Europe’s energy crisis battles with base metal demand for center stage: LME Week

Soaring energy prices, particularly in Europe, have dominated headlines globally and have had significant impacts on base metal prices, both on the London Metal Exchange and in physical spot premiums

But aluminium and zinc have continued to react differently to the energy crisis over the last few months, with the demand story for aluminium outweighing all other factors.

Energy prices have recently fallen slightly with the benchmark Natural Gas EU Dutch Title Transfer Facility (TTF) price at €145.15/Megawatt Hour on October 14, its lowest since July 1. This compares with a peak price of €339.20/MWh on August 26.

Despite this decline, fears within the market remain of further potential supply disruption, particularly following the recent explosions at the Nord Stream Pipelines.


As the most energy-intensive base metal to produce, aluminium has been uniquely exposed to the energy situation in Europe, experiencing significant production curtailments as well as weakening demand.

“The situation in aluminium is really bad,” one trader told Fastmarkets. “If you look at the production [in Europe], almost 50% has now been curtailed.”

Over the past year, aluminium production cuts have been seen at Hydro’s Slovalco smelter in Slovakia, Alcoa’s San Ciprian in Spain and at Romanian producer Alro.

The first smelter cuts at the end of 2021 did give support to aluminium premiums and tighten up the spot market, pushing premiums to record highs.

But in the last few months, the latest production cuts have done nothing to halt the recent steep decline in premiums due to falling demand.

Demand is the key factor right now The most recent production cut at Hydro’s Karmøy and Hydro Husnes aluminium plants in Norway were not due to the energy crisis — they were due to demand.

“Even if 50% of Europe’s primary aluminium production capacity has been curtailed during the last year, the recent drop in demand is causing a build-up of stock, forcing us to take firm actions,” a source at an aluminium producer said.

Fastmarkets’ benchmark aluminium P1020A premium, in-whs dp Rotterdam reached a peak of $600-630 per tonne on April 29 but has since fallen by roughly 50% to the present level of $290-330 per tonne, as assessed on Tuesday October 18.

“Despite all the uncertainty, and the worries about the high energy cost, there is little panic,” a second trader said. “There is enough metal, and demand is the driver.”

Consumers are said to be well stocked, and faltering end-user demand means that the energy crisis is not the driving factor for the European aluminium market.


But for zinc, the energy crisis has taken center stage, with premiums rising to fresh record highs amid persistent supply fears.

Zinc markets were already forecast to be tight throughout 2022 due to production disruptions at the end of 2021. Following production cuts, some large trading houses were forced to turn to LME warehouse stocks, the so-called “market of last resort” to fulfil contractual agreements and support demand within the region.

LME warehouse stocks for the galvanizing metal have decreased by 74% over the course of 2022, from 199,325 tonnes globally at the beginning of the year to just 51,925 tonnes as of October 13.

Recent announcements of production curtailments by both Glencore and Nyrstar have only further heightened supply concerns, particularly for Europe.

“The situation is much more tense now,” one zinc trader said, adding that, “there aren’t LME stocks to fall back on now, so the market will feel any shortage.”

Fastmarkets research forecast that the global zinc market will record a supply deficit of 184,000 tonnes in 2022.

For the European market, sentiment is split over the apparent “race to the bottom” between supply and demand cuts, with price indications significantly diverging.

Right now, supply constraints dominate the physical market spot premiums, which are currently holding at record-high levels. Fastmarkets assessed the zinc SHG min 99.995% ingot premium, dp fca Rotterdam and the zinc SHG min 99.995% ingot premium, dp fca Antwerp at $500-550 per tonne on Tuesday October 18.

A similar picture has emerged within the United States.

Although power has not been an issue in the US, which relies on natural gas and nuclear power for its industrial energy needs, the premium for special high-grade zinc ingots has more than doubled in the past year, rising from 15-18 cents per lb on October 12, 2021 to 35-39 cents per lb on October 18, 2022.

This increase in the premium was caused by continued tightness in the availability of the material. The main culprit behind this tightness were transportation bottlenecks due to limited availability of containers, shippers and truck drivers, as well as long wait times at ports and other transportation hubs.

After peaking at 38-50 cents per lb in June, the premium for the SHG material has since fallen, reaching relative stability in mid-August. Since then, it has kept within that approximate range.

Participants in the US market fear that any further production cuts within Europe will cause the material to become very tight in Europe, which will also have psychological spill-over effects in the US and cause premiums to increase, one US-based trader source said.

“It affects us more psychologically than anything else,” he said, adding that North American countries do not have the same energy restrictions as in Europe, with the US using nuclear power or natural gas, Canada employing hydropower, and Mexico using a mix of nuclear and fossil fuels.

“If production goes down in Europe, then [European consumers of zinc] will scramble to find the material elsewhere and will likely turn to Asia – and then it will affect [the US supply] somehow,” the US trader source added. “But it will not affect all of our supply, because most of our production comes from Canada or Mexico.”

What to read next
US President Joe Biden will increase tariffs on Chinese imports including steel and aluminium, electric vehicles, semiconductors and advanced batteries, to counteract China’s “unfair” trading practices, he announced on Tuesday May 14
Anglo American's rejection of takeover bids by BHP has put copper firmly under the spotlight, but what challenges lie ahead for the red metal as the corporate tussle continues?
Copper fabricators in China and the wider Southeast Asian region continue to feel the pain of high copper prices on futures exchanges and a lack of new orderbooks, with some having already asked for a postponing of shipments of long-term copper cathodes, sources told Fastmarkets in the week to Wednesday May 15
Recent weeks have seen a significant number of miners agreeing sales of copper concentrate to traders for one to four years of supply, Fastmarkets has learned
The copper market is facing a historical moment with Chinese smelters now paying premiums for raw material copper concentrate while selling their finished product at a discount, but participants point to easing concentrate demand in the second quarter as supportive for the market
Raw material tightness added further pressure to imported zinc concentrate supply to China, with volumes dropping sharply in the first quarter and market participants saying that low availability of spot cargoes is not expected to ease in the short term.