By Ambar Warrick and Sonali Paul
(Reuters) – Miner Rio Tinto Ltd <RIO.AX> on Wednesday flagged it may cut output or shut New Zealand’s Aluminium Smelter (NZAS) due to a weak aluminium market and high energy costs, in a potential blow to the country’s top power producer, Meridian Energy <MEL.NZ>.
Rio said it would make a decision on the smelter, New Zealand’s largest single power user, in early 2020. Shares in Meridian, which has a contract to supply the South Island plant until 2030, fell as much as 8%.
“We expect the short to medium outlook for the aluminium industry to be challenging and this asset to continue to be unprofitable,” Rio Tinto said in a statement.
The global miner has said previously it is also holding talks on energy pricing for its three Australian smelters.
Rio said it will complete a strategic review of the New Zealand smelter, which consumes 40% of Meridian’s generation, in the first quarter of 2020.
Both sides said they plan to work with each other to try to find a solution to make the plant profitable.
New Zealand’s only aluminium smelter uses about 5,000 gigawatt hours of electricity a year, roughly 12% of the country’s power, to produce 340,000 tonnes of high-grade aluminium annually.
“The aluminium industry is currently facing significant headwinds with historically low prices due to an over-supplied market. This means that many aluminium providers are reviewing their positions,” Rio Tinto Aluminium chief executive Alf Barrios said in a statement.
Meridian Chief Executive Neal Barclay said NZAS had advised that the smelter also faced challenges from high energy and transmission costs and an upcoming refurbishment bill for one of its production lines.
Meridian agreed to cut power prices to the smelter in 2013 and recently offered further concessions.
“NZAS has advised Meridian that the changes we had offered to date on our contract fall short of the pricing for delivered energy that NZAS needs to re-establish its position as an internationally competitive aluminium smelter,” Barclay said in a statement.
Under its 2013 agreement with Meridian, the smelter can cut its contracted volume from 572 MW to 400 MW or terminate its contract completely on 12 months’ notice.
If the plant shuts, Rio Tinto and its partner, Japan’s Sumitomo Chemical Co Ltd <4005.T>, which owns a roughly 20% stake in the plant, face remediation costs of around NZ$256 million ($164 million), Meridian and Rio Tinto said.
Broker UBS said based on Wednesday’s announcement it expected the smelter to remain open, however the risk of closure had increased and could hurt all the country’s generator-retailers, with the biggest impact on those with South Island plants — Contact Energy <CEL.NZ> and Genesis Energy <GNE.NZ>.
“The ‘gentailers’ have varying degrees of contracting that should smooth the earnings impact, but we expect the trajectory would be down sharply,” UBS analyst Aaron Ibbotson said in a note.
($1 = 1.5620 New Zealand dollars)
(Reporting by Sonali Paul in Melbourne and Ambar Warrick in Bengaluru; editing by Lincoln Feast and Richard Pullin)