European Aluminium Industry: How the future unfurls

The last few months has been tumultuous and yet interesting for the European Aluminium industry. The shortage of aluminium in the European market has propelled the regional prices to spike and then navigated to a fluctuating mode, which in turn has created opportunities for commodity traders to book profits while shipping the metal from warehouses thousands of miles away.  In the last few months, large trading houses have loaded aluminium into break-bulk vessels destined for Europe from a Southeast Asian country. The trade would usually be unprofitable, but European buyers are willing to pay higher prices to get metal, offsetting the cost of the trade.

Since the start of 2022, the price of European aluminium has increased by about 15%, surpassing its previous high of October 2021. It has risen by more than 60% since January 2021. It might seem like good news for aluminium producers, but that might be a mirage. A combination of strong demand and - above all else - a drop in production in Europe and China are driving up prices, while aluminium inventories are historically low. 2021 was a year of falling production mainly due to rising energy prices.

The unusual trade flows spotlight a further indication that European consumers are running low on one of the world's most widely used industrial commodities. Historically abundant stockpiles have shrunk significantly globally, and exchange inventories are at record lows in Europe, while production has dropped in the region due to surging power costs that reduced smelting profits.

Furthermore, in China, due to the Winter Olympics, air pollution reduction had been a top priority, along with reducing carbon dioxide emissions by 5% generated by the aluminium industry - resulting in a decline in aluminium production during 2022. As a result of the shortage in the domestic market, China has to import aluminium on a massive scale.

In light of the fact that energy accounts for more than a third of production costs, the sharp rise in the price of gas is having a huge impact on the profitability of companies, especially in Europe, where the price of natural gas has risen by almost 550% (World Bank report) between December 2020 and December 2021.

Consequently, European aluminium producers countered with a difficult choice. A few smelters decided to shut down, while some axed their production. At the end of December 2021, the largest smelter in Europe, Aluminium Dunkerque decided to reduce its primary aluminium production. Alcoa took the decision to shut down its Spanish aluminium smelter until the end of 2023. Nevertheless, the company will continue to re-smelt aluminium for its pharmaceutical and food customers. The Netherlands' only aluminium smelter, DAMCO Aluminium Delfzijl halted its primary aluminium production in October 2021 due to soaring electricity prices, which usually account for 40 per cent of the total aluminium production cost. Hydro majority-owned Slovakia's Slovalco smelter's production reduced from 80% to 60% and later stated in a statement that there is a possibility to shut down the aluminium smelter without the government coming out to support financially through the carbon compensation scheme.

Despite the geopolitical tensions over the region, prices were already rising due to a shortage of supplies. Exports by Russia account for about 6 per cent of global production, and potential sanctions could depress shipments further. In the event of a geopolitical crisis, Europe still faces the extremity of critical energy supplies. Furthermore, American and European sanctions have also fuelled the crisis, as Russia is a commodity powerhouse and ranks at the top for aluminium production in the world after China.

As a key metal in transitioning to a greener economy, aluminium's demand is slated to increase sharply in the future. Therefore, non-European foundries are benefiting from this increase in aluminium prices. Despite this, the overall growth in production volume is limited or even at risk due to high energy prices and also from the reduction of greenhouse gas emissions. In the near future, primary aluminium producers are expected to expand their product portfolio with high aluminium scrap content (especially post-consumer scrap) and reduce their carbon footprint. Energy-efficient smelting technologies and the usage of renewable energy are anticipated to take the centre stage in the production of primary metal in the near future.