Europe’s aluminum woes

The energy sector in the euro area is now in the doldrums: after growing 0.4% YoY in July, its output dropped 2.9% YoY in the following month[1] (see Fig. 1). Fossil fuels continue to be the dominant energy source in Europe, with the share of coal-fired generation reaching its highest level since January 2019[2] (see Fig. 2). This calls into question the climate agenda with its de-carbonization targets, which might not be achieved as planned.

Europe’s aluminum industry, which is essential to the accelerated rollout of renewable energy in the region, is under immense cost pressure, more so than any other industry. With electricity prices skyrocketing (see Fig. 3), 50% of the aluminum and zinc production capacity across the EU (about 1 million tonnes) has been forced offline,[3] while consumers have to step up aluminum imports from Russia and China.[4] Against this backdrop, a potential ban on Russian aluminum from being traded on the London Metal Exchange, which was announced this October,[5] will cause even more turmoil in the region, as buyers will have to look for new supply sources and face even higher logistics costs.

As the energy crisis deepens, creeping more and more into aluminum territory, the future of Europe’s solar and battery cell manufacturing becomes less certain: 35 GW of solar PV manufacturing and more than 2,000 GWh of battery cell manufacturing capacity could be mothballed unless power prices quickly return to normal levels.[6] Over the first eight months of this year, Europe imported 60.1 GW of modules from China, 127% more than last year’s level,[7] as Chinese products are cheaper to make due to lower power costs and are, therefore, more attractive to buyers. In our previous publications, we mentioned the West’s growing dependence on developing countries, which are rich in metals crucial to the energy transition. Now it appears that this dependence is not just about metals but end products as well.

And while Europe’s energy sector is in malaise, there’s no bright future for either aluminum or renewable energy.