Energy price highs bite in European Al market

The European aluminium market is fast becoming a casualty of soaring energy prices, and any capacity with exposure to spot electricity prices is likely to face curtailment after a number of cuts were already announced over the past two weeks.

Norwegian aluminium producer Norsk Hydro is extending its previously announced cutbacks at the Slovalco plant in Slovakia, while US producer Alcoa's San Cirpian smelter in Spain is shutting down for two years after soaring energy prices made a sale of the plant impossible. Other producers have also announced cuts as smelters face energy prices that have more than doubled and in some cases even even tripled.

Romanian aluminium producer Alro, the country's biggest industrial electricity customer, will reduce operations from five potlines to two due to "the exceptional situation on the energy and gas markets", it said last week. Alro has a capacity of 265,000 t/yr of primary aluminium and 340,000 t/yr of cast aluminium.

The Dunkirk aluminium smelter, which is the subject of a legal ownership struggle between GFG Alliance and its senior creditor, private equity firm American Industrial Partners, is said to be following Slovalco's example by extending previous cutbacks.

While a supply response to high energy prices had been expected when forecasting the aluminium market for 2022, few would have anticipated the precipitous nature of the announcements that have come over the year-end period. But almost all producers in Europe are exposed on some level to spot energy prices, and all face cuts to that extent in 2022.

"The energy cost is a killer, no-one can survive," a trader said. "Any smelter with exposure to spot energy is dead."

London Metal Exchange (LME) aluminium prices have set three-month highs in the past week as a result of the growing shortage, but LME prices have not been the chief indicator of a tightening market for years. Premiums react more to the market's fundamental supply balance, and those are jumping.

The Argus weekly assessment for duty-paid P1020 in-warehouse Rotterdam premium leaped to six-year highs of $400-430/t last week, up from $290-310/t previously, and is likely to rise further as the effects of the recent cutbacks start to bite.

Production of liquid aluminium for casthouses will be heavily affected due to the power costs involved. Substitute metal will have to be sourced from scrap, raising demand levels in an already tight aluminium scrap market.

And this is all on top of a demand picture for aluminium metal that is expected to improve as the year progresses, as latent demand from the automotive industry is freed up by an improving supply picture for electrical semiconductor parts for vehicles.

Additionally, production curbs in China will limit the rise in output from that region, with Chinese import demand likely to remain high as a result. China's status as a net importer of aluminium has been a major driver of the aluminium market through the pandemic.

By Jethro Wookey