No immediate solution to Europe’s energy crisis: LME Week

The energy crisis roiling Europe as a result of Russia’s invasion of Ukraine is expected to last longer than the coming winter, although efforts to secure alternative supplies are expected to eventually prove fruitful

Unfortunately for many of the region’s producers of key metals and agricultural commodities, escaping dependence on Russian fuel will likely come a little too late.

Across the continent, from aluminium to steel, to fertilizer and zinc, producers of key raw materials are facing a weaponization of the energy they need for production, which has sent the cost of power soaring.

Industry association Eurometaux estimates that 50% of the European Union’s aluminium and zinc capacity has already been forced offline due to the power crisis. And there have been significant curtailments totaling around 30% in silicon and ferro-alloy production, as well as further impacts felt across the copper and nickel sectors.

Curtailments have also been seen in steel, with industry association Eurofer indicating that the situation is worsening daily and “remains unbearable” for its energy-intensive producer members.

A similar story can be seen in fertilizers, which transform millions of tonnes of air, natural gas and mined ores into plant nutrition products. According to Brussels-based industry association Fertilizers Europe, at least 70% of the region’s capacity is already offline as a result of high gas prices, and more facilities are at risk.

It is not difficult to see how the escalation of events in Ukraine has left Europe scrambling to diversify its energy sources, given that Russia is the main supplier of crude oil, natural gas and solid fossil fuels to the EU.

Russia has been turning off the taps on natural gas to Europe for months now, emptying storage facilities and slowing down production. It has cut off countries that refused to pay in rubles and has reduced pipeline flows to the region. And most recently, leaks and explosions have been reported at key supply sources.

As governments have desperately scrambled to secure alternative supplies, the prices of fuel oil and coal have also risen. Electricity prices have soared as well, in part because gas is a key fuel used to generate electric power.

Alternatives?

Yet finding alternative energy supplies is not simple.

Transforming the world’s energy supplies to zero-carbon renewable resources such as wind, solar, hydropower, geothermal and biomass, as well as electrifying as many industrial sectors as possible, was already underway before Russia invaded Ukraine.

Several new renewable energy projects have been announced since the invasion, and new gas pipelines are in the works. Reinvestment is also proposed in Europe’s nuclear power infrastructure, despite prior concerns over safety and waste management.

Even coal is having a renaissance, with the previously-scheduled closure of some plants in Germany being postponed and the United Kingdom keeping its coal plants on standby in case it needs them in the colder winter months.

But these projects will all take time — something that commodities producers do not have, particularly as winter weather sets in and energy demands increase.

In the short term, reducing energy consumption is the only immediately available tool for Europe. The EU has approved a plan to reduce gas use by 15% by next March, although it is voluntary and will force businesses to do some serious sums before deciding whether it is a viable option.

Curtailing costs

Curtailing industrial capacity does not just happen with the flick of a switch; there are multiple considerations when deciding to proceed with production cuts, as well as when implementing the shutdown process itself.

Take closing a potline at an aluminium smelter, for example. Without getting too technical, the pot cells must be cooled and the metal removed, although some pots are left with a very small amount of metal in each, depending on the planned restart method. This process takes a week or so to complete.

It takes at least a month of lead time to prepare and recondition the pots for restart, patching up or replacing them where needed and adding the necessary raw materials — a very labor-intensive process. It is not a decision that companies take lightly, in part because shutting down and restarting pots cuts their life expectancy due to cracks and degradation that result from the closure itself.

Once production resumes, it takes several weeks for pots to stabilize, during which time metal purity losses occur.

All of this typically means millions of dollars in staffing, lost raw materials, maintenance, reduced production, and re-establishing sales contracts, to name only a few of the costs.

In other words, companies know that when a plant is taken offline, it is not just for a couple of weeks.

Tough call

Multiple producers have faced that tough choice in recent months.

It led energy-intensive industry associations representing members across metals and mining, fertilizers, glass, paper, cement, ceramics, chemicals, lime, and clay to declare in a letter to the European Commission that there is currently “no business case to continue production in Europe, nor visibility and certainty for investments and further developments.”

Ask a metals company whether it plans to build a new facility in Europe in the coming months, and the likely answer is a hard no.

The energy crisis also puts a spotlight on Europe’s plans to achieve net-zero greenhouse gas emissions by 2050 and to cut them by 55% of 1990 levels by 2030.

On the one hand, the region is moving to boost its production of the critical minerals it needs to achieve this, such as lithium. And it is developing numerous gigafactories for batteries used in electric vehicles. But that will require energy, which is simply not in abundance right now.

It is going to be a long winter. And unless something dramatically changes, more cuts across energy-intensive producers are coming.

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