The owners of the Bluff smelter issued a swift contradiction to this morning's claim by its supplier, Meridian Energy, of an impasse over contract negotiations, saying it believes "a commercial agreement can be reached" on electricity supply to the smelter.

"Our electricity contract negotiations with Meridian have progressed more in the past two weeks than in the previous nine months," the chief executive of Pacific Aluminium, Sandeep Biswas, said in a statement at odds with his Meridian counterpart, Mark Binns's, contention that an agreement was "unlikely."

Pacific Aluminium, a subsidiary of Anglo-Australian metals giant Rio Tinto, owns 79.36 per cent of the smelter at Bluff, which consumes around one-seventh of the country's total electricity output is Meridian's largest customer. The smelter is for sale along with a clutch other Australasian smelters held in the Pacific Aluminium stable.

Failure of the negotiations at this time could place the New Zealand government's plans to partially privatise fellow state-owned power company MightyRiverPower in jeopardy. Listing is planned in mid-May, with offer documents due to go to the more than 400,000 New Zealanders who have registered interest in the float of up to 49 per cent of MRP.


However, New Zealand Aluminium Smelters is the largest single consumer of electricity in the country, accounting for around one-seventh of total output.

While the smelter is locked into its existing contract terms for at least three years, the threat of closure and a huge overhang of uncommitted electricity would be bad news for an industry that has seen little or no demand growth for almost five years. The smelter closure could benefit consumers if there was an electricity supply glut, but would be a huge blow to Southland.

The NZAS website claims the smelter accounts for around 10.5 per cent of the Southland economy and employs 3,200 people directly and indirectly.

"We believe a commercial agreement that is in the best interests of NZAS, Meridian, the New Zealand Government, and the people of Southland can be reached," said Biswas. "We look forward to continuing productive negotiations with a view to achieving a positive outcome for all parties."

Binns is due to appear before the commerce select committee this morning for Meridian's annual financial review and is expected to face both media and MPs' questions on the issue at that time.

Meridian and NZAS had already spent three years renegotiating the current contract, which was signed in 2007, before the global financial crisis and a downturn in global aluminium prices. The new terms on the 18 year contract kicked in on Jan 1 this year, and are set in stone for the first three years.

Electricity prices in the contract already contain clauses that trade off price against trends in world metal prices, and a certain proportion of total load is bought at wholesale market spot prices.

The smelter announced earlier this month that it was cutting production by 5 per cent owing to high spot prices, bringing the total cut in production since April last year to 15 per cent of the smelter's capacity.