Category: Business

ANALYSIS: It is ironic that the nearest town to the Tiwai Point aluminum smelter is called Bluff.

Kiwis could have been forgiven for rolling their eyes at the announcement last week that the smelter’s majority owner, Rio Tinto, is now in talks with power companies about extending the life of the smelter beyond its latest supposed closure date at the end of 2024.

Rio Tinto had previously threatened to close the smelter in 2021 and before that in 2013, only to announce a reprieve – first in return for a $30 million government hand-out and then a sharp reduction in the price that its major power supplier, Meridian Energy , charges the smelter for electricity.

In 2000, against a backdrop of aluminum prices slumping well under US$2000 (NZ$3170) a tonne, Rio Tinto chose to terminate a contract that would have guaranteed it power until 2030 at a price understood to be about $55 a megawatt-hour (5.5 ca kilowatt-hour).

READMORE:
* Aluminum smelter starts talks with power firms to keep smelter open beyond 2024
* Meridian sets out conditions for ’10 to 20 year’ deal with aluminum smelter
* Negotiations to yet again ‘save’ aluminum smelter may face extra complication

Seemingly indifferent as to whether the smelter stayed open or not, it then succeeded in driving a grumpy Meridian down to a price understood to be about $35/MWh in its current contract.

Jarden analyst Grant Swanepoel says the smelter saved about $120 million a year for four years by “holding a gun to the head” of Meridian.

But this time the game of brinkmanship will play out under somewhat different circumstances.

Aluminum prices are currently trading at a much more healthy US$2500/tonne and Rio Tinto has clearly signaled that it would like to keep the smelter open beyond the end of 2024, which will simply not be possible unless it secures a new power deal.

There has been speculation that an agreement is most likely to be struck at a price of $60 to $80/MWh, with billions of dollars potentially at stake over where exactly in that band it lands.

A price at the top end of that band would raise the prospect that Rio Tinto might have been better off never ripping up its original power contract, and instead letting it run through to 2030.

But Swanepoel believes such schadenfreude is unlikely, as its own modeling suggests it would be in Meridian’s interests to still do a deal at a price anywhere above about $62/MWh.

The smelter consumes about 13% of New Zealand’s total electricity supply, which means that if it did close, the excess supply would force down wholesale electricity prices in at least the short term, which is the last thing Meridian should want to see.

But it might be in Rio Tinto’s interests to do a deal even if Meridian insisted on a significantly higher price, which is why negotiations could provide a merry dance.

The negotiations should be underpinned by how much Meridian could earn for power from its Manapouri hydro scheme if it didn’t sell that power to the smelter, and how much aluminum smelters might need to pay for power overseas.

But working out what those prices may be over the life of a contract is no simple matter.

The smelter has more competition for power since national grid operator Transpower completed an upgrade of its transmission network between Clutha and Upper Waitaki ahead of schedule in April, allowing more power from the lower South Island to be diverted north.

Meridian has also been working on a plan that could potentially reassign all of the power the smelter currently consumes to the generation of “green hydrogen” for use in the transport industry, though chief executive Barclay has said it is not a case of “either or ”.

Australian oil and mining giants Woodside Energy and Fortesque have expressed interest in the hydrogen opportunity.

Significantly perhaps, Meridian generation manager Guy Waipara says both companies have been given an indication of the price Meridian would need to charge them for its power to make that scheme work, and he notes they both remain interested.

Globally, cheap gas appears ancient history and the price of generating power from new renewable plant is now rising for a change, in part due to strong demand for wind turbines from Europe in the wake of Russia’s war on Ukraine, potentially also weakening Rio Tinto’s hand .

On top of that, the power industry’s regulator, the Electricity Authority, could potentially torpedo any supply deal at the cheaper end of the spectrum, after it estimated last year that the average household was paying $200 more than it needed to for power each year because of the smelter’s cheap supply deal.

There will be several other moving parts to the negotiations.

For example, Swanepoel says all the power companies now see a “plethora of opportunities” to develop new wind farms in the South Island, in the wake of an overhaul of Transpower’s transmission pricing regime.

Then there are the varied possible impacts on power demand and supply of the Government’s potential multibillion-dollar investment in a pumped hydro scheme at Lake Onslow in nearby Otago.

And it might be wrong to assume human factors couldn’t come into the equation.

Rio Tinto might be left red-faced by any new power deal that meant its original decision to tear up its 2030 power deal was in retrospect unwise.

But Barclay has reported receiving plenty of feedback from shareholders who believed the company caved too easily and completely in its negotiations with the smelter in 2021.

Swanepoel believes the upshot may be a 10 to 20 year power deal for the smelter that would see the price of power linked to inflation and perhaps the aluminum price, and that would also build-in more incentives for the smelter to cut production when electricity was in short supply.

“That is much fairer to both sides,” he says.

He suggests a model might be a deal Rio Tinto struck last year with Iceland’s national power company, Landsvirkjun, to power its aluminum smelter in Straumsvik on Iceland’s Reykjanes Peninsula, which in 2020 Rio Tinto had also threatened to shut down.

Instead of a straight price for power, Landsvirkjun received a confidential rate linked to the US consumer price index and partially linked to global aluminum prices.

I am aged 59, my wife is 58 and our two adult children have moved out. I took a redundancy in 2020 and my wife and I do part-time contract work, earning about $80,000 and $40,000 a year, respectively. Our Melbourne home is worth about $1.5 million, and we have an investment property in regional Victoria, bought in 2011 for $290,000 and now worth about $850,000, but needing $30,000 in repairs. I have $680,000 in superannuation and my wife, $270,000, and we both plan to transition to retirement in the next 12-18 months. A financial advisor has quoted $3000 for a statement of advice and then ongoing fees of $200 a month each. We would like to renovate the investment property, move there for about 12 months, sell our Melbourne house and use that money to buy a smaller Melbourne property, as we have aging parents there. We would then sell the investment property. We need advice to time these various steps. Is this a sound strategy and is the price quoted for advice good value for money? AB

If you feel you need financial advice, the quote is roughly in line with the average for investment advice. It may appear high, but it is being driven up by the high costs of compliance, along with Australian Securities and Investments Commission fees.

As long as you do not take on any debt and can continue to earn your current income, which I assume meet your expenses, I cannot see why you should not do what you want to do. It’s your life and your money.

The one thing I would point out is that you do not appear to have enough in super on which to retire at a relatively young age and, if you start drawing transition-to-retirement pensions, you would be reducing your retirement savings. So, it is arguably important that you keep earning income and maximizing your savings.

If moving out of the city means giving up your incomes, perhaps it would be better not to do so, and thus not spend money on renovating a regional property at a time of falling prices.

In a recent column, you commented “Just ensure you have receipts” when referring to share trades. This is a real problem for will executors or those exercising a power of attorney over another’s affairs. Capital gains tax has been around for about 40 years. However, many shareholders have used a “set and forget” approach, especially for blue-chip shares paying regular dividends. Often, a solicitor or tax agent have sold their practice, or a stockbroker’s records do not go back that far. Does the Australian Taxation Office acknowledge these situations and provide any guidelines where it is almost impossible to turn up the original paperwork? rj

To the best of my knowledge, the ATO does not. When I have asked, the reply is simply that it requires taxpayers to keep good records.

Look for the taxpayer’s Securityholder Reference Number (SRN) or Holder Identification Number (HIN) on any correspondence.

The SRN or HIN is a unique identifier for shareholdings within a company. It can often be found on an initial holding statement, or on the butt of a dividend check or payment advice. Share register records should give a date of purchase.