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Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and NZME. news service.

Rio Tinto old hand at talking tough

Tiwai Pt contributes $525 million annually to the Southland economy.  Photo / Supplied
Tiwai Pt contributes $525 million annually to the Southland economy. Photo / Supplied

Rio Tinto - the ultimate owner of the Tiwai Pt aluminium smelter - is no stranger to playing hardball with governments when it comes to securing energy contracts.

The Government on Thursday said it had opened discussions with the Anglo-Australian resource giant in a bid to broker a deal after talks between the smelter and Meridian Energy broke down.

"Rio is playing hardball, as expected," said one Sydney-based commodities analyst.

The latest development follows closely on the heels of Rio's successful negotiation with the Northern Territory Government, which has won a reprieve for Rio's loss-making Gove alumina refinery.

Rio's decision to keep the plant open followed a commitment from the Northern Territory Government to release a portion of its contracted gas for on-sale to Gove. Rio is also in talks with the Federal Government regarding the construction of a 600km pipeline from Katherine to Nhulunbuy.

Aluminium is a highly competitive industry globally, and the price of electricity can often be pivotal for the profitability of individual smelters.

Merrill Lynch and CitiBank analysts have estimated that 30 to 50 per cent of global aluminium smelting capacity operates at a loss.

Analysts said Rio has a history of talking tough with governments and that New Zealand would be no exception.

Nick Lewis, an analyst at Wellington-based brokers Woodward Partners, said Rio was known as a shrewd operator when dealing with governments.

"It's hard for me to not be cynical," Lewis said.

"It feels to me that Rio is just raising the stakes.

"The Mighty River Power float is getting closer and they [Rio] want to use that as leverage to get the best possible deal that they can."

Canada's Alcan, which Rio bought in 2007 for US$38.1 billion, also had a name for being a tough negotiator.

In 2011, Rio said it would restructure its worldwide aluminium business and said its interests in six of its Australian and New Zealand assets - including the smelter at Tiwai Pt - would be transferred into a new business unit called Pacific Aluminium, and sold.

Analysts said making Gove profitable could improve the prospects of the Pacific Aluminium group and its possible sale but that the industry worldwide was in bad shape.

Even though analysts agree that aluminium has a bright future, the metal has suffered from weak prices and overcapacity, particularly as China continues to build new smelters.

Aluminium last traded at US$1890 ($2260) a tonne on the London Metal Exchange.

The analysts' rule of thumb is that a drop in the aluminium price below US$2000 tonne renders half the world's smelters uneconomic.

The Gove bauxite mine and alumina refinery is the largest private employer in the Territory with a workforce of 1500 direct employees and contractors.

Rio said the business contributed more than A$500 million to the Northern Territory's economy each year.

NZAS - 79.36 per cent owned by Pacific Aluminium and 20.64 per cent owned by Japan's Sumitomo Chemical Co - plays a similarly large part in the Southland economy, contributing $525 million annually to the province's economy and employing 700 people.

Citi Australia, in a research note, said Pacific Aluminium could be a difficult asset to sell given the pressure on costs and margins of aluminium in Australia and New Zealand.

But Citi said the A$452 million investment by China's CITIC into Melbourne-based Alumina last month showed there was still interest in the sector.

Citi said that even though an outright sale of Pacific Aluminium would be the cleanest exit for Rio, "we think it is unlikely".

- APNZ

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