Rio Tinto - the ultimate owner of the Tiwai Point aluminium smelter - is no stranger to playing hardball with governments when it comes to securing energy contracts.
The Government yesterday said it had opened discussions with the Anglo-Australian resource giant in a bid to broker a deal after talks between the smelter and Meridian Energy broke down.
Should the smelter - which uses about 15 per cent of New Zealand's electricity output - close, wholesale power prices are likely to fall, affecting the earnings potential of all power companies including Mighty River, which is expected to list on the NZX later this year.
"Rio is playing hardball, as expected," said one Sydney-based commodities analyst.
The latest development follows closely on the heels of Rio's successful negotiation with the Northern Territory Government, which has won a reprieve for Rio's loss-making Gove alumina refinery.
Rio's decision to keep the plant open followed a commitment from the Northern Territory Government to release a portion of its contracted gas for on-sale to Gove. Rio is also in talks with the Federal Government regarding the construction of a 600km pipeline from Katherine to Nhulunbuy.
Aluminium is a highly competitive industry globally, and the price of electricity can often be pivotal for the profitability of individual smelters.
Merrill Lynch and CitiBank analysts have estimated that 30 to 50 per cent of global aluminium smelting capacity operates at a loss.
Analysts said Rio has a history of talking tough with governments and that New Zealand would be no exception.
State-owned electricity generator Meridian - which is also on the Government's partial privatisation list - said it was "unlikely" that a new supply agreement could be reached with Rio to NZ Aluminium Smelters' (NZAS) Tiwai Point smelter.
Meridian was approached by Rio Tinto's Pacific Aluminium - majority shareholder of NZ Aluminium Smelters - last July to discuss potential changes to its existing electricity contract.
Since talks began, various options have been discussed and Meridian has offered a number of changes and concessions to the existing contract, Meridian said. Chief executive Mark Binns said Meridian had advised Pacific Aluminium of its "bottom line" position.
"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," Binns said.
Nick Lewis, an analyst at Wellington-based brokers, Woodward Partners, said Rio was known as a shrewd operator when dealing with governments.
"It's hard for me to not to be cynical," he said. "It feels to me that Rio is just raising the stakes," he said. "The Mighty River Power float is getting closer and they (Rio) want to use that as leverage to get the best possible deal that they can," he said.
Canada's Alcan, which Rio bought in 2007 for US38.1 billion, also had a name for being a tough negotiator.
In 2011, Rio announced it would restructure its worldwide aluminium business and said its interests in six of its Australian and New Zealand assets - including the smelter at Tiwai Point - would be transferred into a new business unit called Pacific Aluminium, and sold.
Analysts said making Gove profitable could improve the prospects of the Pacific Aluminium group and its possible sale but that the industry worldwide is in bad shape.
Even though analysts agree that aluminium has a bright future, the metal has suffered from weak prices and overcapacity, particularly as China continues to build new smelters.
Aluminium last traded at US$1890 a tonne on the London Metal Exchange. The analysts' rule of thumb with smelters is that a drop in the aluminium price below US$2000 tonne renders half the world's smelters uneconomic.
The Gove bauxite mine and alumina refinery is the largest private employer in the Territory with a workforce of 1,500 direct employees and contractors. Rio says the business contributes more than A$500 million to the Northern Territory's economy each year.
NZAS - 79.36 per cent owned by Pacific Aluminium and 20.64 per cent owned by Japan's Sumitomo Chemical Co - plays a similarly large part in the Southland economy, contributing $525m annually to the province's economy and employing 700.
Citi Australia, in research note, said Pacific Aluminium could be a difficult asset to sell given the pressure on costs and margins of aluminium in Australia and New Zealand. But Citi said the A$452m investment by China's CITIC into Melbourne-based Alumina Ltd last month showed there is still interest in the sector. Citi said that even though an outright sale of Pacific Aluminium would the cleanest exit for Rio, "we think it is unlikely".
