The best deal is no deal

April 1st, 2013 at 2:00 pm by David Farrar

The Herald editorial:

is doubtless more than happy that the Government has stepped in to try to broker a deal over the electricity supply contract for the Tiwai Pt aluminium smelter. The global company’s bargaining position has always been strong. Now, the concerns that have brought the Government to the negotiating table make it even stronger. Nonetheless, there remains no reason to bow to the mining giant’s every demand.

I am unconvinced they should be given any special treatment, beyond a commercial volume based discount for electricity which is up to Meridian to negotiate.

As much was confirmed by Contact Energy’s share price dropping 3 per cent in early trading after Meridian announced the negotiation deadlock.

A 3% drop is not the end of the world.

There are other factors for the Government to consider, not least the threat to 750 jobs at the smelter and a further 3000 indirectly in the Southland region.

But will those jobs endure just because the Government comes to the party? I am doubtful. If the smelter is not a going concern, then its closure is inevitable. If the smelter is a going concern, I’m not too keen to subsidise it.

Some people will make comparisons to Sky City and The Hobbit. But I view those two as quite different. Sky City is not threatening anyone. It is not saying that it will pack up shop, if it does not get its way. That negotiation is about Auckland needing a world class convention centre and negotiating some regulatory changes that would allow Sky City to  build it.

And The Hobbit stuff happened because of the malign interference of the Australian union. They instigated a global boycott that led to a possible shift overseas. Their influence had to be negated.

Rio Tinto are just trying to use the asset sales to renegotiate a contract they had already agreed to. Now that is fine for them to try – but the negotiation should be with Meridian.

Rio Tinto’s position is the stronger in that it has made it clear that it wants to sell the smelter. If that is not possible, closure is an alternative response to the sagging world price for aluminium. Even so, there is no reason for the Government to start genuflecting. This country has already given successive Tiwai Pt operators very good deals since it built the Manapouri hydro station to power the smelter more than 40 years ago. The Government’s approach to these negotiations should, therefore, not be markedly different from that of Meridian. If a deal that makes commercial sense cannot be struck, it will not be fatal to the asset-sales programme, the country’s electricity framework, or, in the long term, the Southland economy. On no account should the Government throw in the towel.

I agree. Any concessions should be minor, if at all.

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39 Responses to “The best deal is no deal”

  1. bringbackdemocracy (391 comments) says:

    Cave-in Key will give them whatever they want. He said at the start that it was a commercial matter between Meridian and it’s customer but now………….

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  2. Griff (6,696 comments) says:

    How far do you devalue the resource effectively subsidizing industry before alternative users of that energy become competitive.

    South land has a huge resource of lignite using the cheap energy from Manapouri could allow us to cleanly convert this to transport fuel at a competitive price with imported fuel .

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  3. thedavincimode (6,518 comments) says:

    Commercial discount fine. Otherwise they can fuck off.

    As for 750 unemployed, NZ industry and agriculture are crying out for way more than 750 people who are capable of turning up to work on time and sober and capable of doing something useful.

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  4. Ross Nixon (607 comments) says:

    Rio Tinto should put the smelter on TradeMe. Then they’ll get ‘market value’ for it and not have any decommissioning costs.

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  5. Manolo (13,312 comments) says:

    John Key, the brave John Key.

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  6. peterwn (3,140 comments) says:

    Such an attitude needs to be assessed in light of circumstances and options.
    Meridian and hence the Government (particularly with respect to Transpower) will have given thought to Plans B and C. These would significantly affect Meridian’s negotiating stance.
    Plan B would be to find another major customer for the Manapouri power who could set up shop in southern SI. I would not be surprised if work has already been done in this area identifying interested customers, load requirements, land requirements and price expectations. Granted it would take several years for the replacement customer to set up shop, but that would be factored into the calculations.
    Plan C would be to re-allocate the power for general use and encourage a series of smaller users. In the extreme this could mean building a 1.2 million (or so) volt HVDC from Manapouri or Invercargill to the Waikato (limiting factor would be the highest feasible voltage for the submarine cables). This is a very big stretch but I think it is do-able. Economics could be a ‘killer’ however.
    There may be options incorporating both Plans B and C.

