CRU: 2022 Opens with More Aluminum Supply Concerns

European primary production is withering under high power prices. The impetus behind the rally in price is simple – incredibly high spot power prices are destroying the economics of producing aluminum even at the current LME price.

Power prices in Germany, France, Norway, Romania and Slovakia have all hit record highs. The most extreme example being prices of over 1,000 euros per megawatt hour in France when many of their nuclear plants were taken offline for precautionary safety checks. Prices at press time still range between 118-235 euros per megawatt hour. Approximately 70% of European production is exposed to spot power.

Let’s put this into perspective. Most expectations for power costs in Europe for 2021 and 2022 were predicated on rates in the range 40-70 euros ($35-662) per megawatt hour. Cleary, this blowout in spot power is badly hurting the industry and it has led to curtailments:

• ALRO is closing 60% of their Romanian smelter = 135,000 metric tons/year

• Alvance has idled 20,000 tons at its Dunkirk, France, facility

• Hydro has closed 40% of their Slovakian smelter = 35,000 tons

• KAP has fully curtailed its Montenegro plant = 40,000 tons

• Trimet is idling part of its German capacity = 70,000 tons.

In addition, Alcoa has announced plans to close its San Ciprian, Spain, smelter for two years to modernize and find renewable energy options. This smelter is operating at 185,000 tons/year.

In the aggregate, 485,000 tons is exiting the market. Aside from the Alcoa announcement as to the duration of their curtailment, the other 300,000 tons has no timetable for return.

Any restarts will depend on a radical decline in power prices and that’s unlikely before Q2 2022 and the end of the winter heating season in Europe. The Russian situation only adds to the uncertainty of prices falling.

This will keep LME prices on edge until there is a clearer picture of restarts.

LME and Midwest Prices Moving Higher to Price the European Production Constraints

The spot Midwest ingot price is $1.60 per pound compared to $1.50 two weeks ago. Prices for the average of 2022 are $1.58 versus $1.51.

LME prices have moved sharply higher since late December, with LME cash now trading at $2,824 compared to $2,672. The curtailments in Europe were a big driver.

Midwest premiums have snapped back also, with spot premiums for January back to nearly 32 cents/pound after falling to near 25 cents/pound in mid-December. The sell-off in December was exaggerated, falling on light volume and was not justified. This rally back to 32 cents/pound is probably a similar overreaction, but the market does believe the fair value of Midwest metal is around 30 cents/pound. Consumers who de-stocked at year’s end will be back in to replenish inventories now. Concerns over the European curtailments and the simmering threat of Russian sanctions will keep this market on edge for some time.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

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