Europe: Aluminium price elevates due to increasing energy cost and production curbs

Aluminium prices are reaching new highs for European consumers as a result of rising energy costs and production cuts, which have worsened metal shortages in the power, building, and packaging industries.

Consumers who buy aluminium on the physical market normally pay the London Metal Exchange's benchmark price — roughly $2,950 per tonne on Tuesday — plus a physical market premium that often covers transportation expenses and taxes. However, due to shortages, dealers and manufacturers with inventories may fetch a far higher premium, which has risen nearly 30% to a record $428.75 per tonne in Europe since the start of 2022.

“With around 650,000 tonnes of capacity cut so far in Europe, we believe that another 900,000 tonnes of output is at risk of closing down fully or partially,” said Michael Widmer, analyst at BoA Securities.

Widmer forecasts 8.5 million tonnes of aluminium demand in Western Europe this year, with a five million tonnes shortfall. He forecasts 72 million tonnes of world demand and a 254,000-tonne shortage. Wind speeds in Europe were lower than typical last year, and windmills throughout the union produced less energy, exacerbating a shortage that drove power prices to new highs as utilities had to acquire more coal and rare, expensive natural gas.

Energy accounted for up to 40% of aluminium smelting expenses prior to the power crisis. For many producers, this ratio has climbed to 50% or more, depending on hedges and power sources. Alcoa's San Ciprian facility in Spain, American Industrial Partners' Dunkirk smelter in France, and Norsk Hydro's majority-owned aluminium plant in Slovakia are all cutting production.

“As we enter 2022, European producers are still plagued by elevated power costs and there seems to be no sign of a quick solution to the issue,” said ING analyst Wenyu Yao

According to Yao, this year's global aluminium market shortfall is expected to be over 1.5 million tonnes.

“Stocks should have started to build in the (top producer) China onshore market following seasonal patterns. But instead, these have declined to 766,000 tonnes as of Monday, far below the five-year average,” added Yao.

Aluminium shortages have resulted in a draw on supplies, which have more than halved in LME warehouses since the middle of March last year.