Meridian boss: 'We offered smelter compelling deal'

Friday, 10 July 2020

Invercargill Mayor Sir Tim Shadbolt talks about the closure of the Tiwai Point aluminium smelter.

Meridian Energy chief executive Neal Barclay says the company put together a “pretty compelling offer” to Rio Tinto to persuade it to keep the Tiwai Point aluminium smelter open, but it had been rejected.

Rio Tinto has indicated that the smelter will cease production by August next year, and Barclay said it expected it would start closing its potlines before then.

Barclay said that if Rio Tinto’s statement about closing the smelter was a negotiating tactic that would be “a pretty cynical play in terms of their own employees and the community in Southland”.

“I think they have decided they want to close the smelter,” he said.

“Maybe there is a possibility to extend that closure period, but that is not consistent with the communications we have seen yesterday,” he said.

* Sudden closure of aluminium smelter worst outcome for jobs, consumers and the environment

Meridian Energy has been undercutting its standard pricing in an offer on comparison site SwitchMe.

* Tiwai Point aluminium smelter to close, 1000 jobs to go

Barclay indicated the four-year deal on power prices the smelter had been offered would have delivered a $50 million cost saving to the smelter in its first year, rising to between $60m to $70m after that.

It would have brought the smelter’s power costs “down to the mid-point” for smelters globally, he said.

Meridian is the smelter’s major power supplier, but others had been involved in putting together the offer, which also included an “underwrite” of the smelter’s transmissions costs, he said.

Barclay said Meridian had told Rio Tinto on Tuesday that it might be able to improve that offer if the smelter committed to a 10-year power contract.

Meridian Energy chief executive Neal Barclay says the Electricity Authority has got it wrong.

That could have got them “a long way towards” their demand for one-third cut in their power prices, he said.

Barclay said he believed Rio Tinto’s decision to instead close the smelter must have been based on “bigger issues”.

“We have put a pretty compelling proposition to them, but they have decided it is not good enough.

“Very unfortunate – but it is what it is.”

Aluminium prices fell from US$1730 (NZ$2633) a tonne when Rio Tinto announced its strategic review in October to US$1451 in May, as a result of the coronavirus pandemic, but have since recovered somewhat to US$1634 per tonne.

Meridian indicated the smelter’s closure could lead it to reconsider its investment in its proposed 41 turbine Harapaki wind farm north-west of Napier.

Electricity supplier Contact Energy has already suggested that the “sensible option” would be for Contact to cancel another renewable energy project: the construction of a $600m “shovel-ready” Tauhara geothermal power station.

Credit ratings agency S&P has warned the smelter closure could “materially disrupt the country's electricity market” and has changed Meridian’s 'BBB+/A-2' rating from stable to negative.

The closure would “fundamentally shift New Zealand's electricity supply and demand” and would result in lower wholesale prices, particularly in the South Island, where about 90 per cent of Meridian's generation capacity was located, S&P said.

The closure would impact “all of New Zealand's electricity generators or retailers to varying degrees at least over the next two to three years, if not longer”, S&P said.

Contact Energy chief executive Mike Fuge on Thursday urged Rio Tinto to “reconsider” its decision.

“All commercial parties involved in dealing with [the smelter], including Contact, had collectively delivered significant cost reductions for electricity,” Fuge said.

“We urge Rio Tinto to seriously consider the offer for improved electricity supply and encourage them to consider what is right for Southland, for New Zealand and for their own global environmental commitments.”

In his initial address to investors on a conference call on Friday, Barclay did not indicate that any further talks were under way or likely.

The outcome was not the one Meridian wanted, but it at least now had clarity, he said.

But Barclay appeared to muddy the waters and raise the possibility of another leg to the saga when questioned by analysts after his address.

In December, Meridian and Fuge got “a strong sense” from Rio Tinto Aluminium chief executive Alf Barrios that there was “no way they saw themselves walking away with a relatively short notice period of one year”, Barclay said.

“That is totally inconsistent with the notice we got from them yesterday,” he said.

“I was talking to my counterpart in Australia yesterday morning, and they indicated they would be open to some sort of offer. But then there has been radio silence since then.

“They have come out with a pretty clear and firm communication, so we have still got to work out what alternative options there are for a more orderly exit – if there are any options,” he said.

Barclay said he believed Rio Tinto, globally, was seeking to curtail its supply of aluminium, and queried whether a sale of the smelter would be in its interests, if that was its goal.

Meridian only found out about Rio Tinto’s decision to terminate its electricity contract with the company at about the same time that it was publicly announced on Thursday, he said.

“We were as informed as the rest of the market.”

Barclay said he expected the smelter would wind down its operations ahead of next August as it closed its potlines.

“We have had no real engagement with them as to how they operationally plan to do that, but we expect to have that in the next few days, as I do understand they have got a plan,” he said.

Rio Tinto’s plan to close the smelter has knocked about $3 billion off the value of New Zealand’s five NZX-listed power companies, as investors contemplate the implications of excess electricity from Meridian’s Manapouri hydro scheme being dumped on the market.

Transpower has indicated it might not be able to complete the $600m-$700m investment required to fully rebalance the national grid to shift power north until between 2025 and 2028.

But it should be able to spread the excess generation to more power users across the South Island by 2023.

“Transpower will now assess whether there is an opportunity to progress this work even more quickly than currently planned,” its grid development manager John Clarke said.