The government is in an ideological tangle over the Tiwai Point smelter negotiations, but could there be a local saviour willing to buy the plant?

Smelting is the process of melting or fusing something to extract a desired end product – at Tiwai Point that's turning bauxite into aluminium. In the Beehive, National is smelting principles and political strategies in an attempt to keep its partial asset sales programme and target of a 2014/15 surplus on track.

The government's smelting operation is a reflection of its "pragmatism" and willingness to do deals.

Rio Tinto announced in 2001 that the smelter at Tiwai Point near Bluff was one of 13 "assets [that] will be divested at an appropriate point in the future". In the meantime, presumably to maximise any sale price, it's trying to negotiate a lower long-term power price with its supplier, Meridian.

As was entirely predictable, Rio Tinto is using the government's plan to partially privatise Meridian and other power companies to its advantage, trying to drive down its power contract by threatening to walk away from negotiations if the government didn't ride to its rescue.

Last week it looked as if the government was back in deal mode – as with Warner Bros and SkyCity before it, National was willing to talk turkey. In this case a short-term subsidy was on offer.

Opposition parties started to howl; this was another example of corporate welfare. Politically, this looked as if it was turning into a defining trend for the Key government, and a vote-losing one at that. National – a multi-national's best mate.

Perhaps it was the politics that has forced National's hand. Or maybe it's Key's dealer instincts. Or maybe Rio Tinto is confident it can get more. Because no agreement was reached and Rio Tinto walked away.

Yesterday the Prime Minister put clear boundaries round the deal on offer.

"We have put our best foot forward, put our only card on the table," Key told TV3's Firstline.

"We have no interest in a long term subsidy. If it can't stand on its own two feet, it shouldn't be there."

Of course the principle sounds good. Of course it makes a mockery of the Warner Bros deal and others. The principle is in fact that if a business can't stand on its own feet – and isn't a big budget movie or perhaps a casino – it shouldn't be there.

On one hand Key deserves kudos for not caving to corporate interests. On the other, he's showing a rare inflexibility. Other governments around the world are doing deals with Rio Tinto to keep the local companies alive. So why not here?

More pointedly, the political question for Key – sure to be asked around the pubs and living rooms of Southland – is why the big city businesses are bailed out and there's isn't.

Key was damned if he did and damned if he didn't in this case – either he did another sell-out deal with an overseas corporate or he sold out the Southland economy. His government's lack of consistent principle is plain for all to see.

The story, however, is not yet over. Negotiations continue, one or other party may yet cave, discussions will be had behind the scenes... But in the meantime the uncomfortable truth for National is that the proposed sale of Meridian is stalled for as long as Rio Tinto wants it to be. To sell when its biggest customer is threatening to walk away is, well, impossible.

The best outcome for New Zealand is that Rio Tinto finds a buyer – it's only then that any government may be more willing to deal. This morning Invercargill mayor Tim Shadbolt has been talking up the Chinese as investors who understand long-term strategies. For while there's much gloom talked about Tiwai Point, it's a victim of current markets and currencies and both of those are likely to change.

It's interesting to note that in the 2011 announcement, Rio Tinto chief executive Tom Albanese said:

"The assets identified for divestment are sound businesses that are well-managed with productive workforces. But they are no longer aligned with our strategy and we believe they have a bright future under new ownership. The strength of our balance sheet means that we can choose the most opportune method and timing to divest these assets, which may not occur until the economic climate improves. In the meantime, we will continue to run these operations safely and efficiently."

If indeed the smelter is a sound business with healthy long-term prospects then it would be a good time to buy, with Rio Tinto so eager to sell and prices so low. But why does it have to be a foreign buyer?

Two organisations in New Zealand leap to mind when I think of long-term investment; two organisations which are on the record saying they want to buy into big infrastructure businesses.

The first is the New Zealand Super Fund. It's oft complained there aren't enough local assets large enough for it to buy into without swamping the market. Well, here's one that fits the bill perfectly – if it is as sound as Rio Tinto says.

The second are iwi. Ngai Tahu in the form of Mark Solomon have also repeatedly spoken of a desire to buy into big, long-term assets, especially ones in their own rohe, as this is.

Is this a big change for either or both? National would surely crawl over hot aluminium, and come up with a decent deal, to get that sale over the line.

 

Comments (12)

by Richard Aston on April 03, 2013
Richard Aston

On the other hand why not let the smelter die a quite death. It will take 5 years so we have some time.

What else could we do with all that power ( 15% of NZ's total power production) ?

Pump it back into the grid - apprently there have been improvements in transmission technolgy. All that power availible to retial would surely lower power costs for all New Zealanders.

Lower power prices would of course impact on the assest sale programme, is that such a bad thing?

It seems with world aluminium prices dropping and China taking up more production perhaps owning a smelter is not such a good investment. I heard Rod Oram saying as such.

