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Aluminum prices can’t keep up with energy costs, driving wave of closures

Rising power prices are causing a shakeout in the aluminum sector.

The price of aluminum on the London Metal Exchange has increased by 24% over the past six months to more than $3,100 a metric ton, approaching a decade high. Tensions between the U.S. and Russia over the deployment of 100,000 troops on the border with Ukraine have also buttressed prices. Russia is one of the world’s biggest aluminum producers and traders fear disruptions to its exports if conflict breaks out.

But energy costs have risen even faster, forcing the closure of plants in China and Europe that haven’t been able to cut costs deep enough to remain profitable. In Europe, natural-gas prices are almost five times as high as they were a year ago because of cold weather and a drop in the flow of gas from Russia. Energy can account for up to half of the cost of making aluminum, which is why traders nicknamed the commodity congealed electricity.

Traders fear smelter closures will make it tougher to secure supplies in a market that is used to having plenty of metal to go around. Rising aluminum costs are an added expense for buyers such as auto makers, already grappling with supply-chain constraints including a global computer-chip shortage.

Alcoa Corp. is shutting its unprofitable San Ciprián aluminum plant in Spain, which has an annual capacity of 228,000 tons and will likely be offline for roughly two years because of challenges stemming from what Alcoa called exorbitant energy prices.

Norwegian aluminum producer Norsk Hydro ASA also said it would cut output at a plant in Slovakia to 60% of its capacity in response to electricity prices which show no sign of falling in the short term.
Other companies that own aluminum smelters in places including Montenegro, Romania and France have also laid out plans for production cutbacks. Those follow a string of cuts from producers of the metal in China amid a power shortage there.

Smelters have recently taken about 810,000 tons in annual production capacity in Europe offline. With several million tons also out of action in China, about 4 million tons of capacity have been closed or mothballed globally as energy prices run high.

There are several more smelters in Europe that might have to cut production or close over the next few months if energy prices don’t retreat, analysts say.Already, stockpiles of aluminum in warehouses approved by the LME have shrunk to fewer than 850,000 tons, the lowest level since 2007, according to FactSet. In March 2021, they stood more than twice as high.

Based on known closures, Morgan Stanley estimates aluminum supply could fall 1 million tons short of demand in 2022. Shipping bottlenecks are still making it difficult to move aluminum to areas clamoring for it.