Aluminium Outlook – Supply Risks & Capacity Investment Trends

There’s a potential double-ban event where the White House and LME [London Metal Exchange] are thinking of banning Russian aluminium, and we have an energy cost crisis that’s been sparked by the Russia-Ukraine conflict and shaky trade relations. What’s your assessment of all these risks and issues, and how do these come back to aluminium?

Given the curtailment of European aluminium capacity triggered by the energy cost crisis vs the potential ban of 6% of global capacity, which Rusal is providing, do you think the energy cost crisis is the bigger deal here?

If Russian supply does get banned, whether it’s by the White House or LME or both, would you expect players, including China and Turkey, to circumvent that and pick up Russian aluminium supply? Would they end up sourcing for their own needs vs aligning themselves with the west and implementing those bans?

Rusal’s 6% aluminium supply could stay in the market even if it gets banned by the White House or LME. What do you think about key companies or industries in such a situation, instead of looking at it from a country angle? Safran went ahead and shifted its titanium input sourcing needs from Russian suppliers to non-Russian. Could we see something similar from players such as Airbus or other high-intensity aluminium consumers within aerospace and transportation in the west? Could they change their aluminium sourcing if Rusal gets taken off the market?

With LME stocks, a bunch of collateral got dumped by Citibank. Now, the stocks are coming up from their lower levels. If LME does ban Russian aluminium and LME stocks do come down as a result, could that change procurement behaviour at all across key channels?

If Rusal is taken off the market, and with 6% of the aluminium supply likely to disappear, is there any flex in the global supply to make up for that in such a scenario, especially with the European capacity that is curtailed?

Could we discuss the energy cost crisis, which you said was a bigger risk, and how that’s impacting existing smelter capacity, specifically in Europe? If we were to look at Alcoa as a representation of spot energy exposure, my understanding is that at least in the most recent quarter, the company only had two problems with spot energy exposure. It was the San Ciprián smelter and a Norwegian smelter, and I think 5% of Alcoa’s overall portfolio is what’s exposed to spot electricity. How would you compare that to most players that have exposure in Europe? Do players have a problem with spot electricity exposure or is most of it under a long-term contract?

I imagine that smelters with spot price exposure are most troubled right now. Is there any issue of long-term energy contracts rolling off in the near term, and as a result, we’re seeing players having to renew long-term energy contracts at higher prices? Is that an issue at all in Europe?

There could be quite a bit of employment within smelter operations themselves, resulting in local and semi-fabricated aluminium end products. There are a lot of employment chains in the aluminium industry. To what extent could governments provide support to keep European smelters online? Are there certain regions where you think that’s more likely to happen?

You noted that most, if not all, of continental Europe smelter capacity is loss-making. What’s your outlook for smelter curtailment? Do you expect more capacity to be curtailed? How much is currently curtailed?

When a smelter gets curtailed, that’s a sign that capacity could’ve been in the red for at least a year. Is that how you see it?

Curtailment costs range from tens of millions to USD 100m as you noted earlier. What drives the decision between partial curtailment and full curtailment? Is there a big cost difference there?

What might be the warning sign if European smelters start the process of curtailment as a result of the Russia-Ukraine conflict and energy price hikes? Was there a particular energy price benchmark or LME aluminium futures benchmark where you thought to yourself that a lot of smelters could lose money?

Could European smelters make a comeback with an energy price of USD 30 per megawatt? Could prices be sustained above USD 1,600-1,700 per tonne? Are these the two parameters for whether we’d see a European capacity restart, or is there anything else?

You mentioned energy price expectations for a European smelter restart. We are already above USD 2,200 per tonne with aluminium. For how long should prices be above USD 1,700 per tonne? Would it be sustained or long-term pricing?

Do you think some of the curtailed capacity in continental Europe has permanently exited the market? Could it come back?

We discussed curtailment and how that can be a big expense for players. What’s your view on the potential dollar cost and time cost in terms of smelter restarts? Alcoa is working on a couple of smelter restarts, both partial and full, and that’s obviously taking some time. Clearly, there’s at least a time cost.

What’s your view on reshoring of European capacity, whether it’s primary or elsewhere in the aluminium chain, to other regions? Could there be significant reshoring in regions such as North America, whether it’s Canada or the US, the Middle East or Asia?

You mentioned the North America market is extremely short. What are the chances of curtailed European smelters reshoring or relocating their prime aluminium capacity to the US or North America? Is that likely or unrealistic?

Who might benefit from the opportunities in secondary aluminium? You said the secondary aluminium opportunity is much larger vs the primary opportunity. To confirm, you don’t expect any additional incremental capacity in primary aluminium? There are only three companies that have smelters in the US – Alcoa, Century and Magnitude 7 – so who might benefit from the opportunities in secondary?

According to 2020 USGS [United States Geological Survey] numbers, primary aluminium production capacity was about one million metric tonnes, and you mentioned 900,000 tonnes of primary production. I think it’s around 3x that in secondary production. How much of an opportunity set did you say was in landfilled aluminium?

Is there an incentive for North America to fully reshore its aluminium capacity in the long term, especially with the opportunities you talked about? Do you think it might rebalance to an import market in the long term?

What’s the biggest reason for the long-term smaller, but still existing, import requirement for the US? Is it just because imports are expected to be consistently more cost-competitive vs local production?

You mentioned the use of scrap and the opportunity in secondary aluminium in North America, which is decarbonisation. How is that impacting the forward capacity investment behaviour by major, local players in North America?