Aluminium traders brace for possibility of more smelter cuts amid rising energy costs

Surging energy prices in Europe have led to fresh concerns about aluminium production across the continent, with market participants mulling the possibility of additional smelter cuts

High energy costs have been plaguing aluminium production since last year, with a number of smelter curtailments announced in December 2021. But the intensification of geopolitical developments following on from Russia’s unprovoked invasion of Ukraine and a wave of industrial action across the continent have led to fresh concerns over the potential for further curtailments.

Market participants said that strikes at French energy company TotalEnergies saw French power prices spike on the Epex Spot Exchange earlier this week, with day-ahead prices for France peaking at €479 per megawatt-hour (MWh) at 7-8pm on Thursday, June 30, with the France Baseload Power Forward Index showing at 715.00 on June 28 for the forward quarter.

“The thing to look at now is the losses of French aluminium smelters [based on more than] €700 per MWh in the third quarter. On average in Europe 14MWh is needed per tonne of aluminium production. It will bankrupt France if they stay open,” one trader in the region said.

High power prices are an issue across Europe, with all regions noting squeezed margins due to increased input costs and weakening LME aluminium prices.

The LME aluminium cash official price was at $2,451-2,452 per tonne on June 29, after peaking at $3,983.50-3,984.50 per tonne on March 7.

“I think it will be a matter of if, not when, we see more smelter cuts for aluminium. It isn’t sustainable for some production to continue,” a second European trader said.

The market is already feeling the effects of previous smelter cuts at the end of 2021.

In December, Alcoa announced that would curtail operations at its 228,000-tonne annual capacity San Ciprian aluminium smelter in Spain due to “exorbitant energy prices.”

Hydro also announced further production cuts at its Slovalco primary aluminium plant in Slovakia. It reduced production to around 60% capacity and will correspond with an annual production reduction of 35,000 tonnes.

This was followed by Romanian aluminium producer Alro which announced in December 2021 that it would reduce production of primary aluminium from five to two electrolysis halls. The company said in February that it would look to restart production from 2023 if the energy market can regain stability.

“I just don’t see any of the smelters coming back online and the concern is there will be even more cuts in Europe. The energy situation isn’t getting better and the winter months concern me,” a third trader said.

“Everyone seems to be holding off right now and trying to work out what’s going on. The premiums may hold up and factor-in the worries [about] further energy [problems] disrupting supplies [and then] the question will once again be ‘where will we get aluminium from’,” they added.

The latest smelter cut took place outside Europe but was still down to high energy prices. The largest primary aluminium producer in the United States, Century Aluminum, announced on June 22 that it will close its Hawesville smelter for up to a year.

‘A lot could happen tomorrow’

The instability around energy costs and concerns of further smelter cuts has put the aluminium market on edge - and so far have stopped premiums falling as far as some expected.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $565-600 per tonne on Tuesday, June 28, down from $575-605 per tonne a week earlier.

Although it has fallen in recent weeks from its all-time high level of $600-630 per tonne, the premium remains 52% higher than at the same point in 2021.

“Although there has been a small decline and no one disagrees that the demand wavered a bit, the concern about cuts and where supply will come from has stopped a collapse,” a fourth trader said.

The previous rally in aluminium premiums were fueled by tightness of aluminium in Europe, smelter cuts and logistics issues preventing imports from easily arriving into the region.

“It will be the duty-paid market that finds support first because those units are what will fill the void of any cuts,” a fifth trader said.

“There is too much that could happen tomorrow, that’s why I’m happy to hold onto my unit and wait,” the trader added.

Fastmarkets assessed the aluminium P1020A premium, in-whs dup Rotterdam at $485-510 per tonne on Wednesday, June 29, down from $490-510 per tonne on the previous day

The duty-unpaid midpoint average for May 2022 was $505 per tonne, compared to $195.40 per tonne in May 2021 and $81.19 per tonne in May 2020.
Recent headlines about more energy concerns have also narrowed the backwardation in CME forwards.

On June 16 the CME duty-paid forwards for aluminium, which are cash-settled against Fastmarkets’ Rotterdam aluminium premiums, were showing at $460 per tonne for July to September 2022 and $425 per tonne for October to December 2022.

Although the premiums remain in a backwardation, the CME forwards for July 2022 is now showing at $566.67 per tonne and for August to December it has risen to $450 per tonne.

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