More smelters face threat of closure as Europe enters a power-starved winter

More European smelters are expected to shut as the region enters a power-starved winter that could force the continent’s big industrial companies to turn to imports just as they are trying to become more self-sufficient following war in Ukraine.

The closure of two large smelters in Slovakia and the Netherlands were announced this week, with traders expecting more shutdowns to follow due to exorbitant energy costs following Russia’s invasion.

“It is clear that European smelter cuts will come deeper and sooner than we anticipated,” said Tom Mulqueen, research strategist for metals at Citi.

The closures have vast ramifications for the European economy, as the region’s biggest manufacturers in strategic sectors such as steel, defence, aerospace and cars try to become less reliant on imports.

These industries rely on smelters for metals such as aluminium and zinc to manufacture their products. If more smelters close, it will force them to turn to overseas producers, helping China and Russia cement their grip on global markets.

The Norsk Hydro plant in Slovakia produced aluminium, while the Nyrstar smelter in the Netherlands, controlled by trading group Trafigura, produced zinc.

The closures also run counter to EU goals to strengthen domestic processing of strategic minerals, with the bloc’s latest list including bauxite, an ore used to produce aluminium.

“We’re facing a real potential aluminium crisis whereby significant portions of western production are challenged as Russia and China are exporting huge amounts of metal,” said Mark Hansen, chief executive of Concord Resources, a global metals trading house.

Half of the EU’s aluminium and zinc output has already been lost from curtailments and closures this year, according to Eurometaux, a trade body for non-ferrous metals that do not contain iron, as producers struggle to cope with surging electricity prices.

In wider Europe, which includes Norway, Iceland and the UK, consultancy CRU expects further disruption to cause zinc production to tumble about 10 per cent to 2.2mn tonnes in 2022 over the previous year and aluminium production capacity to fall 20 per cent to 3.4mn tonnes compared with last September.

German power prices for next year, a benchmark for Europe, have soared to €543 per megawatt hour, 12 times higher than two years ago, driven by the record-breaking rally in gas prices after Russia cut supplies to the continent.

That has created a severe problem for electro-intensive smelting. Known by industry insiders as “solid electricity”, one tonne of aluminium takes about 14,000 kilowatt hours to produce, enough to supply electricity to the average UK home for almost five years.

“When that cost variable goes up manyfold, then the calculus changes and you’re not going to survive,” said Edward Meir, president of Commodity Research Group, an independent consultancy. “And we haven’t even reached the crunch period which is this winter.”

Rebooting a smelter is an expensive and timely process, particularly in the case of aluminium, meaning some production halts are almost certain to be permanent.

“The situation is dire,” said Adina Georgescu, energy and climate change director at Eurometaux. “The rule of thumb is once you close down a smelter, you have little chance of bringing it back online.”

The crisis for smelting also goes beyond Europe. In the US this year, higher power costs and relatively subdued aluminium prices have forced Alcoa to permanently shut a smelter in Indiana and Century Aluminum to idle its huge refinery in Kentucky.

For now, traders are weighing up the cuts to metal supply — combined with extremely low aluminium and zinc inventories at London Metal Exchange warehouses — against the hit to demand from a possible recession.

This week, zinc shed most of the gains made on Tuesday when Nyrstar announced the closure of its smelter in the Netherlands, as traders quickly became more concerned about depressed demand because of Covid-19 lockdowns in China.

“Nobody is clear what wins: the production cuts or demand destruction,” said Al Munro at Marex, a brokerage that posted record first-half profits this week due to volatility in the commodities markets.

And more alarmingly, industry figures say the closures would also knock global efforts to slash CO₂ emissions because European smelters generate three times less than those in China, where coal is often used to generate electricity, and investment plans in “green” production have been paused.

“The problem would not only be that others are increasing production, but the European metals industry is a lot less emissions intensive than non-European ones,” said Georgescu of Eurometaux. “The closures have the perverse effect of increasing emissions.”