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How could the current energy crisis impact European metals?

What could be some of the main metal producers affected?

What is the outlook for the European metals industry for the rest of 2022?

China saw it happening first. But now, European smelters, especially aluminium and steel ones, cannot escape the looming threat of soaring energy prices any longer either. In an almost unprecedented move, top metals and other heavy industry leaders have warned that Europe’s metals industry could potentially be at very high risk if the energy crisis is not contained immediately, with help from other EU heads of state.

In this letter, Eurometaux, the non-ferrous trade body, highlights how smelters could be very negatively impacted if the energy crisis goes on for much longer. A lot of them have already been forced to stop production indefinitely, with many more possibly having to permanently shut down as well.

The Russia-Ukraine war has caused a significant tightening and strain on energy markets worldwide, but especially in Europe. Recently, Russia has declared an all-out energy war on Europe, by announcing that it would not resume gas exports at full capacity until European sanctions were lifted.

Natural gas prices have soared about 64.5% year-on-year, trading at approximately $7.9/MMBtu. Crude oil prices have also seen an almost 26% rise, trading at about $83.9 per barrel at the time of writing. Both these price hikes have severely impacted a number of smelters already in China, causing them to shut down temporarily at first, before closing their shutters permanently.

Now, European smelters could be facing the same situation. Energy intensive metals such as aluminium, steel and zinc could be the first to be affected. This is because with the current prices, the energy required to produce these metals could cost anywhere between 4 to 5 times, if not more, their selling price.

European metals have already lost a lot of ground to Chinese manufacturers, which are able to produce faster, cheaper and often more efficiently. The current energy crisis is likely to widen the gap between these two markets, and drive more consumers away from Europe to China and elsewhere, as Europe struggles to manage costs.

If a number of European smelters do end up shutting down, Europe may be forced to look abroad and import more metals from other countries. This could potentially drive up the cost of metals such as aluminium and steel, while also contributing significantly more to already existing global supply chain blockages, as demand ramps up.

This could also prompt Europe to consider relaxing some of the sanctions imposed on Russia, in order to get it to lift the energy curbs, as well as be able to import metals and other products from the country again. Although this may come as a relief economically, it is likely to be hailed as a very bad move politically, thus potentially making it one of the last options to be considered.

Steel manufacturers such as ArcelorMittal (MT), with headquarters in Luxembourg, but a vast amount of operations in China could be one of the main producers to be affected by the worsening European energy crisis. This is largely due to the company already having taken a significant blow due to the Chinese energy crisis, having fallen approximately 10% since mid-August.

European aluminium manufacturers such as Constellium (CSTM), Norsk Hydro (NHY) and Impol are also likely to be heavily impacted, due to aluminium requiring such a very high amount of energy to be produced. The rising cost of energy has made aluminium production a loss-making strategy and could potentially direct manufacturers to other metals, for the time being at least.

Zinc manufacturers could also be impacted, due to zinc being a high-energy consuming metal as well. Although copper is in the same boat, copper manufacturers are not likely to suffer as much as other metal manufacturers, due to copper still being highly in demand due to its uses in green energy.

According to Piero Cingari, analyst at Capital.com, “Energy-intensive aluminum and steel smelters have come under heavy pressure from soaring electricity and gas prices.As pointed out by the Eurofer’s statement, there is therefore a serious risk that many companies in this sector may no longer be able to produce due to exorbitant costs, and therefore be excluded from the market.

In terms of the consequences of this shock, we can certainly expect more economic damage in the form of job losses in Europe, rather than further inflationary pressures or a significant upward pressure in global aluminium and steel prices.The European steel industry directly employs 326,500 people and indirectly supports up to 2.6 million jobs and generates approximately €132 billion in gross added value.

Germany employs up to a quarter of all European steel industry workers, followed by Italy (9.3%) and France (8%). However, due to China’s exponential growth in this industry, the market share of the European steel production has steadily declined in recent decades. In terms of the production of crude steel by region in 2021, the share of the European Union was only 7%. The European aluminium industry directly employs approximately 230,000 people and indirectly supports up to 1 million jobs. There are over 600 aluminium plants in Europe. Also in this regard, European production as a percentage of global aluminium production is relatively low, as European countries have been met demand through imports from abroad.

Therefore, a problem with competitiveness was already present for the European steel and aluminium industries even before this gas and electricity crisis occurred.I don’t think European companies’ loss of output can significantly increase aluminium and steel prices on international markets, since other countries can fill the hole.

But the job losses and the need for government interventions in the form of unemployment benefits or company bailouts could further harm the Euro Area’s economy and raise the cost of debt.”

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