Rio Tinto rejects Govt's subsidy offer
Tuesday 2 Apr 2013 8:21 a.m.
Mining giant Rio Tinto has rejected the Government's offer of a short-term subsidy to continue running the Tiwai Point aluminium smelter.
Instead, it has gone back into negotiations with electricity supplier Meridian to try and get a better deal.
If no deal is made, Prime Minister John Key says the smelter, 79 percent owned by Rio Tinto and 21 percent owned by Japanese company Sumitomo, could be shut down in about five years.
Speaking on Firstline this morning, Mr Key said the smelter has gone from being a "profitable entity" to one sustaining heavy losses over the last few years, as international aluminium prices have collapsed and the New Zealand dollar has strengthened.
"We thought well look, we'll get criticised if we do something, we'll get criticised if we don't, but in the end we made the call that we would look to help bridge a small amount of that gap for a short period of time, so we put that on the table," says Mr Key. "They came back over the weekend and said, 'No, we're rejecting the Government's intervention, we'll go back to continuing to talk to Meridian,' so that's what they are doing."
If no deal is reached, Mr Key says the current contract would see the smelter continue to operate for another three years, then wind down over a two-and-a-half-year period.
"They could do things faster, and that means people would lose their jobs quicker [and] it would cost them an awful lot of money," says Mr Key. "It's a very expensive exercise for Rio if they walk away in the very, very short-term. Anything is possible, but it would be a very expensive exercise."
He says if the smelter "can't stand on its own two feet, then long-term it shouldn't be there".
"We do think that it made a bit of sense, on balance, to try and support the process – and that's where we've been – simply because the number of job losses involved and because of the power usage. But look, in the end that hasn't been possible at the moment. Who knows where these things will go? But the Government's not going to change its position. It might be prepared to have a short-term amount where it bridges that gap, but it's literally for a short period of time."
Mr Key says he's not convinced the smelter's owners will walk away, but admits it's a possibility.
"Sure it might be losing a bit of money at the moment, but actually it's made a hell of a lot of money in the past, so I'm not as nearly as convinced as others might be that they necessarily will walk away, but they certainly could walk away.
"What makes it challenging is neither us nor Meridian want to do a long-term deal."
Labour's state-owned enterprises spokesperson Clayton Cosgrove says Rio Tinto has the Government "bent over a barrel".
"They were warned about this by analysts," he said on Firstline this morning.
"They were told that if they didn't tie down the Rio Tinto issue before proceeding to sell Mighty River Power, that the trap would be sprung. The trap has been sprung, and the Government is all over the place."
Mr Cosgrove says Rio Tinto executives will be "licking their lips" over the Government's handling of the issue.
"All the cards are, of course, in Rio Tinto's hands because the Government has said [it will sell state-owned power companies] come hell or high water, regardless of the risks."
The Tiwai Point smelter uses 14 percent of the country's electricity, and its closure is likely to affect the Government's asset sales strategy.
"In a lot of ways, what's really important is that everybody understands what's going on, because it will be in the offer documents for Mighty River Power and the other companies, it's not new, that risk has always been there. In fact, it's very important that the analysts fully understand what potentially could happen, and they give people advice on that... the one listed company which obviously is in this sector is Contact, so when Meridian made their announcement that negotiations had broken down with Rio Tinto, [Contact's] stock price fell by just over 3 percent, and then rallied back to finish the day above its opening price.
"So analysts can understand the overall impact on what it might mean, and everyone will need to sort of factor that into their equations if they buy shares."
When asked how Labour would have handled it differently, Mr Cosgrove says they wouldn't have put themselves in this position in the first place by selling state-owned power companies.
"What surprises me is this is John Key's business – he's done this all his life in respect to the commercial sector. Everybody saw this coming, we had debates in Parliament about this."
Tiwai Point employs more than 3200 people, and is thought to be worth billions to the New Zealand economy.