Stakeholders from aluminium producers to downstream consumers in Europe have a strong interest in market growth but more comprehensive transparency around various aluminium smelter emissions is needed to sustain that growth, Anne-Claire Lejeune, green and sustainable asset originator at bank Natixis, said in an interview with Fastmarkets.
Interest in low-carbon aluminium grew after global governments, particularly in Europe, responded to Covid-19 by incentivizing ‘green’ projects to stimulate economies after lockdowns in 2020.
The development of the low-carbon aluminium market was only possible with the development of a solid definition of low-carbon aluminium in recent years, Lejeune said.
Governing bodies, such as the European Commission (EC) and their sustainability taxonomy document, as well as the Aluminium Stewardship Initiative's (ASI) work in shaping the carbon emission limits of aluminium production made way for the development of a low-carbon aluminium market.
“The combination of the ASI documentation and the threshold set by the EC’s taxonomy, gave the market more data and confidence to define aluminium as low carbon,” Lejune said.
“Of course, the Covid-19 crisis can incentivize the market appetite but I think the appetite also comes from the fact that we now [know how] to define what is low-carbon aluminium,” she added.
That appetite has now translated into market participants paying an upcharge for certain aluminium value-added products.
Fastmarkets, in its first ever low-carbon aluminium assessment on Friday March 5, assessed the aluminium low-carbon differential value-added product, Europe at a $5-15 per tonne premium. The next assessment will be published on Thursday April 1.
Although clear definitions of low-carbon aluminium are starting to shape and price discovery transparency is starting to emerge, it remains difficult to acquire audited documentation to show that carbon emission standards of low-carbon aluminium production have been met so this is creating an obstacle for the maturation of the market.
Existing data on carbon emissions in the market from certain producers showed market participants consolidated carbon emissions across an entire company rather than a specific smelter. The issue was identified in a January case study from the European Banking Federation.
“For example, banks will have access to overall [greenhouse gas] emissions intensity figures for an aluminium smelter outside the EU, but will not have access to the scope 1, 2 and 3 breakdown,” the report said.
Over time, market participants expect the bottleneck in transparency to clear up.
“The main problem at this stage is not the appetite because everyone wants to do it, but just that it takes time to collect the data,” Lejeune said.
Bonuses and penalties
For Natixis and Lejeune, the objective is to further stoke that appetite and incentivize the market to expand, Fastmarkets understands.
The bank took the first step in the market, collaborating with Rabobank to support a $500 million low-carbon aluminium financing platform for commodities trader Trafigura.
In the short term, Lejeune said the strategy is to incentivize the use of thoroughly defined low-carbon aluminium by providing discounts on financing.
The longer-term plan, however, is to offer market participants financing with bonuses if certain sustainability efforts are met and penalties if not, through a product called strategy-linked loan instruments.
The sustainability performance indicators the bank looks include carbon dioxide (CO2) and other types of emissions that can occur during the aluminium production process.
“In the aluminium sector we’ll think about sustainability reports, we’ll think about the [perfluorocarbons (PFCs) that can be produced in the primary aluminium reduction process, during events referred to as anode effects], these types of indicators will apply to aluminium,” Lejeune said. “We have annual targets and our job as a green coordinator is to ensure that these targets are ambitious enough.”
“If [clients] reach their targets they’ll have a bonus and if not, they will have a penalty," Lejeune said.
Lejeune is optimistic that demand for this type of financing will grow alongside the low-carbon aluminium market.
“All the big players are so concerned about the environmental changes that they have to be cautious about sourcing commodities,” Lejeune said.
“Many actions are put in place to ensure the sourcing is done in a proper way. There are increasing trends of audited processes on the supply chain so I think this trend will continue to increase because we know the demand for aluminium should grow again, I'm sure the demand for low-carbon aluminium will grow increasingly as well,” Lejeune concluded.