The Current Crisis Crumbling Long-Standing European Aluminium Smelters

Increased energy prices for the production of aluminium, a material with notoriously high power consumption, are reducing profit margins to a razor thin line for a range of primary aluminium producers, if not already sending some smelters into the red.

Even without the threat of market intervention from the White House, the aluminium market has had a turbulent few years. Supply and demand shortages due to repeated Covid lockdowns, Russia’s invasion of Ukraine, and the ongoing energy crisis have all, respectively, impacted the current state of the aluminium industry.

The price of gas in Europe is 90% higher than in Q3, 2021. In the energy-intensive process of producing non-ferrous metals, 40% of production costs are spent on electricity, which translates to a 7% increase in aluminium production costs. 

Reports of aluminium smelters in Europe scaling back production or shuttering smelting entirely are hitting the headlines. Yahoo Finance has published a comprehensive list here. Norsk Hydro have closed their Slovakian plant Slovalco as well as reducing production by 110,000-130,000 across 2 of their Norwegian plants; Talum in Slovenia have reduced output by 80%; Alcoa’s Lista smelter in Norway will reduce output by a third; Speira GmbH is contemplating halving production; G.A. Roeders GmBH plans to alter shift and production patterns to incorporate temporary shutdowns in order to maintain output and save on energy bills. In total, such reductions equate to 1.36 million mt, or a drop of 13.8% compared to total capacity.

Reports of aluminium smelters in Europe scaling back production or shuttering smelting entirely are hitting the headlines.

Preventative measures put in place prior to the Russian invasion to combat energy costs are not enough to keep suppliers operational for the long-term.  Nearly 40% of German aluminium companies have signed long-term contracts with energy suppliers to keep costs competitive until the end of 2022; when these contracts expire, if a new deal cannot be made, then these companies face the issues, and potentially fates, as the rest of the European aluminium industry. In France, the ARENH scheme price cap is rising from 42€/MWh to 49.5€/MWh. The scheme offers producers and alternative energy suppliers access to cheap, fixed-price nuclear power produced by EDF (EDF must sell 100TWh annually at this rate). For example, in Q4, 2021 and Q1, 2022 Aluminium Dunkerque Industries France reported an increased energy bill of 300€ million with 60% of energy supplied by ARENH. From April 1st, this supply increased to 79%. Despite this subsidisation, the remainder of energy bought at market rates has resulted in the company reporting a loss of 4,000€ per ton – a loss that is predicted to increase 275% by December. A decision to reduce production by 22%, given the financial outlook, is wholly justified.

The decision of whether to operate at a reduced rate or shut down entirely is a heavy one. Operating at a loss is often more cost-effective than shutting down and restarting. And shutting down production is not as simple as turning furnaces off and on again – the process is costly and lengthy. However, seeing as there is no definitive end date to the energy crisis, producers have to evaluate the most cost-effective option for a number of timescales. How much to reduce production by and for how long are big questions. Demand for European aluminium is slipping at a greater rate than supply cuts causing stock build-ups – yet the average price of aluminium on the LME in September (prior to the speculation of a US ban on Russian aluminium) was $2228, significantly lower than the all-time high of $4103 in March of 2022.

Shutting down production is not as simple as turning furnaces off and on again — the process is costly and lengthy.

Demand for aluminium will rise again, however, as the European green transition will shape how these companies scale their businesses back up. The new Green Deal will also impact where companies look to import aluminium in the short-mid term to fill the gap in supply.  The European Commission’s EU Green Deal includes a new Carbon Border Adjustment Mechanism (CBAM), whereby businesses are taxed depending on their imports’ embedded carbon emissions. The tax is calculated using the price that would’ve been paid if the import was made in the EU – thus encouraging EU importers away from purchasing products made using high-carbon techniques. The implementation of this deal deters importers from considering Chinese aluminium as an alternative – given aluminium production alone accounts for 4% of the country’s carbon footprint (roughly ​​6.5 t CO2e/t Al ingot in 2013). Many eyes would’ve turned to Russia – a leader in green aluminium. This, however, is possibly set to be banned by the US, and the LME is likely to follow.

The demand for aluminium is projected to rebound, however, the big question on everyone’s minds is just exactly where the supply will come from. Without governmental intervention for price regulation or subsidies, the European aluminium industry is tasked with immense challenges yet to be overcome. The stage is set for lower-cost low-energy substitutes, like secondary aluminium and hydro-powered aluminium smelters, to help fill the gaps in the market. The world needs more aluminium, it’s just a matter of where we’re going to get it.

The stage is set for lower-cost low-energy substitutes, like secondary aluminium producers and hydro-powered aluminium smelters, to help fill the gaps in the market.