LONDON, Jan.6 (Reuters) – It is turning into a winter of discontent for European aluminum smelters as they struggle to cope with soaring electricity prices in the region.

Four operators announced cuts totaling more than half a million tonnes of annual production capacity, while others have shifted production to ease peaks in electric load prices.

European aluminum consumers are already paying the price. Physical premiums have jumped, with the paid spot contract of the CME dropping from $ 290 per tonne in early December to $ 423 today.

That’s beyond the price of aluminum on the London Metal Exchange (LME), which also opened 2022 with a bang, hitting a two-month high of $ 2,938.50 a tonne on Wednesday.

Aluminum was the second best performer among the major industrial metals in the LME last year, as the market assessed electricity-related reductions in China.

The problems of market power have now spread to Europe.

SHUTDOWN

Aluminum smelting is an energy intensive process, with electricity typically accounting for at least 30% of total production costs, although with significant variability depending on source, supplier structure and local energy market.

Electricity prices in Europe have hit several records in recent months and the regional energy crisis is now turning into an aluminum smelter crisis.

“Exorbitant energy prices” were cited by US producer Alcoa (AA.N) as the reason for a two-year reduction at its 228,000-tonne-per-year smelter in San Ciprian, Spain.

The plant will be out of service by the end of this month, to return in January 2024 with renewable energy contracts.

Another casualty is the KAP smelter in Montenegro, which started reducing its annual capacity by 120,000 tonnes in mid-December.

Plant owner Uniprom was facing an increase in its electricity bill from 45 euros ($ 50.89) to 120 euros per megawatt hour in early 2022.

The “exceptional situation in the energy and gas markets” is the reason why Romanian producer Alro is reducing production from five to two vessel lines at its foundry in Slatina, he said.

The 265,000-tonne-per-year plant will operate at around one-third of its capacity until further notice.

Norwegian company Hydro has also doubled the production capacity of its Slovalco smelter in Slovakia, citing “very high energy prices (which) show no signs of improvement in the short term”.

Production will be reduced to 60% of the plant’s annual capacity of 175,000 tonnes per year.

All four operations will maintain remelting and smelting operations, but the combined annualized hit on primary metal production will be around 550,000 tonnes.

Other European foundries are navigating the electricity price crisis by adjusting amperage and operating rates, which means there is considerable drift to any estimate of lost production.

PREMIUM DISTRIBUTION

Europe is already a net importer of primary aluminum, with the regional supply deficit set to widen as the list of smelter victims grows. The sharp rise in physical premiums attests to this changing dynamic.

The US Midwest’s physical premium jumped higher in sympathy, with the CME spot contract dropping from $ 550 per tonne in early December to $ 666 today.

The United States is also a net importer of primary aluminum and now faces increased competition from Europe for the aftermarket metal.

And the two are in competition with China, which imports significant volumes after a series of power cuts to its huge smelter network.

China’s primary aluminum imports totaled 1.5 million tonnes in the first 11 months of 2021, up 60% year-on-year.

The world’s largest aluminum producer became a net importer in 2020 and it looks set to stay that way.

This, ironically, has benefited Japanese buyers, who have just negotiated a 20% reduction to $ 177 per tonne in the premium for Q1 deliveries.

One of the factors that worked in their favor was the relocation of accessible stocks to Asia to feed China’s new hunger for imports.

LME warehouses held 926,800 tonnes of inventory recorded on Tuesday, with just 34,675 tonnes located in Europe and 19,425 tonnes in the United States. The rest 94% is in Asia.

Asian sites also accounted for 79% of the 449,000 tonnes of aluminum lying in the shadow outside the LME’s mandate at the end of October.

This regional availability is cushioning Japanese buyers but exacerbating supply problems outside Asia.

The problems of foundries in Europe accentuate the growing regional divergence in world premiums.

ALUMINUM PARADOX – EUROPEAN VERSION

The European Union has historically protected its aluminum smelting sector with import tariffs, to the chagrin of regional consumers.

The bloc is now also engaged in what it qualifies as “open strategic autonomy” in its green industrial plan, particularly when it comes to securing the metals essential to the energy transition.

These ambitions are threatened today, not only in aluminum but in other industrial sectors of metals such as zinc.

The Achilles heel in the supply chain is the high energy intensity of the fusion process, exposing producers to the sort of energy crisis that is currently shaking Europe.

Electricity supply constraints will only increase as the continent tries to move away from coal in line with its carbon commitments.

China started grappling with the same enigma of the power of metals last year.

Although China’s electricity problems are in part due to natural causes – last year’s drought in the hydropower-rich province of Yunnan – they are also a consequence of energy efficiency targets aligned with China. commitment to reach peak coal production by 2025.

Energy-hungry aluminum smelters have been easy targets for regional governments looking to improve their energy use and efficiency goals.

Chinese primary aluminum production has stalled as production lines have been closed and new projects have been postponed.

This is the paradox of aluminum.

It is a metal at the heart of the energy transition, but which can only be produced in the virgin state with very large quantities of energy, which are increasingly expensive due to decarbonation.

The paradox has just spread from China to Europe.

($ 1 = € 0.8843)

Editing by Jan Harvey

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