CBAM set to push metal buying costs up in Europe

The newly implemented Carbon Border Adjustment Mechanism (CBAM) in the European Union (EU) is set to push some metal buying costs higher from 2026 amid supply constraints. The regulation officially entered into force in the EU on 16 May 2023 after the provisional agreement was published in January 2023. CBAM will be implemented in its transitional phase from 1 October 2023 to 2025 and covers the imports of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. During this transitional period, EU importers are obliged to report emissions embedded in their goods subject to CBAM without paying a financial adjustment. The system will become fully operational in 2026, and EU importers will have to declare annually the quantity of goods and the volume of embedded emissions for the total imports in the preceding year. These embedded emissions will be paid for by EU importers through submitting CBAM certificates with corresponding values. The scope of CBAM is expected to expand to cover other sectors after EU-wide consultation during the transitional period, hence increasing numbers of metal imports will be subjected to this "carbon tax", which is likely to push buying costs higher in the trading bloc. Some in the metal industry have criticised the CBAM with one analyst calling it an "ill-thought-out policy" given the supply disruption caused by sanctions on Russian metals. Prior to Russia's invasion of Ukraine in February 2022, Russia was a key supplier of metals, most significantly aluminium, nickel, steel, palladium and platinum. Following Western sanctions on Russia, India became an important alternative source of aluminium exports to Europe. India is widely anticipated to file a complaint to the World Trade Organisation (WTO) over the additional import tariffs due to the costs related to CBAM. "Something like CBAM only works if every country somehow starts to impose an inequivalent carbon tax in their domestic market," the analyst told the Mining Journal. However, international law firm Norton Rose Fulbright said CBAM may not breach WTO rules. "While in principle, the CBAM rules could in fact be discriminatory, it appears that currently they are not. It is a process that requires maturity and in the implementation period, there is an intention to gather information to assess further actions and the adaptions necessary. As such, the estimated consequences of the CBAM for EU trading partners might not be as detrimental as some countries believe," wrote the law firm said in February. EU metal output constraint as CBAM raises buying costs Russia is the third largest aluminium producer in the world and the top supplier in Europe prior 2022. According to data from the International Aluminium Association (IAI), primary aluminium production in Russia and Eastern Europe reached 4.08Mt in 2022, 40% above the 2.91 Mt of output in Western and central Europe. Russia exports more than 3.5 Mt of aluminium and alloy to Europe in 2021, the sanctions halted much of those exports in 2022. Following the sanctions, EU consumers have been sourcing alternative supply of primary aluminium and alloy from India and the Middle East. From 2026 onwards, buyers of metals from outside the EU will have to pay for the carbon emissions embedded in the production and shipping, which could lead to an additional 20-30% tariff on top of the sale price. Although the European non-ferrous metal association Eurometaux is campaigning for increased domestic production, many in the market are sceptical and said capacity in the continent is insufficient to meet demand. In addition, many European metal production facilities remained shut because of the high energy price as natural gas prices in Europe remained at multi-year highs. "I don't see how it can [increase domestic production] in the near-term because of the power situation; power prices are still quite high," said the first analyst. There are also suggestions of increased use of aluminium scrap, but the collection and processing of scrap will take months to implement. The analyst estimated the supply gap between primary aluminium production and consumption at 4Mt a year in Europe, and the gap could grow as demand increases in the coming years. Amid a supply gap and the additional cost of CBAM, metal premiums in the EU may rise as buyers compete for supply. What is CBAM? The EU's CBAM is a pricing mechanism developed by the EU to levy the costs of greenhouse gas emitted during the production of energy-intensive goods entering the trading bloc.Importers will be required to pay for these "embedded carbon emissions" through the purchase of CBAM certificates, which will be sold through a central platform. The embedded carbon emissions will include greenhouse gas emitted during mining, shipping and transportation. This is expected to have a significant impact on the mining and metal industry because of the energy-intensive nature of production and its related logistics. According to the EU, the CBAM is designed to be compatible with the rules of the World Trade Organisation (WTO). Under the key WTO principle of non-discrimination in free trade environments, "like" products from different trading partners ("most favoured-nation") shall be treated the same as domestic products. "By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU's climate objectives are not undermined," said the EU. Pricing of CBAM certificates as EU ETS phase out The price of the certificates will be linked to the EU's Emission Trading System (ETS), and it will be calculated based on the weekly average auction price of EU ETS allowances in €/t of CO2 emitted.In the current carbon market, metal producers in the EU receive a share of their emission allowances for free, and the proportion of allowances is allocated based on greenhouse gas emission benchmarks developed for each product. The metal producers must surrender carbon allowances to fully cover its emissions, otherwise it will be fined. Free allocation under the EU ETS will gradually phase out with the phasing-in of CBAM in 2026-2034. The rules and requirements under CBAM will develop further through consultations with the regulation committee, and the list of sectors covered is expected to expand to cover other goods and metals from 2026 onwards. Many European metal producers have declined to speculate on the development of CBAM, but many are watching the space. "There are a number of practical challenges in establishing such a system and it is very important that there is an alignment with EU-ETS with the aim of having a level playing field towards other continents," said a Boliden spokesperson.

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