Smelter power review 'bolt from blue' for asset sales

Aluminium smelter owner Rio Tinto is trying to re-negotiate New Zealand's biggest electricity contract. Photo / Mark Mitchell

Meridian Energy's announcement that it had been approached by New Zealand's biggest power user, Rio Tinto, to discuss potential changes to its supply contract has created uncertainty for the Government's plans to partly privatise the three power generators, analysts said.

State-owned South Island power generator Meridian said it had been approached by Pacific Aluminium, a business unit of Rio Tinto, the majority shareholder of New Zealand Aluminium Smelters (NZAS), to discuss potential changes to the electricity contract with the smelter.

The statement comes a time when Rio Tinto is assessing its options for the NZAS smelter at Tiwai Pt.

Tiwai takes about 15 per cent of New Zealand's electricity, so the prospect of changes to the contract between Meridian and Rio was enough to send Contact Energy's share price down 20c to $4.80 on Thursday.

Few in the financial markets expect Tiwai Pt to close, but if it did, much more power would be added to the national grid, depressing prices and affecting the profitability of all the power generators.

In 2007 Meridian renegotiated the contract conditions with NZAS and signed a new electricity supply agreement, which takes effect in January 2013.

Analysts said the 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.

Morningstar analyst Nachi Moghe said there was ongoing concern about the feasibility of Tiwai Pt and the possibility that it might eventually shut down.

"Obviously, if that happens it will hurt everyone, but it will hurt Meridian the most," he said."That additional supply will throw the supply-demand balance out of kilter."

One fund manager said the news was a "bolt from the blue".

In the contract negotiations, he said, the pressure could go on Meridian to reduce its price, or to reduce the volume of power it supplies, which would have an impact on the wholesale electricity market.

"It's poor timing but great timing on behalf of Rio Tinto as we go into the mixed ownership model process," said the fund manager, who did not want to be identified.

Rio's attempt to renegotiate New Zealand's largest electricity contract comes as the company's chief executive warns of "difficult decisions" ahead if its older smelters cannot be made commercially viable, financial news agency Business Desk says.

The international mining giant reported a 34 per cent drop in profits to US$5.2 billion for the six months to June 30 on Tuesday, dragged down in particular by the sustained collapse in world aluminium prices.

Under the new contracts, Rio's take or pay obligations will rise from 543.75 megawatts annually at present to 572MW annually, with the electricity price calculated on a formula taking into account exchange rates and global aluminium prices.