Rio Tinto in no position to dictate over Tiwai smelter.
Ominous sounds have been coming from the deep south since August when Meridian Energy announced it had been approached by Rio Tinto, majority owner of the Tiwai Pt aluminium smelter, seeking to renegotiate its electricity supply contract for the next 27 years. The world price of aluminium had fallen 30 per cent from a peak in April last year and Rio Tinto's returns from Tiwai Pt and several smelters it has in Australia had been further reduced by the strength of the currencies of both countries.
It would not have escaped the mineral giant's notice, either, that it was an opportune moment to put pressure on the New Zealand Government. The smelter is by far this country's largest electricity consumer, taking all the power from the Manapouri hydro station which was built purely for the smelter more than 40 years ago and produces 15 per cent of the nation's power. If the smelter were to close the electricity market would be flooded.
The mere possibility caused Contact Energy's share price to fall in August and put a cloud over the Government's plans to float shares in the other big generating companies.
Ominous noise was heard again this month when a union at the smelter went public with a rumour that Meridian had abandoned the talks. That rumour was denied by Meridian's chief executive, Mark Binns, last week but he also said Manapouri produced the cheapest power in the country and looked forward to national grid upgrades and changes to transmission pricing rules would allow the power to be distributed more widely.
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If this means Mr Binns is playing hard, the public should be behind him. New Zealand has given successive smelter operators very good deals over the years for the sake of the jobs the smelter has provided for Invercargill. Not only was the Manapouri scheme built at taxpayers' expense but its entire output was provided to the smelter at a price the public was not allowed to know.
The power project and smelter were literally made for each other. They survive as a relic of an era when governments decided how economic resources would be best used. Turning hydro power into aluminium, with the raw mineral shipped from Queensland, appealed not only as regional development but for giving New Zealand a new export when farm commodities were facing the prospect of Britain entering the Europe's new common market.
It all seems so long ago, and it is. The smelter has fulfilled the hopes of the 1960s. It has provided a lifetime of employment for thousands in Southland, produced a fine quality of aluminium by all accounts, and contributed to the country's external trade balance. But it might not be built today.
The smelter did not make Southland notably better off. The province languished until one of those old farm commodities, dairy products, brought the boom that Southland still enjoys. Nor did aluminium contribute more than marginally to national growth. When economists in the 1980s looked at the countries' poor return on national investment they told government to let private enterprise pick winners instead.
Meridian Energy is not a private enterprise but in this negotiation with Rio Tinto it must act like one. If it believes it can sell Manapouri's power for a better price than the smelter is offering, it should let the smelter go. If low-cost Manapouri power threatens the profitability of Contact, Genesis and Mighty River, that is not Meridian's concern. The Government should make this clear. Rio Tinto is in no position to dictate terms now.