    These plans give a baseline for negotiations, especially if Rio Tinto are trying for a long term lock-in of prices.

    On Rio’s side, they have a string of smelters and seem prepared to close one or more down depending on the success or otherwise of negotiating power prices. Ross Nixon, Rio is unlikely to sell such a smelter as a going concern. They would remove and scrap key components to render it unusable, then sell the rest at land, building and equipment scrap value. They could even sell with covenants forbidding future aluminium, nickel or other such processing – the courts will uphold such a covenant as they did for the old Waitara freezing works. On the other hand, Rio may consider the Manapouri-Tiwai setup so fondamentally attractive for the future that they could be extremely reluctant to let it go – they could ‘mothball’ it instead.

    So what we have is the classic negotiation situation – and this one is a cracker!

    Given this, there is no such things as an ‘equitable’ price for the power, ‘subsidies’, etc. The Manapouri power is only worth what the highest bidder will pay for it, be it Rio, some other firm or the general NZ power market. A bird in the hand is worth two in the bush – it is that simple.

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  7. davidp (3,540 comments) says:

    I don’t see how this canbe a bad thing for the asset sales program. At the moment Meridian sell electricity to Rio Tinto for almost nothing. If Rio Tinto close the smelter then Meridian will sell the electricity for a higher price. That must help Meridian’s value, even if it takes them a couple of years to adjust.

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  8. UglyTruth (3,913 comments) says:

    Cave-in Key will give them whatever they want

    Well, Rio Tinto Mines was reportedly set up for the house of Windsor, so it’s hard to avoid a conflict of interests if that is the case.

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  9. flipper (3,533 comments) says:

    Peterwn …

    Excellent analysis, thanks

    I wonder what T K (Kerry) McDonald would say…not much different from what you have set out here, I suspect.

    What you have done is to show the knee jerk folk that they are just jerking off.

    A little less bluster and more consideration of a sensible NZ strategy would help. Your analysis should read several times by all, DPF included.

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  10. Jack5 (4,568 comments) says:

    David P posted at 4.13:

    …If Rio Tinto close the smelter then Meridian will sell the electricity for a higher price…

    What???

    In a detailed post by “Tempest” in Kiwiblog yesterday, is was spelled out that the new infrastructure required to put Manpouri’s electricity on the NZ market would cost $2 billion and would take eight to ten years to complete.

    DPF thinks the SOE board should negotiate this contract. This is about more than some electricity price subsidy. How would Meridian raise $2 billion to bring Manapouri electricity north with a wait of six to eight years before it received any revenue from this spending?

    There’s a better case for the Government negotiating here than there was for its role in helping the film industry. And there were film-industry tax subsidies (yes, special industry tax breaks are subsidies), as well as labour rules involved.

    The aluminium industry is in upheaval round the world thanks to a dive in demand and prices, and rising competition from China. Australia and New Zealand have a special difficulty because of the two countries well overvalued currencies.

    In France the French Government is working with Rio Tinto and local community representatives and unions to try to find a buyer for Rio Tinto’s aluminium smelter at Saint-Jean-de-Maurienne.

    Finding a buyer for Bluff, might be harder, however. In Australia, Norsk Hydro announced 12 months ago it was closing its aluminium smelter at Kurri Kurri. Alcoa’s smelter in Victoria is staying open for two years, thanks to a state-federal subsidy.

    If Australia is bailing out its smelters, NZ will have to follow or lose a billion a year in foreign currency earnings. It would also have to raise $2 billion for new infrastructure, and spend heaps on social support in Southland (just as it props up farmers in droughts and kiwifruit farmers in disease outbreaks).

