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European metal producers fear collapse as energy costs cripple profit potential

A number of aluminum smelters are at high risk of closing due to rising production costs – Photo: Shutterstock

China saw it happen first. But today, European smelters, especially those of aluminum and steel, can no longer escape the imminent threat of soaring energy prices. In an almost unprecedented move, key leaders in metalworking and other heavy industries have warned that Europe’s metals industry could be at very high risk if the energy crisis is not brought under immediate control, with the help other EU heads of state.

In this letter, Eurometaux, the non-ferrous trade body, underlines how foundries could be very negatively impacted if the energy crisis lasts much longer. Many of them have already been forced to stop production indefinitely, and many more may also have to stop permanently.

Aluminum is one of the most energy-intensive metals to produce

What impact could the current energy crisis have on European metals?

The Russo-Ukrainian war has caused significant tightening and tension in energy markets around the world, but especially in Europe. Recently, Russia declared an all-out energy war on Europe, announcing that it would not resume gas exports at full capacity until European sanctions were lifted.

Natural gas prices are up around 64.5% year over year, trading at around $7.9/MMBtu. Crude oil prices were also up almost 26%, trading at around $83.9 per barrel at the time of writing. These two price increases have severely affected a number of foundries already in China, forcing them to close temporarily at first, before closing their shutters permanently.

From now on, European foundries could face the same situation. Energy-intensive metals such as aluminum, steel and zinc could be the first to be affected. Indeed, with current prices, the energy needed to produce these metals could cost between 4 and 5 times, or even more, their selling price.

European metals have already lost a lot of ground to Chinese manufacturers, who are able to produce faster, cheaper and often more efficiently. The current energy crisis is likely to widen the gap between these two markets and drive more consumers away from Europe to China and elsewhere, as Europe struggles to manage its costs.

If a number of European smelters end up closing, Europe could be forced to look abroad and import more metals from other countries. This could potentially drive up the cost of metals such as aluminum and steel, while contributing far more to already existing global supply chain blockages as demand grows.

It could also prompt Europe to consider easing some of the sanctions imposed on Russia, in order to get it to lift energy restrictions, as well as being able to import metals and other products from the country again. While this may be an economic relief, it is likely to be hailed politically as a very bad move, potentially making it one of the last options to consider.

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Who might be some of the major metal producers involved?

Steelmakers like ArcelorMittal (MT), headquartered in Luxembourg but with a large amount of operations in China, could be one of the main producers to be hit by the worsening European energy crisis. This is largely because the company has already taken a hit from the Chinese energy crisis, having fallen around 10% since mid-August.

European aluminum manufacturers such as Constellium (CSTM), Norsk Hydro (NHY) and Impol are also likely to be heavily impacted, as aluminum requires a very large amount of energy to produce. Rising energy costs have made aluminum production a money-losing strategy and could potentially steer manufacturers towards other metals, at least for now.

Zinc manufacturers could also be affected, as zinc is also a very energy-intensive metal. Although copper is in the same boat, copper fabricators shouldn’t suffer as much as other metal fabricators, as copper is still in high demand due to its uses in green energy.

What is the outlook for the European metals industry for the rest of 2022?

According to analyst Piero Cingari, “energy-intensive aluminum and steel smelters have come under severe pressure from soaring electricity and gas prices. ‘Eurofer, there is therefore a serious risk that many companies in this sector may no longer be able to produce due to exorbitant costs, and therefore be excluded from the market.

As far as the consequences of this shock are concerned, we can certainly expect more economic damage in the form of job losses in Europe, rather than new inflationary pressures or strong upward pressure on world prices. aluminum and steel. The European steel industry directly employs 326,500 people. and indirectly supports up to 2.6 million jobs and generates around 132 billion euros in gross value added.

Germany employs up to a quarter of all workers in the European steel industry, followed by Italy (9.3%) and France (8%). However, due to China’s exponential growth in this industry, the market share of European steel production has steadily declined over the past decades.

In terms of crude steel production by region in 2021, the share of the European Union was only 7%. The European aluminum industry directly employs around 230,000 people and indirectly supports up to 1 million jobs. There are more than 600 aluminum factories in Europe. Also in this respect, European production as a percentage of world aluminum production is relatively low, as demand from European countries has been met by imports from abroad.

Therefore, a competitiveness problem was already present for the European steel and aluminum industries even before this gas and electricity crisis happened and I do not think that the loss of production of the companies European Unions could significantly increase the prices of aluminum and steel on international markets, since other countries can fill the gap.

But job losses and the need for government interventions in the form of unemployment benefits or corporate bailouts could further hurt the eurozone economy and raise the cost of debt.

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