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LONDON, September 28 (Reuters) – The world will need many more metals such as copper, nickel and aluminum if it is to decarbonise itself.
The potential boom in âgreenâ demand resulting from more renewable energies, more electrical infrastructure and more electric vehicles is the promise of tomorrow for these âenergy transitionâ metals.
Yet, as China first and now Europe is discovering, power is a double-edged sword for producers and manufacturers of metals.
An electricity crisis in China has slowed down more than two million tonnes of the country’s aluminum production capacity.
The ongoing energy crisis in Europe has shut down the Plovdiv zinc-lead smelter in Bulgaria and forced others, such as the Nyrstar zinc smelter in the Netherlands, to cut production during peak periods.
In China, energy constraints are moving up the supply chain to affect not only primary producers but also product manufacturers, a worrying sign of what may be in store for Europe as the end of the season approaches. ‘winter.
The Chinese and European energy crises are the result of a complex mix of factors.
All add up to the same metal-power paradox. How to produce more metals to decarbonize global power systems when decarbonization adds to the pressure on existing electricity availability?
IN THE FIRST LINE
Electricity prices in Europe have increased due to reduced Russian gas supplies, lower wind generation, nuclear maintenance, higher carbon prices and a rebound in post demand. -pandemic.
Large metal production plants are highly exposed to surges in electricity prices as they are heavy users of electricity to convert raw materials into refined metal.
“Producers of aluminum, copper, nickel, zinc and silicon are at the forefront of industries affected by high electricity prices in Europe”, according to the non-ferrous metals industry association EuromÃ©taux , which urges the European Commission to take action.
The impact varies from country to country, as the European electricity market is far from homogeneous.
Bulgarian industrial users, for example, complain that local electricity tariffs are more than double the levels applied to immediate competitor countries.
But any industrial plant with exposure to the European electricity spot market is likely in trouble.
Aluminum smelters are particularly at risk because they require enormous amounts of energy for the electrolytic process of converting alumina to metal.
Eurometaux estimates that an aluminum producer consuming 14.5 MWh per tonne of aluminum produced has seen its energy costs almost quadruple this year, from 580 to over 2,000 euros per tonne, which represents more than 80% of the current price of the London Metal Exchange (LME).
China’s aluminum industry has found itself on the front lines of that country’s energy crisis for precisely the same reason. Foundries are easy targets for local governments looking to ease strain on the power grid.
So far, this has been bullish talk for markets such as aluminum, which hit their highest levels in a decade due to declining output from the world’s largest producer.
But in China, electricity shortages are moving downstream, a decidedly bearish trend.
The tin sector in China is a good example.
Producers in Yunnan and Guangxi provinces were forced to cut production in May and August respectively due to power rationing, but so far appear to have dodged the latest restrictions.
But this is not the case with their customers.
According to the International Tin Association, power rationing in southern provinces such as Guangdong and Jiangsu is slowing down significant amounts of solder capacity and tin chemicals.
The surge in demand halted the rally for tin in Shanghai, the most active contract SSNcv1 slipping 4.5% at some point on Tuesday.
Such disruption is spreading, according to LME broker Marex Spectron, with many aluminum consumers in southern China now operating only two days a week.
Indeed, energy constraints are having a growing impact on China’s huge manufacturing economy, with Goldman Sachs estimating that up to 44% of national industrial activity has been affected.
The bank has just reduced its Chinese growth forecast for this year from 8.2% to 7.8% due to “significant downward pressure” on industrial production.
The pressure on commercial electricity users will only increase as policymakers prioritize home heating during the winter months.
This is not good news for the metals markets, as China remains a major driver of global demand. The power crisis in China is rapidly shifting from a bullish influence to a bearish influence on metal prices.
China’s energy problems are partly caused by one-off events such as the rise in the price of coal, the largest component of the country’s electricity mix, and the drought in hydropower-rich Yunnan province.
But they are in part due to Beijing’s decarbonization policies, expressed in the form of quarterly energy consumption and efficiency targets for each province.
Provinces that miss their targets must reduce their electricity production in the next quarter, resulting in mandatory rationing in energy-intensive sectors such as metals.
Where China is today, the rest of the world could follow.
Europe’s distance from fossil fuels makes it more vulnerable to the kind of “perfect storm” conditions that are driving electricity prices soaring today.
The danger is that industrial metals and other energy-intensive sectors will be forced by rising electricity prices as they attempt to reduce their own carbon footprint.
“If electricity remains too expensive, this will discourage industrial electrification as a decarbonisation route,” warns Eurometaux.
High and sustained prices could lead operators to choose to relocate outside the euro zone, undermining the bloc’s desire to increase its self-sufficiency in raw materials, he added.
And without enough metallic raw materials, the entire EU Green Deal is in jeopardy.
The causes of power crises in China and Europe are different, reflecting the unique characteristics of each power system.
Coal is China’s big headache, both in terms of immediate supply and in trying to get its network to stop using it.
Europe is further on the road to energy decarbonization, but at the cost of an increased need for imported gas when the wind and the sun fail to blow and shine.
But the common troubling theme is the same. How to produce more metals to go green when the price of going green limits the production of metals?
(Edited by Barbara Lewis)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.