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Tiwai Point smelter safe to Jan 2017 under new deal with Meridian

Thursday 8th August 2013

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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 Point 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 Sept 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 Jan. 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," said Binns.

English and Ryall said 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 over $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.

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