 

 

by Antoine on April 03, 2013
Antoine

Are you seriously suggesting that Ngai Tahu or the NZ Super Fund can make the smelter profitable when Rio Tinto can't?

That is a ridiculous idea.

A.

by Antoine on April 03, 2013
Antoine

Let me expand on this.

Which of these does Ngai Tahu or the NZ Super Fund have?

(a) A big Bauxite mine

(b) Big ships to transport Bauxite in

(c) People who know how to make aluminium out of bauxite

(d) Experience in buying lots of electricity for very cheap

(e) Access to markets for a huge amount of aluminium

(f) The ability to avoid paying tax on the proceeds

(g) None of the above

A.

by stuart munro on April 04, 2013
stuart munro

The businesses that can make the smelter profitable are the power companies -assuming they can get a non-gouging bauxite supply. The power capacity already exists, it is a sunk cost. In rainy years the surplus should go into imperishable aluminium. In dry years the plant should mothball. That would mean the government should buy it. It'll never happen. As they only thread of faux credibility this lacklustre government possesses, they wouldn't give up their much touted surplus even for a stake in the next big thing. The Gnats  - worse than useless for over fifty years.

by Antoine on April 04, 2013
Antoine

Stuart

You are dreaming if you think an ageing and polluted aluminium smelter several thousand miles from the nearest source of bauxite or market for aluminium is "the next big thing".

You cannot just turn an aluminium smelter on and off as the price of power fluctuates. They are built for steady operation. If you just turn them off then your potline turns into a series of blocks of solid aluminium. Phasing them up and down takes a long time and is expensive.

And what are you supposed to say when your buyer wants to know where their order of aluminium has gone? "Oh, sorry - it hasn't been raining. Look, I'll ship you some aluminium from one of my other smelters instead. Oh wait - I don't have any other smelters, I'm a New Zealand power company. Sorry"

P.S. I am amazed you are still allowed to post here after your suggestion to "grab a few of these [National] MPs, and beat the living crap out of them"

by stuart munro on April 04, 2013
stuart munro

Antoine - the suggestion that we grab a few of these MPs and beat the living crap out of them was not confined to National.

Throughout history the oligarchs who subborn democracies and render them ineffective periodically get the living crap beaten out of them.

They are doing a hopeless job. (parliament as a whole) Many people are profoundly unhappy with them. It's only a matter of time.

Yes, I am aware that smelters require reasonable periods to warm up and cool down. About a month is typical. Presumably, if one ran a smelter to exploit the rainy year surplus electricity supplies,one would have to refrain from forward selling beyond firm capacity. Hardly rocket science.

by Antoine on April 04, 2013
Antoine

Oh - I am sorry stuart - I did not mean to misquote you. I thought you had only meant to beat National MPs, but in fact you had planned to beat MPs of all parties.

Would you prefer to attack a representative quota across the Left and the Right, or are you not worried about it?

You comment that "If they can walk after three months in hospital they didn't get properly seen to." Does this principle apply to both female and male MPs?

A.

 

by stuart munro on April 04, 2013
stuart munro

You see, this is where you academic apes don't get it. We expect a lot better from our alleged representatives. A representative sample? I am describing an example. Governments that routinely perform as badly as New Zealands historically have to start worrying about their personal safety. Of course diligent, consciencious and hard working MPs would probably be safer on the whole. If there were any.

[Ed: OK ... you've made your point. But could you please dial it back a bit and cut out the references to beating people up. You may think it makes you sound exceptionally radical and hard-edged, but really it is just silly.]

by Tim Watkin on April 05, 2013
Tim Watkin

To get back onto topic, I wasn't claiming any particular knowledge of the smelting industry – you'll note that I prefaced the discussion about those buyers with a quote from RT stressing the smelter's viability and then said "if" this is the case it could be as good buy.

Perhaps the industry is in terminal decline, perhaps you need to own complementary companies... But given the smelter has been profitable in the long-term, is a major employer and is one of the few businesses of a scale suitable for the NZSF it seems the sort of thing they'd be considering.

But Richard you make good points. Maybe it's run its time.

by stuart munro on April 05, 2013
stuart munro

I reckon that if a plant to use the power surplus were being built at Tiwai today it'd be a lithium from seawater operation. Cell phone batteries & electric vehicles.

by Tim Watkin on April 05, 2013
Tim Watkin

Yeah, but Stuart in 20 years cell phones will probably be powered by seawater and the plant you describe will have run it's time too... point is technologies and demands change.

by stuart munro on April 06, 2013
stuart munro

Question is, does the government take a role in riding these waves of change, or is it acceptable that they merely break up and sell (for private gain) the investments in a prosperous future made by more forward looking and less self-interested governments. Because if one of the roles of government is not working to achieve a more prosperous future for all New Zealanders then we pay 40% of net for nothing. That would be a species of banditry.

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