The world will need many more metals like copper, nickel and aluminum if it is to be decarbonised.
The potential “green” boom in demand due to more renewable energies, more electricity infrastructure and more electric vehicles is the promise of tomorrow for such “energy transition” metals.
But as China first and now Europe discover, power is a double-edged sword for metal producers and manufacturers.
A power shortage in China has shut down over two million tons of the country’s aluminum production capacity.
The unfolding energy crisis in Europe has brought the zinc-lead smelter Plovdiv in Bulgaria to a standstill https://newsfounded.com/bulgariaeng/due-to-high-electricity-prices-kcm-plovdiv-stopped-working-2 and others such as Nyrstar’s zinc smelter in the Netherlands to reduce production during peak periods.
In China, electricity restrictions are shifting down the supply chain to affect not just primary producers but product manufacturers as well, an ominous sign of what Europe could face when winter looms.
Chinese and European energy crises result from a complex mix of drivers.
All add up to the same metal-force paradox. How can more metals be produced in order to decarbonise the world’s energy systems when decarbonisation puts additional strain on existing electricity availability?
ON THE FRONT LINE
European electricity prices have skyrocketed due to the lower Russian gas supply, lower wind generation, maintenance of nuclear power plants, rising CO2 prices and rising demand after the pandemic.
Large metal production plants are exposed to high electricity price spikes as they use electricity intensively to convert raw materials into refined metal.
“Producers of aluminum, copper, nickel, zinc and silicon are at the forefront of the industries that are affected by the high electricity prices in Europe,” said the non-ferrous metal industry association Eurometaux, which calls on the European Commission to act.
The effects vary from country to country, as the European electricity market is anything but homogeneous.
Bulgarian industrial customers complain, for example, that the local electricity tariffs are more than twice as high as in immediate competing countries.
But any industrial facility exposed to the European spot power market is likely to struggle.
Aluminum smelters are particularly exposed because they require enormous amounts of energy for the electrolytic process of converting aluminum oxide into metal.
Eurometaux estimates that the energy costs of an aluminum producer with a consumption of 14.5 MWh per ton of aluminum produced will almost quadruple this year from 580 to over 2,000 euros per ton, which is more than 80% of the current price on the London Metal Exchange (LME) matters.
For exactly the same reason, China’s aluminum sector is at the forefront of the country’s energy crisis. Smelters are easy targets for local governments looking to reduce grid loads.
So far, this has been a bullish narrative for markets like aluminum, which has reached its highest level in a decade due to falling production from the world’s largest producer.
But in China, the power shortage is shifting downstream, a downright downward trend.
China’s tin sector is a case in point.
Producers in Yunnan and Guangxi provinces were forced to cut production in May and August due to electricity rationing, but appear to have escaped recent restrictions so far.
Not so with their customers, however.
Electricity rationing in southern provinces such as Guangdong and Jiangsu is draining significant amounts of soldering and tin chemical capacities, according to the International Tin Association.
The slump in demand stopped the tin rally in Shanghai, with the most active contract suddenly slipping 4.5% on Tuesday.
According to LME broker Marex Spectron, such a disruption is spreading as many aluminum consumers in southern China only work two days a week.
Indeed, power restraints are affecting more and more parts of China’s vast manufacturing economy, with Goldman Sachs estimating that up to 44% of national industrial activity is affected.
The bank has just cut its growth forecast for China for this year from 8.2% to 7.8% due to “significant downward pressure” on industrial production.
The pressure on commercial electricity consumers is only likely to increase as policy gives priority to heating households in the winter months. This is not good news for metal markets as China remains such a major driver of global demand. China’s power crisis is rapidly developing from a bull market to an impact on metal prices.
China’s electricity problems are caused in part by one-off effects such as the rise in the price of coal, the largest component of the country’s electricity mix, and the drought in the water-rich Yunnan Province.
But they are partly due to Beijing’s decarbonization policy, which is expressed in the form of quarterly energy consumption and efficiency targets for each province.
The provinces that miss their targets will have to cut power generation in the next quarter, resulting in mandatory rationing in energy-intensive sectors like metals.
Where China is today, the rest of the world can follow.
Europe’s move away from fossil fuels makes it more vulnerable to the kind of “perfect storms” that are driving the current hike in electricity prices.
The danger is that industrial metals and other power-intensive sectors will be constrained by higher electricity prices as they try to reduce their own carbon footprint.
“If electricity remains too expensive, industrial electrification will be discouraged as a decarbonization path,” warns Eurometaux.
Persistently high prices could lead operators to decide to relocate outside the euro zone, undermining the bloc’s drive to become more self-sufficient in commodities, he added.
And without sufficient metallic raw materials, the entire “Green Deal” of the EU is at risk.
The causes of power shortages in China and Europe are different and reflect the unique characteristics of each power system.
Coal is a major headache for China, both in terms of immediate supply and in trying to turn its network away from using the material.
Europe is more advanced on the path of energy decarbonization, but at the cost of more imported gas when the wind and sun aren’t blowing and shining.
But the common worrying topic is the same. How can you produce more metals to become environmentally friendly when the price of environmentally friendly metals is limiting metal production?
Source: Reuters (reporting by Andy Home; editing by Barbara Lewis)