Power Issues Constrain Global Aluminum Production Growth

Power issues constrain global aluminum production growth

According to data from the International Aluminum Industry Association (IAI), global aluminum production increased slightly by 2.0% in 2022, down from 2.7% in 2021 and the lowest growth rate since 2019.

In the second half of 2022, there was almost no increase in raw aluminum production. The annual production in December last year was 69 million tons, only 231000 tons higher than the global production in June.

The energy crisis in Europe has dealt a heavy blow to this industry, which is famous for its power consumption. In 2022, European primary aluminum production decreased by 12.5%, which is the main factor leading to a 0.9% decline in production outside of China.

China is a major producer of primary aluminum in the world, with production increasing by 4.0% for the second consecutive year.

But China has also been working hard to solve the power problem, with the recent power rationing problems in aluminum smelters occurring in Yunnan and Sichuan, which are rich in hydropower resources. China's annual production reached a peak of 41.46 million tons in August 2022, and since then, the operating rate has decreased by 600000 tons.

The energy paradox of aluminum is increasingly becoming a focus of attention. The production of a metal that is crucial for building a green power system is increasingly susceptible to fluctuations in power supply.

The annual aluminum production in Western Europe in December was 2.73 million tons, a decrease of 540000 tons compared to December 2021, making it the lowest production of this century.

Last year, the Russia-Ukraine conflict and the resulting soaring electricity prices led to the closure and shutdown of several aluminum smelters.

The energy crisis in Europe has passed its peak. The basic load electricity delivered by Germany in 2024 has decreased from 470 euros per megawatt hour in August to the current 189 euros per megawatt hour.

Some European aluminum production capacity is also recovering. Dunkirk Plant is one of the largest plants in the region, with an annual capacity of 285000 tons. At present, it is restarting to cut 20% of the primary aluminum capacity in the fourth quarter of 2022.

However, for some aluminum plants, it may already be too late.

The only smelter in Slovakia with an annual production capacity of 175000 tons has closed all its main businesses after 70 years of operation.

The Podgoricha aluminum smelter in Montenegro closed its final 60000 tons of raw aluminum production capacity at the end of 2021.

Interestingly, both factories are included in the IAI's Eastern European and Russian categories. The same is true for aluminum smelters in Romania and Slovenia, both of which significantly reduced their production scale last year.

However, production in the region only decreased by 1.4% last year, which is a counterintuitive result unless the closure of these factories is offset by higher production in Russia.

Considering that Russian aluminum has launched a new factory in Taiset in 2022, it is possible, although there has been no recent progress on this project with an annual production of 428500 tons.

China's aluminum production in 2022 reached an annual high of 40.39 million tons, but this data masks significant changes in the production capacity of China's aluminum smelters.

In some provinces, new production capacity has been put into operation and idle production capacity has been restarted, while in others, power restrictions have led to a reduction in aluminum smelter capacity.

The balance shifted from rapid growth in the first half of 2022 to a decline in output in the last few months.

This year, the overall restrictions imposed during the winter energy crisis in 2021 have not been repeated, but the drought in southwest China is affecting the operating rate of aluminum smelters. According to data from the Shanghai metal market, as of the end of 2022, Yunnan, Sichuan, and Guizhou have approximately 2 million tons of production capacity offline.

This situation may not recover until the second quarter, when the rainy season should restore the water level of the depleted reservoir in the region's hydropower system.

There is still a lot of room for production growth in China, and the production capacity limit of 45 million tons has not yet been reached.

However, the situation over the past two years has shown that it is becoming increasingly rare for China to operate with existing capacity for a long time before implementing such or other power rationing measures in various provinces to balance energy loads.

It is worth noting that the drought problem in southwestern China has not prevented aluminum producers from shifting production capacity from coal dominated provinces in search of metals with lower carbon footprints.

Environmental pressure is also becoming a key factor in the restart of smelters in other regions of the world.

Latin America was the fastest-growing aluminum production region last year, with production increasing by 10.7% year-on-year. A key driving factor is the restart of Brazil's Alumar smelter based on a shift towards renewable energy. According to 40% of owners South32, the time required to increase production capacity is longer than planned, which is not surprising as the factory was last operated 7 years ago.

Alcoa, which owns 60% of Alumar's equity, also hopes to restart its smelter in San Cipria, Spain after switching to renewable energy. It has obtained two wind power generation agreements that will meet 75% of the factory's annual energy demand of 228000 tons.

If the Slovak government can implement the EU's carbon compensation framework, even Slovalco may be put back into operation by Norwegian owner Hydro.

However, the pursuit of renewable energy will only exacerbate the core aluminum paradox. As more and more aluminum smelters shift towards green energy, global aluminum production is increasingly dependent on seasonally variable electricity supply.

In addition, seasonality itself is also changing, as global warming brings longer periods of drought and hotter summer heatwaves, which together increase energy use while suppressing power generation.

In the past few years, it has become evident that when a province tries to balance the power grid, China's aluminum smelters and other power intensive industries are the first to be forced to reduce production capacity.

Such regional adjustments have become an important component of the global aluminum production pattern, but they have injected new volatility into the previously slow changing aluminum supply side.