Meridian drops smelter bomb - new contract unlikely

Meridian Energy says it is "unlikely" to reach a new electricity supply agreement with its largest customer, the Tiwai Point aluminium smelter, which consumes around one-seventh of New Zealand's electricity.

The bombshell disclosure has the capacity to upset the government's plans to partially privatise state-owned electricity company Mighty River Power. Offer documents are due for release in about a fortnight, with listing by mid-May.

This morning's announcement to the NZX comes ahead of a select committee appearance today by the chairman and senior managers of Meridian at the commerce select committee, where it is expected chief executive Mark Binns will outline more fully the implications of the stalemate.

But news that there may be no new price agreement with New Zealand Aluminium Smelters carries huge implications for the electricity sector, which has struggled to grow in the last five years and would face a massive supply over-hang which could last years, were the smelter to close.

However, that outcome is not yet certain.

The smelter's majority owner, Anglo-Australian minerals giant Rio Tinto, is locked into the first three years of an new 18-year contract which took effect from January 1, took three years to negotiate and had been agreed in 2007.

While the New Zealand smelter makes internationally recognised high-grade metal, which sells at a premium, Rio has been hit hard by its exposure to the aluminium sector, where world prices have been hit hard since the global financial crisis.

Rio Tinto is seeking to sell the smelter, along with a clutch of other, older smelters in Australasia, which it has packaged as a new subsidiary, Pacific Aluminium.

Rio's over-exposure to aluminium has been cited as one reason its global chief executive, Tom Alabenese, was replaced earlier this year.

Mr Binns said since Rio had approached Meridian for a renegotiation "various options have been discussed and Meridian has offered a number of changes and concessions to the existing contract".

"Despite significant effort by both parties there remains a major gap between us on a number of issues, such that we believe that it is unlikely a new agreement can be reached with Pacific Aluminium.

"In the event no agreement can be reached, Meridian will seek to engage with Rio Tinto and Sumitomo Chemical Company (which holds a 20.64 percent stake in the smelter) ... who will ultimately decide on the future of the smelter."

The current contract remains "unaltered and binding on the parties".

(BusinessDesk)