By David Winning and Robb M. Stewart
The lights abruptly went out on New Zealand's long-running stocks rally Wednesday. The reason: A global mining giant's threat to pull the plug on the country's biggest buyer of electricity.
The NZX-50 index had been among the world's best-performing stock benchmarks this year, notching a 26% gain through Tuesday. But it fell 2.1%, close to a three-week low, after Rio Tinto PLC said its Tiwai Point smelter is unprofitable, citing high energy costs and historically low aluminum prices because of oversupply in the market.
The selloff illustrates how small stock markets can be especially vulnerable to big corporate decisions. Tiwai Point, which employs about 1,000 people and has been in operation for nearly half a century, is the single biggest user of electricity in New Zealand, where it accounts for roughly 14% of energy demand.
The possible closure risks creating a power-supply glut, which could drive down electricity prices and industry profits.
Power generators bore the brunt of selling, with Meridian Energy Ltd. falling 8.7% on the potential loss of a customer that takes around 40% of its energy output. Meridian is New Zealand's largest listed company by market value. Other power companies also have contracts to supply Rio Tinto's smelter, including Contact Energy Ltd. and Mercury NZ Ltd., which fell 9.7% and 8.4%, respectively.
The NZX "isn't a huge exchange, and it can be thinly traded," said Michael McCarthy, chief market strategist at CMC Markets. "So when you have stock-specific news on a day when there are negative leads elsewhere, the reaction can be disproportionate."
Concerns about the future of Tiwai Point have long hung over the sector. Six years ago, Meridian renegotiated its power-supply contract with Rio Tinto's majority-owned New Zealand Aluminium Smelters Ltd., or NZAS, to help the smelter to stay competitive. The revised deal included a cut in the electricity price.
Investors who bought shares in Meridian when it was privatized by the New Zealand government that same year were warned about the risk of the Tiwai Point smelter closing. "In some circumstances the impact on Meridian is likely to be severe," the listing prospectus said.
On Wednesday, Rio Tinto said a review of the smelter's future would be finished early next year. Other options include curtailing production, it said.
Meridian Chief Executive Neal Barclay said the generator had offered to overhaul its existing power-supply deal, and remained open to negotiating with NZAS and its owners. Rio Tinto owns 79.4% of the smelter, with the rest held by Japan's Sumitomo Chemical Co.
Alf Barrios, head of Rio Tinto's aluminum business, said his company is seeking talks with the government and other groups to "find a solution that will ensure a profitable future for this plant."
Write to David Winning at firstname.lastname@example.org and Robb M. Stewart at email@example.com
Corrections & Amplifications An earlier version of this article misspelled the first name of Meridian Energy Ltd. Chief Executive Neal Barclay as Neil. (Oct. 23, 2019)