Rio Tinto has today announced that is it undertaking a strategic review of New Zealand’s Aluminum Smelter (NZAS) operations at Tiwai Point, to determine the operations’ ongoing competitive position and viability.  We think:

• The probability of closure versus 2013 has increased
• Weak commodity prices, energy and transmission costs are the main issues
• As in 2013, the electricity industry may bow to Rio Tinto’s pressure, but possibly not the Government this time
• Higher volatility in share prices and wholesale electricity prices is likely near term

Today’s announcement by Rio Tinto provides a reminder to investors that, when investing in the electricity sector, earnings and dividends can be at risk from shocks.  NZAS currently consumes around 13% of NZ’s electricity generation with the principal contract being supplied by Meridian Energy.  The review outcomes could have significant implications for electricity prices and the dividends from electricity companies.

The key reasons for the strategic review that Rio has cited are low aluminum commodity prices with a weak outlook, plus the plant operating at the lower end of global comparatives.  The company also has an impending capital expenditure of around $60m on one of the pot lines and finally they have called out the high energy costs.  These costs are the electricity price provided by Meridian and transmission costs.   Rio has, in the last few months, been to see government and all interested parties with negotiation in mind.

So, is this just posturing by NZAS to get a cheaper electricity price?  In our opinion …