John Armstrong: PM shows hardball a game for two

Rio Tinto's rejection of one of the Prime Minister's less elegant solutions was clearly predicated on its goal of a cheap deal over the long term. Photo / Supplied

Forget Warner Brothers and The Hobbit. Negotiating with Hollywood moguls must now feel like a bit of a doddle for John Key compared to mixing it with the cold-blooded, razor-wielding gang of cost accountants from Rio Tinto.

The Prime Minister prides himself on his currency trader-derived capacity to cut a deal in the most difficult of circumstances. The stalled negotiations between Meridian Energy and the minerals conglomerate over how much the latter should in future pay for electricity for its Bluff aluminium smelter may provide the ultimate test of his ability to get a result which satisfies everyone and does not leave anyone looking like a big loser.

He did not get off to the greatest start. Last week's Government offer of a "modest" short-term subsidy to bridge the gap between Meridian's best offer and the price Rio Tinto will accept got short shrift from the firm.

The subsidy was the kind of stop-gap compromise that Key often favours and which - in postponing the smelter's day of reckoning - drives his critics to distraction. But - as he argues - National may have been damned for intervening, but it would have been damned even more had it not waded in.

Rio Tinto's rejection of one of the Prime Minister's less elegant solutions was clearly predicated on its goal of a cheap deal over the long term - something it believes it can achieve because it senses it has the Government over a barrel.

It is National's misfortune that the smelter's future impacts on the two most crucial issues currently confronting the Government; first, creating jobs, not culling them; second, partial privatisation and whether a perceived electricity glut dampens small investors' enthusiasm to take a punt on shares in Mighty River Power.

The politics dictate that the smelter be saved. The economics argue that it should sink or swim without ever more concessions on power pricing.

Key endeavoured to straddle both positions yesterday. He spent the day front-footing in the media, offering far more information than is usually the case in such secrecy-shrouded negotiations. He was fulsome in indicating Meridian and Rio Tinto were far apart when it came to agreeing on longer-term pricing. He was emphatic that his Government was not interested in providing a long-term subsidy.

In part, Key was deliberately engaged in a softening-up exercise to attune people to the very real possibility of the smelter being shut down for good.

He was also telling Rio Tinto that the Government was neither ideologically inclined nor financially capable of propping up the smelter - even if some 3000 jobs in Southland are under threat.

In part, he, like Rio Tinto, was indulging in brinkmanship. His message to the multinational was crystal clear. Two can play at that particular game.