Norske Skog Tasman's plan to halve newsprint production at its Kawerau mill will have implications for the power generation industry if it goes through with it, says an industry analyst.
The company, which accounts for about 2.9 per cent of New Zealand's power demand, is looking at cutting its annual production to 150,000 tonnes from 300,000 tonnes because of dwindling domestic and offshore sales.
The analyst, who requested anonymity, said the partial closure would further extend the "significant" generation over-capacity in the New Zealand electricity market.
A 50 per cent reduction in Norske Skog Tasman's electricity demand would equate to about one year of demand growth estimated in Ministry of Economic Development forecasts.
The analyst estimated that it would take until 2016 for the electricity demand and supply to return to balance if Norske Skog went through with its plan.
Norske Skog's announcement follows a statement from Meridian Energy early this month that it had been approached by New Zealand's biggest power user, Rio Tinto, to discuss potential changes to its supply contract.
Meridian said it had been approached by Pacific Aluminium, a business unit of Rio Tinto, to discuss potential changes to the electricity contract with the smelter at Tiwai Point, in the south of the South Island. Tiwai is responsible for about 15 per cent of New Zealand's power demand.
Analysts said Rio's announcement had thrown the market a curve ball just months before the Government embarks on its so-called mixed ownership model for the three state power generators, starting with Mighty River Power later this year.
"More broadly, we see Norske Skog's cuts and the recent announcement that Rio Tinto's New Zealand Aluminium Smelter is renegotiating its electricity supply contract as highlighting the pressures on manufacturers from weak global economic conditions and high New Zealand dollar," the analyst said.
"When coupled with low migration and likely increased efficiency offsets following strong electricity price inflation over the past decade, we see downside risk to the Ministry of Economic Development's demand forecasts and the 2016 demand-supply adjustment time-frame," he said.
Generation over-capacity would suppress wholesale electricity prices over the medium-term and would promote the continuation of strong retail competition.
Medium-term lower prices should heighten pressure on thermal generators Contact Energy and Genesis Energy to reduce capacity, he said.
Norske Skog gets most of its power from Mighty River Power, which the government plans to partially privatise under its mixed ownership model.
Mighty River is scheduled to report its annual result on August 28.
Norske Skog Tasman's general manager, Peter McCarty, said the newsprint industry faced challenges due to general economic conditions and increased competition the print media is facing from the electronic media.
He said the Tasman Mill had successfully increased exports to Asia over the last three years in an effort to offset the decline in demand in New Zealand and Australia, however demand in these new markets was now weakening and prices falling due to fierce competition between newsprint suppliers.
Norske Skog Tasman is a wholly owned subsidiary of Norske Skogindustrier ASA, a Norwegian pulp and paper company based in Oslo. The corporation is the world's largest producer of newsprint magazine paper.