Europe Al cuts continue despite power relief

Up to half of European aluminium production capacity was cut over the past two years as skyrocketing power prices slashed margins among all but the lowest-cost producers. But the cuts have continued even as power prices have fallen back, and despite all the capacity taken off line, prices have yet to recover from their precipitous falls that started a year ago.

More than 1mn t of annual aluminium capacity has been cut from European smelters as a result of high power prices since late 2021. Average monthly electricity wholesale prices peaked in August last year, in some cases settling 10 times higher than they were two years earlier.

Prices in Germany reached almost €470/MWh in August last year, from €47/MWh in March 2021, according to market and consumer data platform Statista. French prices jumped to €493/MWh from €50/MWh in the same period, and Italian prices reached €543/MWh from €60/MWh.

But power prices fell back significantly in September and October, and again in January. German prices fell by 71.1pc from their August peak to €136/MWh in January, with French prices dropping by 73.2pc and Italian prices falling by 67pc.

France's Aluminium Dunkerque, which operates one of Europe's biggest aluminium smelters, began restarting idled capacity in January, leading some market participants to predict that other producers would do likewise amid a more favourable energy market. Dutch TTF Natural Gas Futures fell below €50/MWh in February, the lowest level seen since August 2021 from an all-time high of €345/MWh in August last year.

But the aluminium capacity cuts have continued elsewhere in Europe, with a further two such announcements this month alone. Germany-based aluminium producer Speira will fully curtail its Rheinwerk smelter in Neuss because of high energy costs, while Slovenian producer Talum said it will halt operations at its smelter in Kidricevo, Slovenia.

Producer margins are still not adequate, even with power prices falling. Power prices remain up to three times higher in Europe than they were two years ago. Aluminium prices have not recovered enough to salvage producer margins, or even at all. London Metal Exchange aluminium prices peaked at over $3,950/t in March last year, following Russia's invasion of Ukraine in February. But prices fell to lows of just over $2,100/t in September, and after a brief recovery are down by almost 15pc this year from January highs of around $2,660/t.

Global aluminium production has continued to rise. Global aluminium output reached 5.27mn t in February, data from International Aluminium show, up by 2.69pc on the year. Chinese production rose by 4.5pc on the year in 2022 to reach 40.21mn t, and China's output has continued to grow this year, reaching 3.11mn t in February, up by 4.26pc on the year. This is despite power shortages prompting aluminium capacity cuts in Yunnan province.

It may be that the latest cuts to European aluminium production have less to do with power prices and instead reflect a structural shift of primary production eastwards. Speira's latest cuts may have been attributed to high power prices but the company has been transitioning to a pure aluminium rolling and recycling company since it was formed in 2020 from Norwegian aluminium producer Norsk Hydro's former aluminium rolling business. Talum's stoppage was likewise hung on power prices, but the smelter was only operating at 20pc capacity because of earlier cuts.

Restarting aluminium smelting capacity entails high costs, and so the power crisis has accelerated a structural shift and it is unlikely that any significant portion of curtailed European capacity will be restarted.

The European aluminium market has appeared vulnerable to an improvement in demand because of its curtailed supply picture, but consumers may avoid the worst of predicted price hikes that higher demand could cause if they secure access to new, lower-cost production in other locations.

Jethro Wookey