The metal mills powering Europe's factories are facing an existential crisis

(Bloomberg) — In the aluminum industry, closing a smelter is a painful decision. Once the power is cut and the production “pots” return to room temperature, it can take many months and tens of millions of dollars to bring them back online.

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Yet Norsk Hydro ASA is preparing to do just that this month at a massive plant in Slovakia. And that’s not the only thing – European production has fallen to its lowest levels since the 1970s and people familiar with the industry say the escalating energy crisis now threatens to wipe out large swaths of aluminum production in the region.

The explanation lies in aluminum’s nickname: “frozen electricity.” The metal — used in a huge range of products, from car frames and soda cans to ballistic missiles — is produced by heating the raw materials until they dissolve and then passing an electric current through the vessel, making it extremely energy-intensive. One ton of aluminum requires about 15 megawatt hours of electricity, enough to power five houses in Germany for a year.

Some smelters are protected by government subsidies, long-term power deals or access to their own renewable energy, but others face an uncertain future.

“History has shown that once aluminum smelters go, they don’t come back,” said Mark Hansen, chief executive of metals trader Concord Resources Ltd. “There’s an argument that goes beyond employment: it’s an important base metal commodity, it goes into aircraft, weapons, transport and machinery.

As production declines, the hundreds of European producers who turn the metal into parts for German cars or French planes remain increasingly dependent on imports, which can become more expensive. Some buyers are also trying to avoid metal from Russia, which is usually a big supplier to Europe.

The industry says it urgently needs government support to survive. However, any measures such as fixed price caps to support power-hungry plants may be difficult to justify while consumers face rising electricity bills and the threat of rationing and blackouts.

Read: Europe looks poised for energy rationing after Russian cuts

The woes of the aluminum sector offer a stark example of what is happening in Europe’s energy-intensive industries: across the continent, fertilizer producers, cement plants, steel mills and zinc smelters are also shutting down rather than pay impressive gas and electricity prices.

Most worryingly for the region’s manufacturing sector, it may not simply be a case of shutting down for the winter. Electricity prices for 2024 and 2025 have also soared, threatening the long-term viability of many industries.

At recent market prices, the annual electricity bill for the Slovalco smelter would be around two billion euros, according to CEO Milan Veseli. Slovalco decided to shut down the plant due to a combination of a spike in energy prices and the lack of emissions compensation available to smelters elsewhere in the bloc.

Restarting the plant – which could take up to a year – will only be possible through a combination of cheaper energy, a sharp rise in aluminum prices and additional government support, Vesely said in an interview this week on the site.

“This is a real existential crisis,” said Paul Voss, director general of European Aluminum, which represents the region’s biggest producers and processors. “We really need to sort something out pretty quickly or there won’t be anything left to fix.”

Coupled with import tariffs, which Europe’s struggling producers have fought hard to put in place, the rising cost of energy could see producers face ever higher premiums over prevailing international prices to secure supplies, in a further blow to Europe’s competitive position globally. industrial economy.

“There will be nothing to fix”

Producers of other metals such as zinc and copper are also suffering badly, but the huge amount of energy required to produce aluminum has made the sector particularly unprofitable.

In Germany, the energy needed to produce a tonne of aluminum would have cost about $4,200 in the spot market on Friday, after topping more than $10,000 last month, according to Bloomberg calculations. Futures on the London Metal Exchange were around $2,300 a tonne on Friday. This means the restrictions look set to accelerate over the winter.

“Whenever we have downturns in economic growth and smelter margins are under pressure, we see European plants closing a decent chunk of capacity,” said Uday Patel, senior research manager at Wood Mackenzie. “When things pick up, there are some smelters that never come back online.”

Wood Mackenzie estimates that Europe has already lost about 1 million tonnes of its annual aluminum production capacity, and Patel said he expects about 25% of that to be permanently curtailed. Another 500,000 tonnes are “highly vulnerable” to closure, Wood Mackenzie estimates.

The restrictions have had little impact on aluminum prices, which have fallen more than 40 percent since a peak in March as traders brace for a global demand slump that could be even more severe.

But while production losses in Europe account for around 1.5% of global supply, they will leave European consumers increasingly dependent on imports, which will be more expensive and have a larger carbon footprint.

European producers already pay hefty shipping fees to ship aluminum to local ports, and further increases could leave them increasingly uncompetitive with rivals in Asia and the US.

The energy crisis is also spreading rapidly down the supply chain to companies that buy aluminum from smelters and transform it into specialized products used in everything from cars to food packaging.

They use significant amounts of gas in the process, and many seek to pass on their rising energy costs through contractual surcharges that could add additional costs to producers for years to come.

“Restricting smelters is only the tip of the iceberg because you also have downstream players who buy premium metal and transform it into products for use in sectors such as beverage cans and cars,” said Michel Van Hooy, senior partner at McKinsey & These companies have typically seen a tenfold increase in their energy bills and “will not be able to fully pass on these costs without some degree of demand destruction or import substitution.”

At Slovalco, Veseli, who has worked at the company since 1989, hopes to be able to reopen the plant once energy prices fall, but acknowledges the risk that it could remain offline for years.

“Something has to be done if we don’t want to destroy European aluminum production,” he said. “If Europe considers aluminum a strategic metal, then aluminum plants should have guaranteed electricity prices.”

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