It’s not a new concern for the region’s metals companies, but it could mark another round of capacity curtailments and potentially even closures for some of the most beleaguered producers.
Metals smelters and refineries in the EU have been dealing with the high price tag of their energy supply for years, a situation that has been exacerbated this decade amid high inflation and Russia’s invasion of Ukraine.
Natural gas prices have risen in the aftermath of the end of the pipeline transit deal, with the benchmark front-month gas contract at the Dutch TTF hub climbing to €51 per MWh, its highest level since October 2023.
It has already led Italy’s Energy Minister Gilberto Pichetto Fratin to call for the EU to extend its emergency cap on gas prices and set a ceiling of €60 per MWh to prevent a possible energy price shock.
Last crisis
The cost of electricity has always been a crucial factor for producers of aluminium, namely because energy accounts for 30-45% of operational costs, even before a crisis.
During the last energy price spike in 2021 and 2022, around 50% of the EU’s aluminium capacity was forced offline due to the power crisis.
Production was curtailed in the Netherlands by Adel, in Spain by Alcoa, in Romania by Alro, in France by Aluminium Dunkerque, in Slovenia by Talem, in Germany by Trimet and in Slovakia by Slovalco.
Similarly, more than 50% of EU zinc capacity was curtailed, plus over 30% of the region’s ferro-alloys and silicon capacity, while further impacts were felt across the copper and nickel sectors.
Curtailments were also reported in steel, with industry association Eurofer saying at the time that the situation was worsening daily and remained “unbearable” for its energy-intensive producer members.
Metals producers that weren’t forced to cut capacity or close operations still came under severe pressure as costs rose and profit margins were slashed.
A similar story was 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, more than 70% of the region’s capacity was pushed offline as a result of high gas prices.
The last energy crisis led the heads of 40 metals companies and a number of industry associations to write a letter to EU leaders, calling on them to take emergency action to temporarily reduce gas prices in order to alleviate costs and help continued production at their sites.
Metals producers had some respite in 2023, when energy prices fell amid emergency measures including regulatory actions, along with reduced demand and improvements in other market fundamentals.
The industrial curtailments at metals plants helped: electricity consumption in the EU recorded a sharp 3.5% year-on-year decline in 2022 due to demand destruction in its consumer base.
Alternatives
The termination by Ukraine of its deal with Russia this week had been telegraphed well in advance and didn’t come as a surprise to energy-intensive metals producers.
But its timing isn’t great. Supply chain issues had already intensified cost pressures, inflationary fears have not vanished, and the EU is facing a shortage of labor and investment, along with the war in Ukraine.
And with alumina prices elevated after recently reaching near-record highs, the input cost pressure on non-integrated aluminium producers was already intense.
Before Russia’s invasion of Ukraine, the EU sourced almost 40% of its natural gas needs from Russia. Since then, the EU has worked to end its dependence on Russian fossil fuels, including oil and natural gas.
Now the Turkstream pipeline is the sole remaining pipeline transporting meaningful levels of Russian gas into the EU, increasing the region’s dependence on imported liquified natural gas (LNG) and adding yet more impetus to the need to develop renewable sources as an alternative.
That’s easier said than done.
Transforming the region’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, is underway.
But these projects will all take time – something that commodities producers do not have, particularly as winter weather sets in and energy demands increase. Investments in renewable energy sources have not been sufficiently accelerated, and securing financing for projects has been slower than anticipated.
Risks
The changing nature of the EU’s energy supply brings other risks too.
Increased reliance on imports of LNG will keep the EU in competition with other regions and reliant on countries like the US for supplies.
This could, in turn, keep energy prices elevated and put the EU under threat of tariffs by US President-elect Donald Trump when he takes office later this month, creating a situation in which Europe’s metals plants face the renewed peril of rising operational costs.
According to Capital Economics, European energy prices are currently more than four times their US level. Even with an anticipated increase in LNG supply from the US and Qatar in the next couple of years, Capital Economics forecasts that prices will still be two to three times those in the US by the end of 2026.
It doesn’t bode well for Europe’s smelters and refineries, at least not in the short-term.
For sure, curtailing industrial capacity does not just happen with the flick of a switch; there are multiple considerations when deciding to proceed with productions cuts, as well as when to implement the shutdown process itself.
But unless something drastically changes, the region’s metals operations remain at the whim of energy prices and an ever-increasing need for affordable, decarbonized electricity.
In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Read more coverage on our dedicated Hotter Commodities page here.
