By Andy Home
LONDON: How much would you love your aluminum?
The answer for a growing number of electronics manufacturers, automakers, and packaging companies is as green as it gets.
This growing demand for metal with a low or no carbon footprint is rapidly reshaping the market landscape.
Russia’s Rusal, the world’s largest aluminum producer outside of China, announced last week that it plans to divest its higher-carbon production assets into a new company, leaving its refineries and smelters to low carbon emission in a new brand “AL +”.
Chinese company Hongqiao, the world’s largest private producer, plans to move another million tonnes of smelting capacity from coal-rich Shandong Province to hydroelectric Yunnan to reduce its carbon footprint.
The race to decarbonize the energy-intensive production process of aluminum is on and the world’s largest players are repositioning themselves to adapt to the resulting tectonic changes in the market.
MAKE RUSSIAN SPLITS
Rusal’s carbon split is a reflection of a growing consumer preference for greener aluminum brands such as the company’s ALLOW, which has a carbon footprint five times smaller than the industry average.
But it is also motivated by the imminent prospect of a European carbon tax on imports of industrial products such as aluminum.
The region accounted for 42% of Rusal’s sales in the first quarter of this year and the company warned of a “one-size-fits-all” Carbon Frontier Adjustment Mechanism (CBAM) in an October submission. to the European Commission.
Rusal has instead suggested a waiver of existing EU tariffs on aluminum for low-carbon metals, but the political momentum seems to be going in the opposite direction, with growing support in the European Union for a carbon tax d ‘a kind.
The shape and timing of any aluminum and carbon wall remains tied to the labyrinthine decision-making process of the European Commission.
The European Aluminum Association (EAA), which represents more than 80 companies in the region, has also spoken out against the proposed CBAM and is leading intense rearguard action on the devilish details of the proposals.
However, carbon differentiation is happening sooner or later in Europe and the Rusal split anticipates this reality.
The renamed “AL +” with its new Siberian hydroelectric smelters will direct green metal flows to Europe and other export markets.
The oldest assets, which are to be the subject of a long-term modernization program, “will focus on the development of the domestic market and its growth potential,” Rusal said.
The green consumer revolution has obviously not yet arrived in Russia.
THE RACE IN YUNNAN
Rusal has the enormous ecological advantage of being largely a hydroelectric aluminum producer.
China’s Hongqiao started at the opposite end of the carbon spectrum, producing more than six million tonnes each year from smelters powered by captive coal generators in Shandong Province.
It has already dismantled two million tons of capacity and moved it to Yunnan province, as part of a larger rush for hydropower by a Chinese smelter sector that is mostly coal-based.
Planned transfer of an additional million tonnes is a sign of construction pressure on the sector following President Xi Jinping’s promise that Chinese coal consumption will peak during the current five-year plan until 2025 .
It should be noted that Hongqiao migration has an operational price.
He trades his energy security against the vagaries of the Yunnan electricity grid.
Low rainfall in the province is already affecting operating rates at aluminum smelters, and other issues could arise as the regional government tries to meet its energy consumption targets.
Yet Hongqiao clearly decided that the price was worth it if he wanted to reap the rewards of being a green aluminum and hydroelectric producer.
The political decarbonization mandates in Europe and China are accelerating the trend of consumers towards greener aluminum products.
They also force a market price burst between low and high carbon metals.
The resulting premium for green metal has so far only appeared in the financial plumbing market in the form of financing tied to sustainability indicators.
Rusal, for example, signed a $ 200 million pre-export financing facility in February with an interest rate “subject to a discount or a sustainability premium” depending on whether the company meets its sustainable performance targets.
Trafigura trading house announced last September a $ 500 million low carbon aluminum financing facility at a reduced rate, allowing the payment of a notional premium to the producer.
Stock market financiers, a key part of the aluminum market ecosystem, can already trade a green premium in this way.
So far, no low carbon premium has been observed in the physical transaction chain.
But that may also be about to change.
Pricing agencies such as S&P Global Platts and Fastmarkets have launched new green aluminum premium assessments this year.
They clearly predict that the premium for low carbon aluminum will sooner or later spill out from the financial sector into the physical supply chain.
Rusal and Hongqiao, in their different ways, are bracing for exactly such an outcome, clearly differentiating part of their production as a low-carbon product.
Fastmarkets is currently pricing premiums for European low carbon bullion and products at a nominal $ 0 and $ 10 to $ 15 per tonne against the London Metal Exchange spot prices respectively.
Given the current pace of decarbonization change in the market, these valued premiums will not stay at these nominal levels for too long.