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Metal plants feeding Europe’s factories are in existential crisis

5th September 2022

By: Bloomberg


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In the aluminum industry, closing a smelter is an agonizing decision. Once power is cut and the production “pots” settle back to room temperature, it can take many months and tens of millions of dollars to bring them back online.

Yet Norsk Hydro is preparing this month to do exactly that at a huge plant in Slovakia. And it’s not the only one — European production has dropped to the lowest levels since the 1970s and industry insiders say the escalating energy crisis is now threatening to create an extinction event across large swathes of the region’s aluminum production.

The explanation lies in aluminum’s nickname: “congealed electricity.” The metal — used in a huge range of products, from car frames and soda cans to ballistic missiles — is produced by heating raw materials until they dissolve, and then running an electric current through the pot, making it massively power intensive. One ton of aluminum requires about 15 megawatt-hours of electricity, enough to power five homes in Germany for a year.

Some smelters are protected by government subsidies, long-term electricity deals or access to their own renewable power, but the rest face an uncertain future.

As production drops, the hundreds of European manufacturers that turn metal into parts for German cars or French airplanes are left increasingly reliant on imports that could get costlier. Some buyers are also trying to avoid metal from Russia, which is usually a big supplier to Europe.

“History has proven, once aluminum smelters go away, they don’t come back,” said Mark Hansen, CEO of metals trading house Concord Resources. “There is an argument which extends beyond employment: this is an important base metal commodity, it goes into aircraft, weapons, transport and machinery.”

The industry says it urgently needs government support to survive. However, any measures like fixed price caps to keep power-hungry plants running may be difficult to justify while consumers face soaring power bills and the threat of rationing and blackouts looms.

The woes of the aluminum sector offer a striking example of what's playing out in Europe's energy-intensive industries: across the continent, fertilizer makers, cement plants, steel mills and zinc smelters are also shutting down rather than pay eye-watering prices for gas and electricity.

Most worryingly for the region's manufacturing sector: it may not simply be a case of shutting for the winter. Power prices for 2024 and 2025 have also soared, threatening the long-term viability of many industries.

At recent market prices, the annual power bill for the Slovalco smelter would be around two billion euros, according to CEO Milan Vesely. Slovalco decided to mothball the plant due to a combination of surging energy prices and a lack of emissions compensation that is available to smelters elsewhere in the bloc.

Restarting the plant — which could take up to a year — will only be possible through some combination of cheaper power, a sharp rise in aluminum prices, and additional government support, Vesely said in an interview this week at the site.

“This is a genuine existential crisis,” said Paul Voss, director-general of European Aluminium, which represents the region’s biggest producers and processors. “We really need to sort something quite quickly, otherwise there will be nothing left to fix.”

Combined with import tariffs that Europe’s struggling producers have fought hard to put in place, the rising cost of energy could leave manufacturers facing an increasingly large premium over prevailing international prices in order to secure supply, in a further blow to Europe’s competitive standing in the global industrial economy.

“There will be nothing left to fix”

Producers of other metals like zinc and copper are hurting badly too, but the vast amounts of power needed to make aluminum have made the sector particularly unprofitable.

In Germany, the power needed to produce a ton of aluminum would have cost roughly $4 200 in the spot market on Friday after topping more than $10 000 last month, according to Bloomberg calculations. The London Metal Exchange futures price was around $2 300 a ton on Friday. That means curtailments look set to accelerate over the winter.

“Whenever we get downturns in economic growth and smelter margins come under pressure, we see European smelters shutting a decent portion of capacity,” said Uday Patel, senior research manager at Wood Mackenzie. “When things improve, there are some smelters that never come back online.”

Wood Mackenzie estimates that Europe has already lost about one-million tons of its annual aluminum production capacity, and Patel said he expects that about 25% of that may be curtailed permanently. Another 500 000 t is “highly vulnerable” to closure, Wood Mackenzie estimates.

The curtailments have had little impact on aluminum prices, which have fallen by more than 40% since a peak in March as traders brace for a global slump in demand that could be even more severe.

But while Europe’s production losses account for about 1.5% of global supply, they will leave consumers in Europe increasingly reliant on imports that will be costlier and carry a heavier carbon footprint.

Already, European manufacturers are paying hefty delivery fees to get aluminum shipped to local ports, and further increases could leave them in an increasingly uncompetitive position relative to peers across Asia and the US.

The energy crisis is also rippling quickly down the supply chain to companies that buy aluminum from smelters and transform it into specialist products used in everything from cars to food packaging.

They use significant amounts of gas in the process, and many are looking to pass on their surging energy costs via contractual surcharges that could bake in additional costs for manufacturers for years to come.

“The smelter curtailments are only the tip of the iceberg, because you also have downstream players who are buying prime metal and transforming it into products for use in sectors like beverage cans and automotives,” said Michel Van Hoey, a senior partner at McKinsey & Co. These companies have typically seen a ten-fold increase in their energy bills and “will not be able to fully pass on those costs without some degree of demand destruction or import substitution.”

At Slovalco, Vesely — who has worked at the company since 1989 — is hopeful it will be able to reopen the plant once energy prices fall, but acknowledges the risk that it could remain offline for years.

“Something must be done if we don’t want to destroy European aluminum production,” he said. “If Europe considers aluminum as a strategic metal, then aluminum plants should have guaranteed prices of electricity.”

Edited by Bloomberg



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