    Too much is at stake with the smelter to leave it to a State-appointed board. Such boards have sometimes proved very poor. Solid Energy comes to mind. Air NZ when it bought Ansett, wasn’t too hot, and TVNZ’s board hasn’t always been impressive.

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  11. Monique Watson (1,062 comments) says:

    Thanks Peterwn.
    IJust like to add that this is a completely different scenario from the Hobbit Hater intervention. Hobbit Haters were trying to use a legal precedent to unionise a workforce that didn’t wish to be unionised. That situation required intervention to establish certainty for the producers to establish and be able to rely on a working budget and the tax breaks were not directly underwriting the studio’s business model.

    Any intervention here is the govt propping up Rio Tinto’s profit margin.

    Should the government have intervened earlier to prevent this scenario. Remember the spot price spike, 26th March 2011? That to me was a sentinel event.

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  12. Monique Watson (1,062 comments) says:

    @Jack5

    Meridian is not exactly under-prepared. They’ve been planning for this for years. Yes increasing transmission capacity to take the power north would be costly and take years. But consumers would get the benefit of decreased power prices and this would translate as discretionary spending = booster to the economy and wages.

    It’s better to put the money to infrastructure and decommissioning older Huntly type power plants than underwriting Rio Tinto.

    As long as there is a plan to boost other industry in bluff.

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  13. Jack5 (4,568 comments) says:

    Monique Watson posted at 5.43:

    …But consumers would get the benefit of decreased power prices ..

    When? After $2 billion spent over eight years? Who is going to pay the interest on the $2 billion except, ultimately, Meridian’s customers? Then there will be depreciation of the $2billion of new lines. And can you imagine a National Government fast tracking approval of lines of big pylons through dairy farms from Invercargill to Nelson? And what of the opportunity cost of eight years of Manapouri generators being idle?

    Cheaper power by closing the smelter? A Wellington dream.

    Closing the smelter would bring down the kiwi dollar with a thump as the balance of payments deficit shot well over 6 per cent of GDP. That would sour voters as petrol prices jumped.

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  14. Johnboy (14,857 comments) says:

    I think we should hold out on the power price and when Rio Tinto are prepared to quit the smelter at a very low price we should buy it as an SOE with the cash from MRP.

    We could make Winston chairman and Sir Mickey deputy chairman. (the opposite would be better but Winnie plays second fiddle to nobody. :) )

    When the world prices of AL rise to unprecedented heights after the Second Korean War we would be in, dare I say it, a win-win situation! :)

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  15. Monique Watson (1,062 comments) says:

    There is at least 6 years to run before Tiwai can mothball it’s operations. Plenty can happen in this time frame. If the asset sales process raises money for new infrastructure then all the better.
    I’m not saying there wouldn’t be consequence to Tiwai being mothballed. I am saying that there is no way that the Govt can or will subsidise a failing business model.
    John Key has been clear about this from the outset.

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  16. Nostalgia-NZ (4,896 comments) says:

    Surely the Government can’t ‘gamble’ with tax payers money by offering anything other than a bulk purchase discount. There are too many uncertainties in the market, not just the price but newer and more efficient technology being utilised in China according to many reports. So yes, maybe the best is ‘no’ deal, or in fact honoring the current deal, it’s all ‘crisis’ politics when in fact there is no crisis just a sense by Rio Tinto that they can ‘milk’ the SOE sale. JK should give them the big finger and leave it to the board whose responsibility it is anyway. Having said that Ryall was speaking some ‘double’ talk on the matter last week about how the Government won’t bend over, in such a way that led to a natural conclusion that is exactly what they were going to do and call it by another name.

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  17. Jack5 (4,568 comments) says:

    Monique Watson posted at 6.16:

    ..There is at least 6 years to run before Tiwai can mothball it’s operations…

    In that case Monique, the Government has to begin the $2 billion transmission structure immediately, with planning then seeking resource consents from its cow farmer friends. The Government will have to start borrowing $2 billion, too.

