No easy answer on who caved on smelter deal
Mining giant Rio Tinto has agreed to keep the Tiwai Point aluminium smelter open for a few more years, as expected. But surprisingly, it has done so without first securing an agreement with the Government on reduced electricity transmission prices from Transpower.
That would appear to the best outcome for everyone.
Not only will about 1000 staff and contractors at the smelter keep their jobs until the end of 2024, but Transpower will get enough time to build the power lines needed to make the electricity it uses available to other South Island customers before the closure.
And it seems the Government hasn’t had to get its hands dirty in the negotiations. Or has it? If you were expecting the answer to the question of who caved to be simple – my apologies.
To dial back to the beginning, when Rio Tinto first announced it was reviewing the smelter’s future in October 2019, it had two demands.
First, it wanted to cut the price it paid to Meridian and Contact for electricity by about a third. It is believed to be paying about 5 cents a kilowatt hour for power.
Second, it wanted to roughly halve the annual bill it was paying to Transpower to carry that electricity to the smelter, from about $60m a year to $28m a year.
Meridian and Contact put together a sharper deal, which the smelter effectively rejected when it announced in July that it planned to close the smelter by August this year.
Meridian chief executive Neal Barclay described that offer as compelling, saying it would have delivered a $50m costsaving to the smelter in its first year, rising to $60m to $70m after that.
But after the rebuff and some time before late September, it sharpened its offer further.
Meridian would not confirm yesterday whether it was that deal Rio Tinto has now accepted, or whether it improved its offer once again.
But the chief executive of the smelter, Stew Hamilton, indicates it was having more of an iterative conversation with the company about prices.
Regardless, we know Meridian caved on pricing at least twice.
What about Rio Tinto’s demand for lower transmission pricing from stateowned Transpower?
Prime Minister Jacinda Ardern announced before the election that Labour would look to keep the smelter open for three to five years by ‘‘supporting’’ Transpower to reach a fair price for transmission costs.
The plan seemed to be that the Government would ask Transpower to cut the smelter a deal, and accept a lower dividend from Transpower so as not to increase prices for other electricity users.
It was that concession that seemed put the final piece of the jigsaw in place for the smelter’s reprieve.
But Rio Tinto announced yesterday that discussions with the Government over transmission pricing were still continuing.
Energy Minister Megan Woods said the Government and Rio Tinto ‘‘remain in discussion around transmission pricing and remediation of the smelter site’’.
But why would the Government encourage Transpower to lower its prices to the smelter now that Rio Tinto has already agreed to keep the smelter open? There are three possible explanations. One is that Meridian’s price cut was steep enough for Rio Tinto to agree to keep the smelter open, but that the Government still feels it needs to keep talking to the smelter better about transmission pricing in order to get a separate deal with Rio Tinto over cleaning up the smelter site when it does close.
The second explanation is that the Government was perhaps more involved in paving the way for the agreement than it might seem, and that Rio Tinto believes it has a tacit understanding – or at least a sufficient level of comfort – that a transmission pricing break is still coming.
The third explanation is that Rio Tinto has given ground, and decided Meridian’s sharper pricing combined with recent rises in the price of aluminium are enough to keep the smelter open until 2025 regardless of whether the talks over transmission pricing come to anything.
After speaking to Woods and Hamilton yesterday, I’m leaning towards either it is Rio Tinto not the Government that has caved, or it being a more murky blend of perhaps all three explanations.
When asked if Rio Tinto might have a legitimate expectation that transmission prices might be reduced, Woods says ‘‘that is a question for them; I can’t talk to what their assumptions are’’.
Rio Tinto may know, but of course we don’t. For his part, Hamilton says the deal with Meridian had given the smelters’ owners the confidence to commit to keep the smelter open to the end of 2024.