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Unequal Loads – Why China Must Include Aluminium In Its ETS

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Unequal Loads – Why China Must Include Aluminium In Its ETS

Electricity has long been the largest single cost associated with the production of primary aluminium. Though understood in theory for many years, the process of smelting aluminium was not economically viable prior to the advent and availability of large-scale electrical production. Even if energy requirements have fallen over the years due to advances in technology, electrical costs still account for over 40% of the total cost of producing raw aluminium.

As a result of the substantial effect electrical costs have upon aluminium production, even the smallest increase in electrical prices can have a tremendous negative impact on the economic viability of an operation. Adding a drop in the market price of aluminium is often all that is needed to erase a razor-thin margin and plunge a smelter into the red.

A recent OECD report titled Measuring distortions in international markets: the aluminium value chain between the years of 2013 and 2017, shows the unequal playing field that smelters have to face. According to the organization, over the past several years China has been significantly subsidizing electrical costs – amongst other generous aids – for its aluminium smelters. The total sum of these market-distorting mechanisms is found to be in excess of US$70 billion, 85 percent of which was distributed to a quintet of mainly upstream producers (such as Hongqiao, Henan Shehuo, SPIC, Chalco). By contrast, European smelters received very little support in the same timeframe. As Jehan Sauvage, Policy Analyst at the OECD and lead author of the report points out, rules promulgated by the EU and the EFTA make state aid to smelters in the form of inexpensive power a dicey proposition.

Commenting on the OECD report, Alcoa CEO Roy Harvey agreed, “That playing field simply isn’t level,” Harvey said. “And that in turn means that you’re getting this sucking sound of productive capacity, and now semi-fabricated products, into China. You’re pulling more and more of that primary demand back into China, and it’s only a gain for the Chinese.” The European Aluminium Association echoed that same sentiment, and has identified the “unlevel playing field on GHG emissions” as one of the industry’s main challenges in the years ahead.

While Chinese aluminium smelters enjoy the subsidies passed on to them by politicians in Beijing, their European rivals cannot expect such largesse. In Sauvage’s telling, “a few years back, Italy offered subsidised electricity to what was once an Alcoa smelter in Sardinia. This prompted an investigation by the European Commission, which eventually forced Alcoa to reimburse the Italian State for what was deemed ‘illegal state aid’ (i.e. against EU rules). On the other hand, “the R&D subsidies that the Norwegian Government provided recently to Norsk Hydro’s Karmoy demonstration plant have had to be reviewed and approved by the EFTA Surveillance Authority, which has concluded that these were not trade distorting”, Sauvage concluded.

While there is ample reason for concern now, these disparities are only set to worsen in the coming years, as the regulatory distance between Europe and China widens. Indeed, climate goals and other forward-looking policies are now set to add further to the burden of European smelters, as regulatory costs are slated to increase sharply due to the implementation of the European Union Emissions Trading System (EU ETS).

EU outlook especially bleak

Established 14 years ago, the EU ETS is a “cap and trade” system among the 28 member states of the EU (plus Iceland, Norway, and Liechtenstein) to cut greenhouse gases by 21 percent below 2005 levels by next year and 43 percent by 2030. The ETS established an upper limit of GHGs allowed to be emitted by a particular installation, reducing that number as well as the price per tonne as time goes on. For example, allowances cost €5.8/tCO2 in 2017, before jumping to over €23 in February.

Due to the effects of the cap and trade system, Europe’s energy prices have risen dramatically, contributing to the overall burden borne by European aluminium smelters as a result of the entirety of the EU ETS’s regulations. European smelters start the race for profit with a significant handicap in the form of significant business costs of production – according to a CEPS report commissioned by the European Commission, continental smelters pay US$2,041 per metric ton of aluminium smelted, over US$100 per metric ton higher than American smelters, and US$120 per metric ton beyond the average Chinese smelter. Of that cost of production, ETS-linked costs are between €125-160/tonne. For European smelters, regulatory costs can end up costing even as much as 40% of EBITDA (in 2009 and 2012). Put another way, that amounts to around €70 million per year on average in the last implementation phase of the ETS (Phase four, 2020-2030).

Pub Time : 2019-02-15 11:09:28 >> News list
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