European ferro-alloys industry needs urgent help to survive energy crisis — Euroalliages: LME Week

The European ferro-alloys industry needs help now if it is to survive the global energy crisis. This is the stance of European ferro-alloy and silicon producers’ association, Euroalliages

In a complex and mutable legislative landscape, the ferro-alloys industry, like many others, finds itself in an extremely challenging position with the energy crisis persisting across the continent. And that position is only likely to worsen with time, the association believes.

“Our ask to the decision makers is for Europe to have an emergency plan now and not take months,” Nadia Vinck, director of environment, health and safety, and energy and climate at Euroalliages, said.

With electricity already representing up to 40% of its production costs, the ferro-alloys sector is facing rising input costs as energy prices soar in the wake of Russia’s invasion of Ukraine.

That means the European Union needs to act now to help the sector survive, Euroalliages has said.

How did the sector get here?

The energy crisis began before the war, of course. There had already been a 300% increase in energy costs between the summer of 2021 and December of that year, according to Euroalliages.

“It’s not that long ago that the price of electricity and energy globally had increased, even before the war,” Inès Van Lierde, secretary general at Euroalliages, told Fastmarkets.

In the wake of the Covid-19 pandemic, as the industry — and the world — began to return to full capacity, the sudden spike in demand sparked a major rise in energy prices.

“Between last summer and December 2021, electricity bills [for the industry] increased by 300%,” Vinck said.

As well, a study carried out in 2021 by the European Roundtable on Climate Change and Sustainable Transition (ERCST) and commissioned by Euroalliages, found that “indirect costs” for the industry — which include utilities — would reach “unmanageable levels” by 2030.

The study also looked at carbon costs — a per-tonne cost applied to carbon pollution designed to encourage polluters to cut their emissions. It outlined two scenarios, setting costs at €58.90 ($57.35) per tonne and €86.40 per tonne. The study also assumed much lower energy prices.

“The study concluded that the viability of our sector would be threatened if the carbon price was beyond €86,” Vinck said.

“The study was conducted at the beginning of last year. That’s before the crisis of the war in Ukraine, and the energy price at the time was not what it is today,” Vinck added.

The European carbon price neared €100 per tonne in February, although it has since come down, according to news reports.

In the immediate aftermath of Russia’s invasion of Ukraine, alloy prices shot up, as panic buying set in across various markets.

Fastmarkets’ twice-weekly price assessment for ferro-vanadium basis 78% V min, 1st grade, ddp Western Europe, for example, reached $60-64 per kg on March 9 — the current peak for 2022. And the fortnightly price assessment for ferro-chrome 0.10% C, average 65-70% Cr, delivered Europe peaked at $6.35-7.09 per lb on May 24.

Although these price increases provided something of a cushion against rising energy costs, there was always a sense, at least among some market participants, that it couldn’t last.

And indeed, while energy prices are still at extremely high levels, alloy prices have not been able to maintain their upward trajectory, given that end users have also been forced to curtail production, thereby reducing demand.

Both prices — each with significant production links to Russia — have substantially decreased since their respective peaks, with ferro-vanadium trading at $31.90-33.25 as of October 7, and low-carbon ferro-chrome at $3.75-5.42 as of September 27.

What’s the status of the European ferro-alloys industry now?

The energy crisis has already affected production across a significant proportion of the continent, figures produced by Euroalliages show.

The figures indicate that the European Economic Area (EEA) has a ferro-alloy production capacity of 2.9 million tonnes. As of September this year, 635,000 tonnes had been shut off due to rises in energy costs. The EU has a capacity of 1.8 million tonnes, and 479,000 tonnes have been shut off.

In percentage terms, this represents a curtailment of 22% of EEA capacity, and 27% of EU capacity. Of the 60 ferro-alloy furnaces in the EEA and 37 furnaces in the EU, 17 had been closed as of September, or 28% and 46% respectively.

The figures also showed marked curtailments in silicon production, with 48,000 tonnes of the EEA’s 351,000-tonne capacity and the EU’s 194,000-tonne capacity shut off as of September. Of the EEA’s 21 furnaces and the EU’s 13 furnaces a total of three had been closed.

What happens without immediate measures to address the crisis?

The ferro-alloys industry is now facing the possibility of even more closures, and while it is favorably positioned to restart fairly easily after stoppages, other issues are also emerging, Vinck said.

“Restarting, from a technical point of view, may be possible, but there are many other components, and one is the workers,” she said. “There are production plants in remote places where, if they stop, they will lose their workers because they won’t come back.”

The potential influx of lower-priced imported material from countries with fewer restrictions on carbon emissions is another factor.

“Since Europe is shutting down [production], it will be replaced by imports from countries where production has a much larger carbon footprint compared with Europe,” Vinck said.

Growing production stoppages could lead to greater “carbon leakage,” according to Euroalliages, with emissions potentially increasing in countries less affected by the energy crisis but lacking the parameters of EU and comparable legislation.

