Metal factories that feed Europe’s factories are facing an existential crisis

(Bloomberg) — In the aluminum industry, closing a smelter is an agonizing decision. Once the power goes out 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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However, Norsk Hydro ASA is preparing this month to do just that at a massive plant in Slovakia. And that’s not all — European production has fallen to its lowest levels since the 1970s, and industry insiders say the escalating energy crisis now threatens to create an extinction event across large swaths of the region’s aluminum production.

The explanation lies in aluminum’s nickname: “molten electricity”. The metal – used in a huge range of products from car bodies and soda cans to ballistic missiles – is produced by heating the raw materials until they melt and then running electricity through the container, making it highly active. One ton of aluminum requires about 15 megawatt hours of electricity, enough to power five homes in Germany for a year.

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

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

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

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

Read: Europe looks poised for energy upgrade after Russian cut

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

Most worrying is for the region’s manufacturing sector: it may not just be a shutdown for the winter. Electricity prices for 2024 and 2025 have also skyrocketed, 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 Vesely. Slovalco decided to shut down the plant due to a combination of rising energy prices and a lack of emissions offsets available to smelters elsewhere in the bloc.

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

“This is a real existential crisis,” said Paul Voss, managing director of European Aluminum, which represents the region’s biggest producers and processors. “We really need to sort something out pretty quickly or there’s nothing left to fix.”

Coupled with import tariffs that Europe’s beleaguered producers have fought hard to impose, rising energy costs could leave manufacturers facing an ever-increasing premium over prevailing international prices in order to secure supply. in a further blow to Europe’s competitive position in the global industrial economy.

“There will be nothing left to fix”

Producers of other metals such as zinc and copper are also hard hit, but the huge amounts of energy required to produce aluminum have made the industry particularly unprofitable.

In Germany, the power needed to produce a tonne of aluminum would cost about $4,200 on the spot market on Friday, after rising above $10,000 last month, according to Bloomberg calculations. London Metal Exchange futures were around $2,300 a tonne on Friday. This means the cuts look set to accelerate over the winter.

“Whenever we have a slowdown in economic growth and smelter margins come under pressure, we see European smelters shutting down a decent chunk of their capacity,” said Uday Patel, senior director of research at Wood Mackenzie. “When things pick up, there are some foundries 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 could be permanently curtailed. Another 500,000 tonnes are “highly vulnerable” to a shutdown, Wood Mackenzie estimates.

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

But while Europe’s production losses represent about 1.5% of global supply, they will leave consumers in Europe increasingly dependent on imports that will be more expensive and have a larger carbon footprint.

Already, European manufacturers pay hefty delivery fees to ship aluminum to local ports, and further increases could leave them in an increasingly uncompetitive position with peers across Asia and the US.

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

They use significant amounts of natural gas in the process, and many are trying to pass on their rising energy costs through contractual surcharges that could create additional costs for manufacturers for years to come.

“Smelter cuts are only the tip of the iceberg because you also have downstream players who buy primary metal and turn it into products for use in sectors such as beverage containers and cars,” said Michel Van Hoey, senior partner at McKinsey & Co. These companies typically see 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, Vesely — who has worked at the company since 1989 — hopes to be able to restart the plant once energy prices fall, but acknowledges the risk of being 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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