    As for your comment:

    …there is no way that the Govt can or will subsidise a failing business model.
    John Key has been clear about this from the outset…

    Even if this is far cheaper than the $2 billion transmission structure, and the likely credit downgrade and higher state borrowing costs if NZ’s balance of payments deficits shoots well over 6 per cent because of the loss of aluminium exports?

    John Key has changed his position before. As on the smacking legislation. And did he change his mind on gay marriage, too? It’s not always admirable to never change your position.

    You suggest Government reluctance to subsidise. The National Coalition is a Centre-Left Government, after all. Apart from the film industry, there’s the tourist industry which may be the ultimate recipient of the film subsidy, there’s help for drought-stricken farmers and disease-hit horticulturists, and for the private education industry (Foreign Affairs promotion and work and other NZ status for foreign students).

    I hope John Key continues to be pragmatic on the smelter issue.

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  18. slijmbal (1,210 comments) says:

    Standard Mexican standoff in negotiations in a bad situation. Does not compare to Sky City, Hobbit et al. We all have sunk costs.

    Standard question to ask – who loses what if it dies and who gains what if it doesn’t?

    Rio probably need to write off billions and they’ve been doing a bit too much of that recently. Meridian a lot less and it may well be beneficial to the country on the whole in the long term as we could be effectively wasting energy better used elsewhere.

    Rio are trying to play the political card and are having their bluff called.

    Share the pain and the gain.

    It’s looking like the government may well be playing this quite cleverly from a commercial perspective.

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  19. Nostalgia-NZ (4,896 comments) says:

    For Rio Tinto the only questions are what they might gain, but also what they might lose. If the deal was good enough until recently and isn’t now, then they should be weighing the costs of their departure on an already troubled balance sheet and see how that tastes.

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  20. burt (7,786 comments) says:

    Welfare anyway you look at it. If it falls over the tax pays suck it up in unemployment payments, if it stays we suck it up in power prices supporting cheap electricity for a corporate. Smoke and mirrors really as the government play being big business with our capital…. Lovely.

    Remind me again why so many people think shit changes when we sell our assets ? What would be different here if the applicable power generation was owned by xyz-enterprises ?

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  21. s.russell (1,559 comments) says:

    Meridian has said that the gap between the parties over the short term is very small. It is the long term that is the problem. So close the short-term gap, but let the long term issue wait. In a few years the aluminium price will have risen again and things will look very different.

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  22. Jack5 (4,568 comments) says:

    slijmbal posted at 8.22:

    …Rio are trying to play the political card and are having their bluff called…

    Who is calling Rio’s “bluff”, apart from Peter Dunne cheerleader Monique Watson? And just how are they calling this “bluff”? You aren’t punning on “Bluff”, home of the smelter, are you slijmbal?

    Rio’s not going well, but that’s because they overpaid for Alcoa. Aluminium will bounce back, and Rio’s got state and federal governments helping them in Europe, Australia, the United States. There’s a cyclical overproduction of aluminium, so perhaps the real opponents for our Government aren’t Rio’s managers but the foreign governments helping the big company out to protect their own golden geese.

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  23. OECD rank 22 kiwi (2,810 comments) says:

    Just another day in Corporatist New Zealand. What Privileges will you petition for today?

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  24. Nostalgia-NZ (4,896 comments) says:

    If Rio’s got all those governments helping them, as they suck on the tit, why would NZ line up to be another benefactor? That situation (the help) shows why they should get kicked in the butt. By what you say they’re trying to lay their needs on NZ as though they’re are a beneficiary rather than a producer of wealth.

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  25. Jack5 (4,568 comments) says:

    Nostalgia posted at 9.22:

    …If Rio’s got all those governments helping them, as they suck on the tit, why would NZ line up to be another benefactor?

