In Europe, metallurgical plants began to stop due to expensive electricity

Slovalco, the largest aluminum smelter in Slovakia, has announced a halt in primary aluminum production since September due to a sharp increase in the cost of electricity. This was reported on August 17 by the Bratislava newspaper Pravda.

The publication clarifies that, given the high electricity prices, aluminum production in 2023 is “economically impractical.” “Solution [об остановке производства] will affect up to 300 core plant employees and more than 1,000 employees of subcontracting companies, since the shutdown of production will also reduce the need to purchase services from suppliers in the region. At the moment, we are concentrating on a safe shutdown of production, ”the message says the words of the general director of the plant, Milan Vesela.

According to the top manager, Slovalco is a key supplier not only for Slovakia, but for the entire EU. “Having stopped production, Europe will be forced to import aluminum from China or Russia,” he said.

Ola Seter, head of Norsk Hydro’s core operations (which owns 55.3% of the Slovak company) and chairman of the board of directors of Slovalco, Ola Seter, noted that Slovakia failed to implement a competitive carbon offset system, which ultimately prevented the Slovak plant from entering into long-term contracts for electricity. The current long-term electricity contract with the Slovak plant expires at the end of 2022. “Due to the current conditions in Slovakia and European electricity prices, Slovalco will suffer significant financial losses if it continues to operate after 2022,” the top manager said.

Since the beginning of this year, Slovalco has reduced its primary aluminum production by 40% and is currently using 60% of capacity. The main production lines of the plant will be mothballed and will be able to resume operation at a later stage if market and baseline conditions permit. The closure process is planned to be completed no later than the end of September 2022. At the same time, the enterprise will continue to produce secondary aluminum (processing capacity is 75,000 tons per year).

The Slovalco plant with a capacity of 175,000 tons of primary aluminum per year is part of the Norwegian company Norsk Hydro, the remaining 44.7% is owned by Penta Investments, follows from the information on the website. In 2021, the plant produced 163,995 tons of primary aluminum, 197,250 tons of finished products (extruded ingots, cast alloys, etc.), sales amounted to 193,327 tons, of which 70% was shipped for export. Slovalco’s revenue in 2021 was $473.2 million, with an operating loss of $41.9 million.

According to Norsk Hydro, the company’s aluminum sales in the second quarter amounted to 581 million tons, the sale price of the metal on the London Metal Exchange (LME) was $3,031/t, with a production cost of $2,500/t. Taking into account the premium for the shipment of metal to the LME at $870/t in the II quarter, the company received $1,400 per ton of aluminum sold, according to the presentation to the semi-annual report. In Q1, the figure was $1,000, in Q2 2021, $650.

In a release to the semi-annual report, the Norwegian company has already expressed concerns about the decline in metal prices due to the recession and weak demand for aluminum in China. In addition, Norsk Hydro reported that the outlook for aluminum production is “uncertain” due to pressure on segment margins from high energy prices. As a result, “manufacturers in Europe and the US are partially reducing production,” the company said.

The current quotations for aluminum are at the level of $2390/t (+1% compared to the previous session), zinc costs $3562/t (-4.9%), nickel – $22,235 (+1%), copper – $7979/t (-1 %) follows from the LME data.

The shutdown of aluminum production in Slovakia amid high electricity prices is not an isolated case in the metallurgical industry. Earlier, Nyrstar announced its intention to suspend the production of zinc at the Dutch plant Budel due to the increased cost of energy resources, which on August 16 provoked an increase in the cost of zinc on the LME by 7.2% to from $3819/t. At the same time, Nyrstar has already reduced zinc production at three European plants by 50%.

High gas prices in Europe against the backdrop of weak demand for steel products may also have a negative impact on the iron and steel industry. According to the adjusted forecast of the association Eurofer, due to the lack of gas, the consumption of ferrous metallurgy products in the EU by the end of 2022 may decrease by 1.9% against the previously forecast growth of 3.2%.

Electricity in Europe began to rise in price as early as 2021, following gas, which runs most thermal power plants. Since autumn, gas prices in the EU have been around $1,000 per 1,000 cubic meters. m, and at the beginning of March 2022, fuel at the moment rose in price to almost $4,000. Problems with gas supplies from Russia, which began in the spring of 2022 after the start of the NWO due to a decrease in pumping through the territory of Ukraine and the Nord Stream pipeline, aggravated the situation on the European energy market.

The price of electricity in Germany and the UK reached record levels, Bloomberg reported on August 15. Noting that in Germany the cost of electricity on the wholesale market rose in August by almost six times compared to last year’s level, and in the UK – by seven times. The abnormal heat that has been established in the EU has warmed up the demand even more, sharply raising the demand for air conditioning. Spot quotes on the daily market on Nord Pool as of August 18 are 563.8 euros per 1 MWh in Germany, 553.6 euros in France, 538.5 euros in Belgium, 384.7 euros in Poland, 482.2 euros in the UK .

High energy prices are becoming literally ruinous for European producers of non-ferrous metals and for electrometallurgical enterprises, Finam analyst Aleksey Kalachev notes. “Producers are unable to pass on to consumers the increase in their costs because metal prices have declined amid slowing economic growth, the scaling back of loose monetary policy and fears of a global recession,” he adds.

Sergey Grishunin, managing director of the NRA rating service, calls the suspension of energy-intensive production in the EU amid high electricity prices and low quotations for non-ferrous metals “logical and inevitable”, the same fate awaits ferroalloy producers. In the second quarter of 2022, prices for non-ferrous metals in the world fell by 24% and reached the level of March 2021. This was the first quarterly decline in the index since the beginning of the coronavirus pandemic and the strongest since 2008, when the fall reached 30–40% (Vedomosti wrote about it on August 9).

“Copper and nickel producers are still out of the risk zone, as the prices for these metals are still higher than the cost of production, even taking into account expensive electricity,” adds Grishunin. The expert admits that if energy prices remain high in Europe, the entire aluminum industry may come to a complete halt.

Kalachev believes the EU has options to support its own industry. “It will take some time to adopt a softer financial policy, and it is also necessary to subsidize energy-intensive industries by introducing lower tariffs for electricity and fuel,” he argues.

Stock market expertBCS The world of investments” Dmitry Puchkarev also believes that state benefits and subsidies could help European metallurgists. “Another option is the introduction of foreign trade restrictions, which will reduce the supply of metals on the market and thereby stimulate domestic prices to rise,” he says.