Does European energy crisis risk investment in renewables and green transition? - LME Week

With soaring European energy prices squeezing margins and curtailing production of various commodities, Fastmarkets explores whether the crisis risks the postponement of investment in renewable power and in the transition to green metals.

For metal producers in Europe, accessing the required power remains a key factor ahead of winter, whether the energy comes from renewable sources or not, because of concerns over gas rationing.

“The challenge now is energy availability in the short term, with a share of lower-carbon sources moving toward higher-carbon. The alternative is no energy availability,” Halvor Molland, senior vice president of communications and public affairs at Norwegian aluminium producer Hydro, said. “It’s more about having energy at all, rather than renewables versus gas.”

With the European aluminium P1020 premium not being supported by the soaring energy costs, or the subsequent smelter cuts, there is a risk that green metal upcharges will become harder to achieve when they represent a larger portion of the premium.

Fastmarkets’ assessment of aluminium P1020A premium, in-whs dup Rotterdam, was $230-250 per tonne on October 19, with the aluminium low-carbon differential, P1020A, Europe, most recently at $10-30 per tonne on October 7, unchanged month on month. The upcharge accounted for 8.3% of the premium.

This compares with P1020A at $360-400 per tonne on September 2, with the low-carbon differential at the same level, but accounting for only 5.2% of the premium.

The market risks losing momentum as it strives to reach its climate targets, with output cuts in Europe approaching 1 million tonnes of aluminium production this year, and concerns that metal produced overseas with higher emissions could replace the curtailed tonnages.

“One thing is certain,” a spokesperson from industry association European Aluminium said, “to achieve our climate objectives, we need aluminium. The question now is whether this aluminium is produced according to the highest environmental and sustainability standards, or imported from third countries where carbon footprints are sometimes three times higher.

“Our non-European competitors, and China, in particular, are ramping up their primary aluminium capacity. They are ready to replace European losses with their exports, which are on average much more carbon-intensive than the aluminium we produce here in Europe,” the spokesperson added.

“[Smelters] are costly to curtail and costly to turn back on,” Molland said. “Every cost is taking money away from investment. It’s a balancing act to do both. You need production and you need profit to have a surplus to invest back into the green transition.”

While funding can be allocated on a long-term basis, companies are facing a juggling act in trying to maintain profitability while also meeting climate targets.

“The low aluminium price on the London Metal Exchange represents a big challenge for all primary aluminium producers on their way to carbon neutrality. With the current price level, many primary aluminium producers are operating at a loss,” a spokesperson for Russian aluminium producer Rusal said.

For many producers, it is “understandably challenging to do both,” Molland said. “It risks a delay in the change, with [renewable] projects postponed, which is a concern we see. Many are trying to continue to invest in technology that enables the green transition.”

There is not yet enough renewable power, which restricts new projects.

“The shift to greener production will continue,” Molland said. “The aluminium industry has to change its energy sources to renewable energy to become sustainable, in order to continue its production in Europe. Europe must therefore continue to develop more renewable energy to continue the green transition.”

“Decarbonization of primary aluminium production is directly linked to more sustainable energy sources and smelting technologies,” the Rusal spokesperson said. “Both require substantial investment over the next decade, and those investments must be supported by aluminium prices.”

Alcoa chief executive Roy Harvey told delegates at Fastmarkets’ International Aluminium Conference in September 2022 that, despite serious headwinds, the company remains committed to “making sure we are making good decisions about decarbonization for the long term.”

“It’s a difficult and challenging environment in every other aspect, but we can’t lose the acceleration and momentum of solving the long-term problems in this industry,” he added.

He said that the aluminium market was now fundamentally shifting away from a competitive environment, largely focused on growth in China and the Middle East, with access to coal reserves, to those who could access renewables.

“There is a shift in the playing field, toward who has access to that renewable power, and then how can you create that competitive smelter,” Harvey said. “That’s why you see this dearth of new projects happening – because you don’t have excess power right now, you don’t have that easy and consistent access to that next hydro facility.”

For end-user sectors such as the automotive industry, green metal tonnages are likely to be secured on a long-term basis and will therefore be less exposed to short-term situations that could dampen spot appetite.

In the long term, demand for low-carbon aluminium and its role in the energy transition looks robust, but the supply of green metals on the market remains constrained.

To meet the growing customer demand, Rio Tinto will increase low-carbon aluminium billet production at its Alma plant in Canada by more than 200,000 tonnes per year, with construction to begin in spring 2023, while Rusal, which accounts for around 21% of the global low-carbon aluminium supply, plans to ramp-up its Taishet smelter to increase capacity, with sales of its Allow brand increasing by 44% in 2021 to almost 1 million tonnes.

The company told Fastmarkets that the energy crisis was accelerating the energy transition process.

