mark Binns told Radio New Zealand's Morning Report he would like to keep supplying the smelter but the electricity could easily be sold elsewhere.

The Government has ruled out long term subsidies to ensure the smelter's future.

Energy analyst Grant Swanepoel of Craigs Investment Partners said if the smelter closes, electricity generators will have time to reconfigure their plants to manage the surplus electricity.

Wholesale electricity prices would come down gradually, he said , but it would take longer for residential prices to follow.

Impact on asset sales not a factor - PM

Prime Minister John Key says the Government will not be held hostage by Rio Tinto because of the possible impact on the partial asset sales programme, should the Tiwai Point aluminium smelter close.

State-owned power companies are among the assets up for partial sale by the Government.

The Tiwai Point smelter uses 15% of New Zealand's electricity and if it closed power prices could fall because of the increase in supply. In turn, this could push down the price of some of the companies up for sale, including Mighty River Power, due to be partially sold this year.

Labour Party leader David Shearer says Rio Tinto knows the Government wants to get the best price for Mighty River Power, so it can play hardball, and the Government will just have to take it.

However Mr Key says the Government will not be pressured into providing long term taxpayer funded subsidies.

"The argument the Labour Party are saying is that we should be held hostage to Rio (Tinto) so that they can force the best deal out of us because we are somehow worried about the mixed ownership model programme. Well that's not true."

Invercargill mayor Tim Shadbolt says there may be little the city council can do to help keep the smelter remain open, except to try to find another owner.

He says the council's sister city in China has expressed interest in helping to find a new owner, which he hopes might take a longer term view of the smelter's profitability than the current owner.