LONDON, September 1 (Reuters) – Two other European aluminum smelters are shutting down production as the region’s energy crisis shows no signs of easing.
Slovenian Talum will cut production by just one-fifth of its capacity, while Alcoa (AA.N) will cut a line at its Lista plant in Norway.
Nearly 1 million tonnes of European primary aluminum production capacity is currently offline and more could be shut down as an industry known for being energy intensive struggles with rising energy prices.
However, the aluminum market shrugged off growing production problems in Europe, with three-month London Metal Exchange (LME) prices falling to a 16-month low of $2,295 a ton on Thursday morning.
The weaker global reference price reflects rising production in China and heightened concerns about demand in China and the rest of the world.
But buyers in Europe and the US will only get partial relief as physical surcharges remain at an all-time high as regional differences push down the “full price” of the metal.
According to the International Aluminum Institute (IAI), aluminum production outside of China fell 1% in the first seven months of the year.
The increase in production in South America and the Persian Gulf cannot fully offset the cumulative energy shock to steel mills in Europe and the US.
From January to July, production in Western Europe fell 11.3% year-on-year, with annual production consistently below 3 million tonnes for the first time in this century.
Production in North America fell 5.1% over the same period to an annual output of 3.6 million tonnes in July, also the lowest this century.
The sharp decline reflected the complete closure of Century Aluminum (CENX.O) in Havesville and the partial downsizing of Alcoa’s Warrick plant.
The scale of the collective blow to steel mills is expected to support at least direct LME prices.
Last year, China’s smelters collectively cut annual output by more than 2 million tonnes, and several provinces were forced to close to meet daunting new energy targets.
Aluminum producers have responded quickly to the ongoing winter energy crisis, forcing Beijing to temporarily abandon its decarbonization plans.
Annual production increased by 4.2 million tons in the first seven months of 2022 and has now reached a record high of almost 41 million tons.
Sichuan province shut down 1 million tons of aluminum in July due to drought and power outages, which will dampen but not stop the surge.
Power restrictions in Sichuan have also hit aluminum producers, adding to concerns about demand conditions in China.
Drought, heat waves, structural problems in the real estate sector and ongoing lockdowns due to COVID-19 have reduced the production activity of the world’s largest consumer of aluminum. Official PMI and Caixin entered into contracts in August.read more
The inconsistency with the sharp increase in supply manifests itself, as in the Chinese aluminum market, when excess metal flows in the form of exports of semi-finished products.
Exports of so-called semi-finished products such as bars, rods, wire and foil hit a record high of 619,000 tons in July, with year-to-date deliveries up 29% from 2021 levels.
The wave of exports will not break trade barriers set up directly by the United States or Europe, but will have an impact on primary demand in other countries.
Demand in the rest of the world now looks noticeably volatile as the impact of high energy prices spreads throughout the production chain.
Industrial activity in Europe contracted for the second month in a row in July due to high energy prices and a sharp drop in consumer confidence.
From a global perspective, China’s supply growth has outpaced Europe’s output decline, and its fast-growing semi-finished products exports are spilling over into a weak demand pattern.
LME time spreads also do not currently indicate a shortage of available metals. While stocks fluctuated at a multi-year low, the cash premium to the three-month metal was capped at $10 per ton. In February, it reached $75 per ton, when the main stocks increased significantly.
The key question is not whether there are invisible stocks on the market, but where exactly they are stored.
Physical premiums in both Europe and the US declined during the summer months but remain ultra-high by historical standards.
For example, the CME premium in the US Midwest has fallen from $880/tonne in February (above LME cash) to $581 now, but still above its 2015 peak due to contentious loading queues on the LME’s storage network. The same is true for the current duty surcharge on European metals, which is just over $500 per ton.
The US and Europe are naturally scarce markets, but the gap between local supply and demand is widening this year, meaning higher surcharges are needed to attract more units.
In contrast, Asia’s physical surcharges are low and falling further, with Japan’s premium on the CME currently trading at nearly a yearly low of $90/t compared to the LME.
The global premium structure tells you where the surplus is right now, both in terms of available primary metals and in terms of semi-finished products exports from China.
It also highlights the gap between current aluminum prices between the LME global benchmark and increasingly differentiated regional surcharges.
It was this outage that led to the LME’s chagrin over the worst warehouse shipping problems in the first half of the past 10 years.
Consumers are doing better this time around with tradable CME and LME premium contracts.
Trading activity on CME Group’s duty-paid contracts in the US Midwest and Europe surged, with the latter reaching a record 10,107 contracts in July.
As the dynamics of electricity and aluminum production in the region deviate from the global benchmark LME price, new volumes are sure to emerge.
Senior Metals Columnist who previously covered industrial metals markets for Metals Week and was the EMEA merchandise editor for Knight-Ridder (later known as Bridge). He founded Metals Insider in 2003, sold it to Thomson Reuters in 2008, and is the author of Siberian Dream (2006) about the Russian Arctic.
Oil prices remained stable on Friday but fell this week due to a stronger dollar and fears that a slowing economy could dampen demand for crude oil.
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