December 2021
Often described as ‘solid electricity’, aluminium takes ~14kWh of power to produce 1kg of metal. If the aluminium smelting industry was a country, it would be the fifth-largest power consumer in the world.

As such, beyond the alumina feedstock, power is the key input into the aluminium production process, typically accounting for ~40% of production costs. Its price is a key determinant of a smelter’s viability—the price of power can make or break an aluminium producer.

Despite a post-pandemic surge in demand for the metal, an unfolding energy crisis—acutely affecting the northern hemisphere through the winter—and its effect on power prices is making it difficult for some aluminium producers to operate, despite elevated metal exchange prices.

Aluminium supply, historically capable of quickly responding to strong demand, is being hampered by the energy crisis rocking the northern hemisphere, with the shortage intertwined with more meaningful attempts at decarbonisation. These two interlinked issues are most notable in China as it tries to hold the line on reducing or limiting emissions. These efforts may be reaching their limit.

Is China Reaching Its Limit?

China–by far the world’s largest aluminium producer – has continued to crack down on pollution and has been enforcing reforms aimed at decarbonising the country’s economy. The Chinese government capped electricity consumption for energy-intensive industries such as aluminium and steel production earlier in 2021.

With this, coupled with power shortages in many parts of China, several aluminium smelters in the provinces of Guangxi, Xinjiang and Inner Mongolia have been required to cap output for the year. The country's power-hungry smelters have been hit by both a temporary power crunch and structural energy restrictions linked to Beijing's decarbonisation goals.

Under the country’s ‘dual-control’ policy—reducing energy intensity and limiting total consumption—energy-intensive industries, particularly aluminium smelting, are finding themselves in a tight spot. While it has a self-imposed primary aluminium capacity cap of 45Mtpa, the country is struggling to maintain consistent production of 40Mtpa in the current circumstances. It has been reported that attempts to meet the imposed consumption targets have seen around 3Mtpa of capacity curtailed, with the problem compounded by low rainfall in hydropower-rich Yunnan province, largely seen as one of the keys to reducing carbon emissions in China’s aluminium sector.

The power constraints are impacting not only operating capacity but new capacity as well. While China had been expected to increase production this year, with expected new capacity of up to 1.8Mt, the vast majority of this is now expected to be postponed by up to a year given the current power shortages and administrative shutdown initiatives.

Intervention by Chinese policymakers has seen coal prices fall recently, easing some of the pressure on power prices. However, this has not addressed the de-carbonisation initiatives and consumption limits currently affecting smelters. An easing of demand has also eased some pressure.

Europe Self-Inflicting

In the wake of soaring gas prices, European energy prices have been breaking records even before the true onset of winter. With temperatures about to drop, it is expected that things will only get worse. The decline of coal and nuclear in the region has increased its dependence on gas, particularly from Russia.

Part of the problem is that a fix is unlikely to come from the supply side. Russia has generally only been exporting what it has to export, and Qatar says it is already flat-out. This suggests demand needs to fall to ease pressure on the market. The resurgence of Covid-19 cases may go some way towars addressing this if hard lockdowns have to come into force again, but governments are not keen to go down that path.

The Netherlands’ only smelter, the ~115ktpa Aldel operation at Delfzijl, announced in mid-October it was suspending production due to the high cost of electricity. The smelter’s owners have declared they are not anticipating any attempt at restarting operations before the end of the winter period.

The shutdown is of note—beyond the surging demand environment, producers are often loath to curtail production capacity, even in the face of low metal prices, given the difficulty and expense of starting it up again. The age of the majority of smelting technology at European smelters can also compound issues, as older technology is typically less energy efficient, requiring more (currently high-priced) power per tonne of aluminium produced.

Alcoa’s existing, longer-term concerns regarding the San Ciprian smelter will no doubt be compounded by the prevailing high energy cost environment.

A direction for Russia’s Gazprom to fill storage facilities in Europe over November may ease some pricing pressure, but winter has barely started.

India’s Inventory Aversion

Highly coal-dependent, India has struggled to secure coal supplies for power plants captive to industrial operations, like aluminium smelters. Indian power stations tend to operate with tight stockpiles and are often affected by any supply-side uncertainty which is largely in the hands of state-owned Coal India.

Following disruption to coal supplies, coal was being prioritised for power producers supplying to the grid at the expense of industrial producers. The diversion of supplies from Coal India to thermal plants occurred despite aluminium production being declared a public utility service due to its strategic importance and an essential commodity for diversified sectors crucial to the economy.

The country’s coal shortages and electricity blackouts started easing in November on declining demand due to cooling temperatures, though stockpiles at power plants are still considered critically low, with generation at risk from relatively minor disruption.

Filling the Gap

With China apparently reaching the limits of its smelting capacity development, particularly if it is serious about reducing emissions, continued demand growth will need to come from somewhere. Options in the short term appear limited.

Australia’s smelters, which have previously been described by their primary owners, Rio Tinto and Alcoa, as having some of the highest power prices in the world, are suddenly not looking so bad. In Rio’s case this is despite an explosion at the Callide power station pushing up electricity prices in Queensland, where its Boyne Island smelter is located. Realistically, however, major expansion in Australia is currently considered unlikely.

However, Alcoa has gone so far as to announce the restart of idled capacity at the 360ktpa Portland smelter in Australia. In November, the company announced plans to restart 35ktpa of curtailed capacity—which had been idled since 2009—which was to start immediately and was secured with a new four-year power supply deal from AGL.

With northern hemisphere producers largely struggling, Alcoa is also looking to fill the gap with the restart of its share of the Alumar smelter in Brazil. In the Middle East, EGA has completed a capacity expansion at Al-Taweelah. Large-scale projects in the short term, however, are harder to come by.