More ferro-alloy production stoppages could also jeopardize the European Green Deal and the Fit for 55 program, casting doubts onto the EU’s target to reduce net greenhouse gas emissions by at least 55% by 2030, Euroalliages has said.

The association believes that if the energy crisis intensifies due to the war, the result could be a “historical deindustrialization of Europe with massive consequences for low carbon value chains to implement REPower EU and the climate law goal.”

REPower EU is a European Commission plan put forward in response to the global energy market disruption caused by Russia’s invasion of Ukraine. It aims to save energy, produce clean energy and diversify energy supplies. The European Climate Law sets a legally binding target of net-zero greenhouse gas emissions by 2050.

What’s wrong with the current proposals to address the crisis?

“The current policy is a step in the right direction, but there are several flaws with this regulation,” Vinck said. “For example, if you want to get [financial aid], you have to show an operational loss, which means you have to be near bankruptcy.”

There is little the industry can do to guard against the impact of soaring energy costs, Euroalliages has said, other than implement curtailment measures — and these are not a long-term solution.

“If it were able to protect itself, there wouldn’t be these massive shutdowns,” Vinck said.

At the same time, Euroalliages has said, the solutions put forward under REPower EU may not be feasible for the industry, or for other similarly energy-intensive sectors.

“For our sector, the [REPower] options are not really viable,” Vinck said. “Liquid Natural Gas [LNG] is expensive and not an option for this industry. We’re not gas users. In terms of solar and wind and increasing that part of the renewable energy mix, it’s very important, but it’s a long-term story.”

Using LNG requires not only specialized equipment, but customized vessels and port terminals for its proper transport, Vinck said.

Meanwhile, when prices are high, Power Purchase Agreements (PPAS) — long-term agreements between renewable energy developers and consumers — become much less accessible. And, at the same time, consumers are facing major financial difficulties.

“We need to be able to conclude PPAs, but of course, no one will at the moment,” Vinck said.

Adopting the Fit for 55 package will take time. For an energy-intensive industry such as ferro-alloys, carbon markets such as the EU’s Emissions Trading System (EU ETS) could undermine the industry’s capacity to invest given the cost involved, Euroalliages believes.

Under EU law, there is state-level compensation available to the most “electro-intensive” sectors for the increased electricity costs stemming from the EU ETS. But this financial support may not be sufficient.

“A CO2 price reaching nearly €100 per tonne is a really serious burden for an electro-intensive sector like ours,” Vinck said.

Furthermore, some EU member states are providing different levels of financial aid to energy-intensive companies, and this creates distortion within the single market, Van Lierde said.

“Producers are no longer operating on equal footing, and the grants are not the same everywhere,” she said.

What’s the solution?

The only way to resolve the crisis for the industry will be through high-level intervention from the EU.

Whatever the EU does, Euroalliages said, it must be done quickly, to reduce the cost of electricity and keep operations running.

In an open letter in September, put out by European metals industry association Eurometaux and co-signed by 40 metals and alloys industry CEOs, Euroalliages said a key measure would be to increase the cap on the funding that EU member states can provide to companies in energy intensive sectors — perhaps by as much as 10 times.

Currently, member states can provide up to €50 million ($49.3 million) in aid to companies within sectors and sub-sectors particularly hard hit by rising energy costs, which includes ferro-alloy producers.

“If you take as an example, a silicon producer of 40,000 tonnes per year, with electricity consumption of 12 MWh per tonne, with a cost of €200 per MWh, the cost [increase] would be nearly €80 million,” Vinck said.

Euroalliages is also asking for the eligibility requirement of negative earnings before interest, taxation, depreciation and amortization (Ebitda) to be replaced by net losses and for the EU’s Temporary Crisis Framework’s lifespan to be extended until at least the end of 2023.

A further possibility, Euroalliages said, would be to suspend the EU ETS. The emissions trading system works on a “cap-and-trade” principle. It allows regulated entities to buy or receive emissions “allowances,” which they can trade with one another as needed.

Euroalliages is also asking the EU to reduce or cap taxes and surcharges on electricity and gas for energy-intensive industries, and to refrain from making financial support to energy-intensive companies conditional on investing in renewables or energy efficiency.

To make renewable energy more accessible, the association is calling for the promotion of PPAs through targeted schemes. Alongside that, it would like to see immediate regulatory intervention to make larger amounts of renewable electricity available in the market, to better meet the needs of energy-intensive industries such as ferro-alloys.

This intervention could, for example, include actions such as increasing liquidity for PPAs by incentivizing existing and new generators to offer electricity for this purpose.

“PPAs can protect the industry as long as the price is affordable,” Vinck said.

Ultimately, Van Lierde said, it will be for companies and their shareholders to decide how long they can hold out.

“Unfortunately, some companies will have to make difficult decisions. It’s not sustainable,” she said.

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