    Benefactor? It looks to me as though it’s rather a minimax choice: minimising the amount we lose over the current position, and the foreign governments will be making their decisions on the same basis.

    The problems were made at the beginning, decades ago. Our governments, for the excellent reason of obtaining a large new export industry, competed with the various states of Australia and others further afield for a new aluminium smelter.

    Just as America, Britain, and others have been hurt by allowing the growth of banks too big to fail, we’ve been caught by having an industry that, relative to the size of our economy, is close to being too big to be allowed to fail.

    I agree with the many posters who have suggested an optimum course is to keep the Bluff smelter going for a few years at least, and meantime scrabble for another or supplementary use for the big power output from Manapouri. Suggestions from the past have included a nickel smelter (which apparently also needs a lot of power) and Solid Energy’s idea of using the power to convert some of Southland’s vast lignite resource into fertiliser (which was more feasible than Solid Energy’s earlier idea of making diesel from the lignite). Unfortunately we can’t just export the electricity to a nearby country, as some hydro rich countries (such as Norway) do.

    NZ needs new exports to complement those from agriculture, horticulture and fishing, and the big Manapouri station should be the basis for something along these lines. Spending billions just moving the power to the North Island, and losing a chunk of it along the way, doesn’t seem an intelligent choice.

    It’s unfortunate that Lefties see this as a chance to ambush National. John Key, who has been a top international high-stakes currency trader, must be unique among political leaders in the ice-cool nerves he brings to a negotiating table. It would be perilous to have, as our chief negotiator against Rio Tinto, a Greenish politician, or a bureaucrat, or a run-of-the mill SOE board chief.

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  26. emmess (1,367 comments) says:

    It would be perilous to have, as our chief negotiator against Rio Tinto, a Greenish politician, or a bureaucrat, or a run-of-the mill SOE board chief.

    Or Michael Cullen?

    What you want five billion for it?
    Ok, ten billion and that’s my final offer.
    Shit, I forgot you a supposed to offer lower than they are asking.

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  27. OECD rank 22 kiwi (2,810 comments) says:

    The Spice must Flow

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  28. alloytoo (430 comments) says:

    RT and BHP billiton try this stunt in every country they operate in.

    Subsidising them invariably costs more in the long term than what the smelter is worth to the economy.

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  29. Mark (1,356 comments) says:

    Perhaps Rio Tinto were looking for the same sort of deals s the movie moguls got from Key. It is good to see that at last they are showing the balls to give right message to foreign owned companies looking for large subsidies from the NZ tax payer that they should perhaps look elswhere

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  30. rouppe (913 comments) says:

    Let them walk.

    Once they have Rio Tinto will have an expensive asset doing nothing, we can buy it for a heavy discount, and run the aluminium smelter ourselves. Make it a subsidiary operation of Meridian

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  31. muggins (2,983 comments) says:

    http://www.stuff.co.nz/national/politics/8496789/Smelter-firm-subsidy-talks-stall
    The Government is out,so now it’s down to Meridian and Rio Tinto. Which is the way it should be, in my opinion.

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  32. Pete George (22,731 comments) says:

    Make it a subsidiary operation of Meridian

    I’d thought of that, at least part ownership.

    Or to connect the price of electricity to the price of aluminium, so Meridian have to bear some of the cost of low prices but benefit if/when the prices recover.

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  33. Paulus (2,490 comments) says:

    As I understand current contract goes to 2016 irrespective of use, and early closure will cost Rio Tinto.
    I also have heard that it would take three years to link to the national grid, and 50% loss would occur from the South to North Island anyway.

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  34. Jack5 (4,568 comments) says:

    Rouppe posted at 9.39:

    …run the aluminium smelter ourselves. Make it a subsidiary operation of Meridian

    We would have to buy the alumina from Rio Tinto or a competitor, who would take a margin, and then we would have to sell the aluminium ingots in competition with refineries being subsidised in Australia, France, America and probably (in a Communist price system it’s hard to tell what is a subsidy) in China.

