Column: Power is the big new problem for industrial metals supply: Andy Home

Nyrstar NV

18/08/2022 15:59

By Andy Home
    LONDON, Aug 18 (Reuters) - Europe's power crunch is taking a
rising toll on the region's industrial metals sector, with two
more smelters this week announcing plans to halt operations. 
    Nyrstar  NYR.BR  will place its Budel zinc smelter in the
Netherlands on care and maintenance from the start of September
until further notice, while Norsk Hydro  NHY.OL  will fully
power down its Slovalco aluminium smelter in Slovakia by the end
of the same month.  urn:newsml:reuters.com:*:nL1N2ZS0K7  urn:newsml:reuters.com:*:nL8N2ZS362
    More closures will likely follow. Smelting raw materials
into refined metal is an energy-intensive process and Europe's
power crisis shows no signs of abating and may indeed get worse
heading into winter. 
    It's hot summer weather that's the problem for smelters
right now in China though. Drought in Sichuan province has led
to power rationing, forcing metals processing plants to curtail
output. Lithium operators are included, a warning that the
energy transition metals are themselves dependent on existing
power availability. 
    Getting sufficient quantities of minerals out of the ground
to meet green demand is challenging enough. Getting enough power
to process them into refined metal is now fast emerging as a big
new problem for supply. 
    
    POWERING DOWN IN EUROPE 
    Budel is the second zinc plant to close in Europe after
Glencore  GLEN.L  mothballed its Portovesme facility in Italy
late last year.  urn:newsml:reuters.com:*:nL1N2SD0TG
    Nyrstar referred only to "various external factors" in its
decision to shutter Budel but power pricing has to be top of the
list. The 315,000-tonne-per-year smelter was already operating
at reduced capacity due to soaring power costs, as are both of
Nyrstar's still-operating smelters in France and Belgium. 
    Glencore conceded on its results conference call that its
zinc smelting business is barely covering its costs and warned
that European power prices pose a significant supply risk to the
global zinc market.  urn:newsml:reuters.com:*:nL8N2ZL4EI 
    Aluminium smelters are even more dependent on affordable
power since alumina is transformed into metal by a process of
electrolysis. 
    Slovalco is the fourth European smelter to close over the
last 12 months. Alcoa  AA.N  has taken its San Ciprian smelter
in Spain off line for two years while primary smelters in the
Netherlands and Montenegro have also come to a halt.
    Others such as Romania's Alro have part-idled capacity and
all are modulating run-rates to avoid peak usage times. 
    Western European annualised aluminium production has fallen
below three million tonnes for the first time this century with
the rising risk that temporary curtailments could become
permanent if there is no respite from the energy storm. 
    The power hit to the region's processing capacity bodes ill
for both the European Union's energy transition plans, which
will need a lot more metal, and its strategic autonomy drive,
which means more of that metal should be mined and refined in
Europe. 
  
    SHUTDOWNS IN SICHUAN
    China's series of extreme heat waves and drought is 
simultaneously boosting electricity demand and lowering
generation capacity in hydro-powered provinces such as Sichuan.
 urn:newsml:reuters.com:*:nL1N2Z300N
    Industrial users across 19 out of 21 cities in the province
have been ordered to halt or cut production so power can be
prioritised for homes.  urn:newsml:reuters.com:*:nL1N2ZR0FP
    Aluminium producers such as Henan Zhongfu Industrial
 600595.SS  are curtailing output with Shanghai Metal Market
estimating the cumulative capacity https://news.metal.com/newscontent/101921806/SMM-Analysis-on-Implications-of-Expanded-Output-Cuts-by-Aluminium-Smelters-in-Sichuan-amid-Escalated-Power-Rationing-
 cuts have reached 395,000 tonnes. 
    This is a repeat of last year's drought in neighbouring
Yunnan province which also led to multiple smelter curtailments
in what is an even bigger aluminium production hub. 
    Sichuan is also a big lithium producer and several local
processors are running reduced operations due to power
rationing, according to Fastmarkets, which has just lifted its
assessment of the local spot carbonate price. 
    Power rationing is now spreading to other provinces and the
pressures on the grid will persist until the heat wave, now in
its 65th day, finally breaks. 
        
    LIVING WITH CLIMATE CHANGE
    Europe's power crisis is a direct consequence of what Russia
calls its "special military operation" in Ukraine and the
restrictions on west-bound gas supplies. 
    What's happening in China, however, is a warning that
European power availability and pricing might never return to
some sort of pre-war normal. 
    Global warming poses huge challenges for power generation
and grid stability, adding to the problems of decarbonising the
whole sector. Ironically, green hydro energy is particularly
sensitive to changes in weather patterns as Sichuan is finding
out. 
    Temperatures in China have been rising faster than the rest
of the world and are expected to continue doing so, according to
Yuan Jiashuang, vice-director of China's National Climate Center
(NCC).  urn:newsml:reuters.com:*:nL1N2ZG05I
    This poses a significant long-term threat for industrial
metals markets since China is the world's largest processor of
everything from aluminium to zinc. 
    
    NEW DISRUPTOR
    The pricing dynamics of metals such as zinc tend to derive
from changes in mine output, the costliest part of the
production process and the one most prone to unexpected
disruption. 
    The existence of sufficient smelting and refining capacity
to treat what comes out of the mines has historically been
something of a given. Even if the occasional smelter was retired
or closed, China always seemed to have spare capacity to
compensate. 
    Aluminium is something of an exception. Bauxite is plentiful
and cheap to mine, meaning smelter output is the key determinant
of supply. But smelter outages have historically been rare and
largely down to worker stoppages or acts of God such as
lightning strikes.
    All that is changing. Smelting aluminium or any other
industrial metal for that matter is no longer the efficient
supply-chain processing channel it used to be. 
    Power is the Achilles heel of all industrial production
plants and all metals are to some extent impacted. 
    This new disruptor adds an extra layer of complexity to the
metals supply picture. Power rationing tends to be localised by
its very nature, dependent on specific dynamics such as those in
Europe or weather patterns such as drought in Sichuan. 
    It is manifest in a greater fragmentation of the London
Metal Exchange (LME) global reference price and regional
physical premiums. 
    The LME aluminium price has shrugged off the Slovalco news,
the market collectively calculating that there is no global
shortage of aluminium. 
    But there is in Europe, where physical buyers are paying
more than $500 per tonne over and above the LME price to get
their metal. Such a premium was unprecedented until Europe's
power problems began to build last year. 
    Expect more such futures-physical divergence because the
metal industry's smelter problems look here to stay.
      
    The opinions expressed here are those of the author, a
columnist for Reuters.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Bad news for zinc smelters as European power crunch shows no
signs of abating    https://tmsnrt.rs/3BShnw7
European aluminium production melt-down    https://tmsnrt.rs/3xO1sM2
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Kirsten Donovan)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))