“The energy crisis and weak economic conditions are accelerating energy transition processes,” the Rusal spokesperson said, “particularly increasing the penetration of electromobility and growing the share of solar and wind generation worldwide. Aluminium plays a vital part in this transformation because it is widely used in low-carbon technologies.”

Research by management consultant McKinsey showed that the economics of commodity producers going green had radically improved, but it still was not clear that decarbonization investments would show a competitive return on capital.

It added that although it may make a clean-energy transition more complicated in the short term, questions around energy security and economics could ultimately converge to force net-zero transition efforts to move faster.

The McKinsey outlook expects low-carbon aluminium demand and supply of 41 million tonnes to be nearly balanced in 2030, with most of the supply coming from secondary aluminium.

But energy cost pressures are also squeezing margins for secondary aluminium producers, at a time of muted buying interest amid fears of a recession in Europe, and this is creating further concern over low-carbon supply in what some participants see as a significant growth area in the long term.

Earlier this year, Hydro tendered an offer to acquire 100% of the shares in Polish recycling company Alumetal, saying that the acquisition would strengthen its recycling position in Europe. Hydro currently offers a low-carbon aluminium product using post-consumer scrap.

“A lot of people think that the secondary market will be better placed to deal with the situation than the primary market, because production is less energy-intensive,” one European secondary aluminium producer said. “But we in the secondary market also see curtailments and reductions in production. If you were reliant on Russian gas, and can’t find a new supplier, you have a big, big issue. It’s really not a good feeling at all.”

Fastmarkets assessed the price for aluminium pressure diecasting ingot DIN226/A380, delivered Europe at €2,250-2,300 ($2,216-2,265) per tonne on October 14, falling from €2,300-2,400 per tonne one week earlier, and down by 24% from the record high of €2,900-3,050 per tonne in March 2022, following Russia’s invasion of Ukraine.

“A [European] recession seems to be very real and already alive,” a secondary aluminium trader said. “Demand is low, and there is a lot of material available on the market. We could hit lower levels very soon. But with these energy costs, who will produce it? The producers will suffer a great loss.”

Falling European scrap prices have been providing little relief to secondary producers, with market participants noting that energy costs have increased to more than 50% of total secondary production input costs, from around 10%, depending on the region.

Fastmarkets assessed the price of aluminium scrap clean HE9 extrusions, delivered consumer UK at £1,750-1,800 ($1,982-2,039) per tonne on October 19, down from £1,780-1,850 per tonne a week earlier, and down from highs of £2,400-2,500 per tonne in March.

But some were expecting greater demand for primary-grade scrap in 2023, once demand returns to the market, with participants noting its enhanced sustainability credentials.

The struggle for renewable power is not a concern for the European steel sector, where many planned green-metal projects will use hydrogen.

Demand for green flat steel from end-users has been growing recently, but the sector is also concerned about the potential postponement of costly sustainability initiatives.

“Of course, we all need to go to greener and greener, but I don’t think this is the time to do it,” a trader in Northern Europe said.

Another trader in Northern Europe believes that widespread use of green steel in Europe will take a long time to achieve – much longer than within the next few years – and that the current plans are wishful thinking.

“The market, the economy, energy [costs] – everything is very uncertain. And then we make large changes to other methods of production. I don’t think it’s the time at this moment,” a third trading source said. “We don’t have the infrastructure yet, and if we look back at how long it took before we had a certain percentage of green energy produced in Europe…I think it will take longer.”

But another trader from Germany said that the energy crisis is making the topic of green steel and low carbon more attractive, and European flat steelmakers have no plans to postpone green-steel project implementations, with a number of agreements signed between steelmakers and automotive companies for the supply of green steel.

Some sources expressed concern about the installation of direct-reduction iron (DRI) modules, which are very energy-intensive, notably in terms of gas. But flat steelmakers highlighted that their DRI plants will use hydrogen, not fossil natural gas, so the only consequence arising from the current energy crisis is the cost of electricity, which they viewed as a temporary obstacle to the long-term green steel target.

“We will not use fossil gas for our hydrogen production [even on an interim basis],” a spokesperson for Swedish steelmaker H2greensteel said. “And yes, we feel confident that we will have enough for our production. We have already secured the base of our portfolio and will continue to work on it up until the start of production.

“The currently planned build-out of energy production in Northern Sweden will cover the needs of the industrial ramp-up,” the spokesperson added. “We haven’t seen any direct effect from the energy crisis [on our green steel plans], other than delays in negotiations due to uncertainty in the market. And actually, [we have seen] an increase in the focus on renewable energy.”

“Today’s energy crisis shows additional risks with fossil fuels,” a spokesperson for Swedish energy company Vattenfall said, “which rather strengthens our belief that fossil-free energy and fossil-free industrial processes are the right way to go.”

Vattenfall will produce fossil-free hydrogen with electricity at its planned green-steel production site, the spokesperson said, and in Northern Sweden, there is already a stable supply of fossil-free electricity.

Additional reporting by Holly Chant.

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