Aluminum output 'withering' in Europe on power costs

Production and Markets

Rising aluminum prices in 2010 may not be enough to halt the decline in European output of the metal as producers quit the region for cheaper electricity in the Middle East.

Half of Europe's remaining capacity may shut by the end of this year and two-thirds could be cut through 2013, according to the European Aluminium Association. Relying on imported metal would raise costs for fabricators of aluminum products such as foil and window frames, who employ more than 200,000 people in Europe, the EAA said. End-users such as Volkswagen AG and Bayerische Motoren Werke AG would also end up paying more.

"Western European smelters are gradually withering on the vine," said Julian Kettle, a London-based analyst at metals research company Brook Hunt who has tracked the aluminum market for more than two decades.

Aluminum consumers in the European Union pay a 3% duty on imports. Metal delivered into Rotterdam, Europe’s largest port, also incurs transport and insurance costs that are currently about US$65/t, according to UK research firm CRU International Ltd.

The aluminum spot price dropped US$67.50, or 2.9%, to
US$2,275.25/t as of 7:10am on the London Metal Exchange. On that basis, duty, delivery and insurance costs on imports were about US$133/t. Europe used 5.3Mt and produced 3.9Mt in 2009, according to CRU.

Europe was the fourth-biggest aluminum producer in 2009, trailing China, North America and Russia, according to Brook Hunt. It was the largest in 1940, accounting for half of global supplies of the metal that’s used in of cars, aircraft and beverage cans.

Norway's Norsk Hydro ASA, Europe's third-biggest producer, said December 11 it may close a German smelter because of power costs. Output started at Hydro's 585,000t smelter in Qatar, it reported 10 days later. Alcoa Inc signed a contract on December
20 to build a US$10.8 billion aluminum complex in Saudi Arabia by 2013, a month after saying it would close two Italian smelters.

Electricity is the biggest single cost for producers. European plants pay tariffs equal to about US$950/t produced, Daniel Brebner, an analyst at Deutsche Bank AG in London, wrote in a December 11 note. Some producers are struggling to renegotiate "competitive" power contracts, Mr Brebner said.

The European Commission's emissions trading system imposes carbon-dioxide quotas on utilities and requires those exceeding their limits to buy or borrow credits. European electricity prices are the highest in the world because generators pass on the cost of their emissions, the EAA said.

There's "no legal certainty" whether EU regulators will allow producers to access electricity at below market prices, the Brussels-based EAA said in an emailed response to questions.

Alcoa idled the Fusina and Portovesme smelters in Italy, which have a combined annual capacity of 194,000t, after the commission ruled against reduced power tariffs. Alcoa's output in Spain, where it has three smelters, may also be vulnerable to curtailment, Mr Brebner said. The commission opened a probe in 2007 to establish whether Spanish power prices comply with EU state-aid rules.

Alcoa is "continuing dialogue" in Spain to reduce costs, company spokesman Kevin Lowery said. When asked for further comment, he referred to Alcoa’s third-quarter filing, in which it said the Spanish tariffs conform with all applicable laws and regulations.

"It is a one-way road for some industries in Europe and I think that is to disappear and emerge in other areas where there is cheap power," Mr Brebner said.

Rio Tinto, the world’s second-largest aluminum producer, stopped smelting at its 148,000t plant in Wales at the end of the third quarter of last year after an energy contract ended. Hydro is evaluating the future of its Nuess smelter in Germany and the European Commission is still considering whether to approve Germany's proposed €40 million (US$57 million) aid package for the plant, Hydro spokesman Erik Brynhildsbakken said.

Industrial users pay €36.80-48.60/MW hour under electricity supply contracts, compared with €20 in the Persian Gulf, according to the EAA.

Emirates Aluminium Co Ltd, a joint venture between Abu Dhabi state-owned investment company Mubadala and Dubai Aluminium Co, the largest aluminum smelter in the Middle East, started production on December 1. Emal, as the venture is also called, will reach its initial capacity of 700,000t a year by the end of 2010.

"With the full ramp-up of Qatalum and Emal, output in the Middle East will continue to grow," said Massimo Rossi, an analyst at London-based researcher CRU Group.

Global aluminum demand will rise 12% to 38.9Mt in 2010, after shrinking 6.6% in 2009, Macquarie Group Ltd said in a December 29 report. Aluminum cash prices will average US$1,984/t in 2010, the bank said, compared with US$1,671 in 2009.

Jan 8 (Bloomberg)