By Bernard Hickey
Prime Minister John Key has announced after the weekly cabinet meeting that Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall would release more detail about the Mighty River Power share offer on Friday. He said the offer document would spell out the risk of the closure of the Tiwai Pt aluminium smelter within five years and how that release of 15% of New Zealand's power supply might affect electricity markets.
Earlier on Friday Key revealed Rio Tinto and Sumitomo, who own the NZAS Tiwai Pt smelter at Bluff, had rejected the government's offer of a small subsidy to bridge a gap over the next five and a half years between the smelter and its power supplier Meridian Energy.
He said there was a big gap between the smelter and Meridian Energy in their discussions beyond 2018. The government had decided it could not subsidise Tiwai Point over the long term, he said.
"To ensure the offer document released later in the week fully discloses all of the risks and the impact of what might happen -- in the end, there's a number of potential outcomes. There could be a failure to reach an agreement and over a period of four or five years the smelter winds down. Another option is that an agreement is reached and the smelter remains," Key said.
"What's really important is that the analysts that look at these things fully understand what the options are and what the impact might be on the value of the companies and give advice on that," he said.
Key said the potential closure of Tiwai Point was not a new issue and was well known by analysts. "Over an orderly period of time, there'll be plenty of people who want to buy power for a variety of reasons, or there'll be other less productive assets that will be retired. That is the natural market forces that take place, but it's really important that that information is in the public domain."
Key said the government gave no thought to delaying the Mighty River Power float until it had a deal with Rio Tinto.
Key said Rio Tinto's situation had changed in recent months, including a fall in aluminium prices, the rise in the New Zealand dollar, big losses for other Rio Tinto investments elsewhere, and a change of chief executive.
Detail on talks over Tiwai Pt
"The government has made a small offer to try to facilitate a successful solution between Meridian and Rio Tinto. That's been rejected by Rio, but they are continuing to talk to Meridian. There is a contract in place between NZAS is a strong contract and it goes out to both 2016 at the earliest break point, with a two and a half year ramp down from there," Key told the news conference.
"But obviously, for the number of people involved, the jobs, the impact on the local community and the impact in the short term on the electricity markets, the government would like to see the orderly exit of the smelter, or a long term agreement between the companies," he said.
Key said there were other alternatives for using the 15% of the power supply that would be freed up if Rio Tinto were to leave after 2018.
He declined to say how big the short term subsidy offered was, other than to say it was "reasonable but not massive," and the government had offered to make up some but not all of the agreed shortfall in the first 5 year period.
"Beyond that, is where the bigger issue lies, from years 5 out to when the contract ends in 2030, there's a substantial gap," he said.
'Let's use the power elsewhere'
Key said the government could justify the short term subsidy.
"Firstly A -- it would ensure a more orderly result. B -- there are lots of jobs and it would have a big impact on the Southland economy -- and C -- while there is power that we can in some instances get all of it out of Manapouri, and at certain times we can't get all of it out, it would allow for the build of a stronger transmission line to over time allow that to be used in the rest of the economy, but that takes a number of years," he said.
"We're not interested in a long term subsidy for the smelter. That's the pathway the Australian State and Federal governments have gone down. The New Zealand government doesn't believe that's the right approach for Tiwai Pt.
"In our view, what's currently happening at the moment is there's 15% of NZ power is being consumed by the smelter. That was probably quite a logical thing to do when it was established, but over the long run it's quite possible that power could be used by new ventures coming to New Zealand," he said, pointing to a decision today by the Overseas Investment Office to approve investment in another infant milk formula plant near Pokeno just south of Auckland.
"Alternatively, it would allow the less productive assets to be closed down or it would allow NZ not to build as much new generation as might have otherwise have been required. For us to subsidise this thing for a very long period of time strikes me as being a big exchange of NZ taxpayer dollars, when it's not in our best long term interest to do that.
"There's a bit of difference between smoothing the process for the next four or five years, vis a vis a long term subsidy," he said, pointing to subsidies for five Australian smelters that had cost billions of dollars.
Asked whether the potential long term subsidies for Tiwai Pt were for billions, Key said: "It's a hell of a lot of money."
"There's no way that we are interested in subsidising the longer term gap. It's very substantial and it would be an enormous transfer of taxpayer support for Rio Tinto."
Elsewhere, Key said cabinet considered the detail of the 2013 budget due on May 16. He said the government's latest estimate was the drought would reduce GDP by between NZ$1-2 billion over 2013.
The next cabinet meeting is April 15. Key is in China with a trade delegation next year.
(Updated with more detail from post-cabinet news conference; more soon)