Govt must not kowtow to Rio Tinto's every demand.

Rio Tinto is doubtless more than happy that the Government has stepped in to try to broker a deal over the electricity supply contract for the Tiwai Pt aluminium smelter. The global company's bargaining position has always been strong. Now, the concerns that have brought the Government to the negotiating table make it even stronger. Nonetheless, there remains no reason to bow to the mining giant's every demand.

The higher-level renegotiation of the contract for the next 27 years follows the failure of talks between Meridian Energy and Pacific Aluminium, which is 80 per cent owed by Rio Tinto. Meridian's chief executive, Mark Binns, said on Friday that after nine months of negotiations, "there remains a major gap between us on a number of issues". This, he said, led Meridian to believe it was unlikely a new agreement could be reached.

That is not what the Government wanted to hear as it prepares for the part-sale of Mighty River Power next month, to be followed by other power companies, including Meridian. Tiwai Pt consumes about 15 per cent of the electricity produced in New Zealand. If no supply agreement is reached and Rio Tinto closes the smelter, the wholesale market would be oversupplied and prices would slump. The sharp reduction in power companies' revenues would have a substantial impact on their market value.

This uncertainty has forced the Government's hand. Most of the potential Mighty River shareholders may be aware of the Tiwai Pt negotiations but assumed an agreement would be reached. If the uncertainty continues, shares in Mighty River will, inevitably, be somewhat cheaper. As much was confirmed by Contact Energy's share price dropping 3 per cent in early trading after Meridian announced the negotiation deadlock. There are other factors for the Government to consider, not least the threat to 750 jobs at the smelter and a further 3000 indirectly in the Southland region. That, ironically, is the bailiwick of Finance Minister Bill English, the driving force behind the asset-sales programme.


All this means that the Government will enter negotiations with far more on its mind than was the case with Meridian. The power company's focus would have been very much commercial. It would have been seeking to extract the best price for its electricity, knowing that it had a viable alternative if its demands were not met. This would entail selling the power formerly used at Tiwai Pt to the likes of Genesis or Contact, which would allow the closing down of some of the country's more inefficient power stations, such as the one at Huntly. During the negotiations, Meridian would not have been concerned about the impact of the final outcome on the Government's asset-sales programme or the effect individually on Genesis or Mighty River.

Rio Tinto's position is the stronger in that it has made it clear that it wants to sell the smelter. If that is not possible, closure is an alternative response to the sagging world price for aluminium. Even so, there is no reason for the Government to start genuflecting. This country has already given successive Tiwai Pt operators very good deals since it built the Manapouri hydro station to power the smelter more than 40 years ago. The Government's approach to these negotiations should, therefore, not be markedly different from that of Meridian. If a deal that makes commercial sense cannot be struck, it will not be fatal to the asset-sales programme, the country's electricity framework, or, in the long term, the Southland economy. On no account should the Government throw in the towel.