ALUMINIUM
The Price of Power
June 2019
At a time when demand is set to grow faster than new supply, low aluminium prices are becoming more and more of a frustration on producers. The factors keeping prices down—global-scale economic uncertainty and slowing growth—are not reducing input costs by the same degree, putting many aluminium producers in an uncomfortable position.

Generally, high-cost smelters are located in the US, Australia, New Zealand, and some areas of Europe. At the lower end of the cost curve are smelters located in Russia and Canada, followed by those based in the Middle East and the newer smelters in China. Input costs rose roughly 20% during 2018, and in many regions, Europe and the Pacific particularly, this was partially driven by high power costs—although China is not immune to these increases.

Power cost is a key defining factor in the cash cost of a smelter, with some producers describing aluminium as “congealed electricity”. Aluminium smelters in the lowest quartile of the global cost curve see power make up around one-fifth of total costs—whereas the upper quartile sees smelters average around 50%, and sometimes higher. One-third is the generally-accepted average for most middle-of-the-road smelters.

 

 

 

This cost is higher than many other metals, simply because the strength of the chemical bond between aluminium and oxygen is significantly stronger than the same bond between iron and oxygen. As a result, much more energy is required to split the bond and form the metal.

With prices currently below the US$2,000/t mark, half of all smelters are seeing slim or non-existent margins. Chalco, for example, has shut its Shandong, China aluminium plant, citing rising power costs and saying that it will be using “flexible production” for the near future while it considers a complete overhaul of its production facilities to lower costs. Chalco has closed almost 1Mt of capacity since 2018.

New Zealand’s NZAS has been facing struggles with power and distribution costs for years. Hardly a year has gone by where the company has not petitioned the government for an overhaul to the nation’s power transmission cost structures. The company’s smelter consumes almost one-seventh of the nation’s power, and has previously applied for government grants in order to pay for its power needs—to the tune of NZ$30m (US$20m). Australia’s Portland Aluminium is also facing difficulties paying power, with the possibility looming that the Victorian state government may need to bail out the smelter again, as it did in 2017, for a coast of just over A$1bn (US$700m).

Some companies—such as Hydro Norsk and Rusal—circumvent this high and often volatile input cost by operating captive hydro-generated power plants, greatly reducing their energy costs and exposure to market fluctuations. Indeed, Rio Tinto's $43 billion takeover of Canadian aluminium giant Alcan was largely driven by Alcan's large sources of hydro-electric power in Canada. Rusal has invested in significant amounts of money in branding its “ALLOW” aluminium, produced via hydro power and—as a selling point—accounting for less than four tonnes of CO2 per tonne of aluminium produced. This is not, however, a viable approach for many smelters and is highly dependent on the local environment. Not every smelter can be hydro-driven. 

For companies that cannot ensure captive power, research continues into reducing the costs of energy usage in producing primary aluminium metal. The emphasis of most research is squarely on electricity, which represents about three-quarters of the total process energy used in converting bauxite into primary aluminium.

Most research efforts have been concentrated on reducing the electrical resistance of the anode, cathode and electrolyte, and reducing heat losses from the cells. Methods tested include the addition of lithium and sodium salts to the electrolyte, the use of titanium diboride coatings for anodes and cathodes, and automated control of cell operations to minimise the increases in temperature and electrical resistance when alumina becomes depleted in the electrolyte.