    As for Meridian running an aluminium smelter: we’ve seen what SOEs can do in Solid Energy, and TVNZ. You wouldn’t survive if you came in cold from an NZ electricity SOE to a multinational needing expertise in shipping, ore and mineral processing and international marketing. All this in competition with refineries which Australian federal and state and foreign governments seem ready to nurse through cyclical downturns.

    PG posted “Or to connect the price of electricity to the price of aluminium.”

    That is surely what the Government is trying to do, Pete, and may well already do to a lesser degree.

    Paulus posted at 10.04: “I also have heard that it would take three years to link to the national grid…”

    Paulus, there was a detailed Kiwiblog post on March 29 by “Tempest”, who in summary estimated it would take eight to ten years at a cost of about $2 billion to get the infrastructure in to carry Manapouri power to the North Island markets. And costs blow out and time is extended on many big engineering projects.

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  35. muggins (2,983 comments) says:

    http://www.stuff.co.nz/national/politics/8496789/Smelter-firm-subsidy-talks-stall
    I think John Key sums up the position pretty well .

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  36. Black with a Vengeance (1,552 comments) says:

    Still spinning the hobbit and sky city bullshit…

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  37. SPC (5,334 comments) says:

    If the smelter closes, how will it impact on the supply of power onto the market by other companies?

    The Manapouri dam is set up to supply power continuously, thus the power company owning it would (once set up do so) take market share off other South Island dam suppliers – they would become reserve supply.

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  38. Jack5 (4,568 comments) says:

    With the MSM shrinking, NZ seems to have more public relations touts than journalists.

    The MSM haven’t been the only ones conned by Government-line stories ahead of the announcement that the state aid offered for the Bluff smelter has obviously been too little for Rio Tinto. A sudden swarm of posters on Kiwiblog backed the Government decision in the days ahead of it.

    This PR storm is either to soften reaction to the smelter being abandoned, or it’s still part of the Key negotiating strategy, with steely nerved Key pulling Meridian’s strings in continuing negotiations Let’s hope it’s the latter.

    Could John Key have another use for a smelter demise with its portent for the balance of payments? Could he be trying to scare off the hot money that is wildly inflating the kiwi dollar. Nuh! That’s just too Machiavellian.

    Meanwhile, only those who believe in UFOs and ghosts can be confident about the current economy, with meat farmers facing poverty, and drought racking dairying. Add this to the smelter, and all I hear is gloomy news, broken at one point today by advertisements enticing people to get into foreign currency punting.

    Weimar Germany or Wall Street partyingin the late 1920s must have been like this.

    John Key’s got the right idea – a bolt hole in Hawaii.

    The Oracle

    Today, interesting claims were made about the smelter. For example Radio NZ’s Labour Programme economics oracle, Rod Oram, suggested the smelter’s role in the national balance of payments was being exaggerated, and that costs of imports were ignored, and thus questioned those who said it contributed a billion a year to the balance of payments.

    The price of export aluminium is around five times the price of imported alumina, the raw material. That’s a high added-value ratio, remembering that even farmers use imports, from diesel and chemicals to tractors and fertiliser. NZ aluminium exports are running around $1.25 billion a year, which means about $1 billion net of imports.

    One of Oram’s suggested new industries for Southland? Education for foreign students. One of the things a smelter rigger might teach them would be how to use the phrase: “for fuck’s sake”.

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  39. SPC (5,334 comments) says:

    If the Manapouri dam supplies the national grid then other dams become reserve supply – they could be used for water storage and irrigation.

    The real question is not all or nothing, but whether there can be a phase down in the number of pot lines.

    Without this power coming on stream we have to invest in more expensive sources.

    The gains of water storage, reduced need for investment new power generation, lower power generation prices nationwide vs the (inevitable cost of bringing the MD supply into the grid) increased transmission costs offset by the (decline then) end of the subsidy cost.

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