Market close: NZ shares fall as smelter closure routs energy stocks

New Zealand shares slumped, led by a sharp drop across the energy sector. Photo / File

New Zealand shares slumped, led by a sharp drop across the energy sector after Rio Tinto said it will close the Tiwai Point aluminium smelter next year, having given notice to its supplier Meridian Energy.

The S&P/NZX 50 Index declined 266.39 points, or 2.3 per cent, to 11,440.88. Within the index, 34 stocks fell, 13 rose, and three were unchanged. Turnover was $226.5 million.

The benchmark took a dive as New Zealand Aluminium Smelters - a joint venture between Rio Tinto and Sumitomo Chemical Company - gave Meridian notice to terminate the smelter's power contract when it expires at the end of August next year. The mining giant had been reviewing the business for the past nine months to weigh up its viability as the cost of energy squeezed margins amid weak aluminium prices.

Greg Smith, head of research at Fat Prophets, said the news was a "bolt from the blue" that had reverberated across the energy sector.

When the strategic review was announced in October, energy companies were anticipating a staged closure of the smelter, if it happened at all, Smith said.

"Now it is outta here in just over 12 months, that's probably as much a shock as the fact it is going," he said.

The Covid-19 outbreak may have been the tipping point for Rio Tinto, Smith said. The pandemic caused a downturn in the motor vehicle and aerospace industries, both of which are large consumers of aluminium.

Energy stocks led the market lower as investors repriced power companies that would have to cope with an oversupply of electricity putting pressure on margins.

"Some of them are putting on a brave face and putting out positive statements through gritted teeth," Smith said.

Contact Energy bore the brunt of the blow, dropping 14 per cent to $5.80. Chief executive Mike Fuge said the "disorderly exit" was "very disappointing."

Contact will defer the development of a second geothermal power station in Tauhara and consider closing its thermal power station in Stratford to offset the loss of the smelter.

The nation's largest generator, Meridian fell 10.8 per cent to $4.69, snapping six days of gains. As owner-operator of the Manapouri Power Station, built to supply electricity to Tiwai Point, it was the most directly affected by the termination of the contract.

"Meridian didn't give too much away, just saying they will review the decision and will assist in an 'orderly' exit," Smith said.

Mercury NZ dropped 3.5 per cent to $4.68. The North Island power generator said its renewable generation would be unaffected by transmission constraints that would arise from reduced South Island electricity demand.

Genesis Energy - also a predominately North Island generator - declined 7.9 per cent to $2.90. It said the closure was an opportunity to accelerate electrification of industry and it would reassess its generation portfolio.

Trustpower said it had capacity to store water in the South Island for extended periods until demand in the sector rebalances. Its shares fell 3 per cent to $6.80.

Summerset Group posted the day's biggest gain, rising 2.4 per cent to $6.92 after it warned first-half underlying profit could be up to 16 per cent lower than last year as the virus outbreak halted construction as well as property settlements.

"They've downgraded guidance, but investors were primed for worse," Smith said.

Outside the benchmark index, Augusta Capital shares rose 0.5 per cent to 94 cents after a takeover offer from Centuria Capital was declared unconditional after it secured two-thirds of acceptances of its cash and scrip offer of 22 cents plus 0.392 Centuria stapled securities for each Augusta share.

The Warehouse Group rose 1 per cent to $2,11 after it reported online demand had been strong since stores reopened after lock-down. Year-to-date online sales were up 54.8 per cent, representing 11.8 per cent of all group sales, but the company hasn't provided formal earnings guidance.