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COLUMN-Aluminium producers' race to go green may fracture market: Andy Home

Fri, 11th Sep 2020 15:13

(The opinions expressed here are those of the author, a
columnist for Reuters.)

* Global aluminium production by energy source: https://tmsnrt.rs/2Fbh0lK

By Andy Home

LONDON, Sept 11 (Reuters) - Tesla is ordering giant
aluminium casting presses for its assembly line in Germany.

The "Gigapress" is the size of a small house and will
replace with a single module around 70 parts that are currently
glued and riveted into the car's chassis.

Aluminium is one of the materials of choice for the electric
vehicle pioneer because of its light weight and strength, which
mean extra mileage and enhanced safety.

Indeed, aluminium is going to be one of the metals critical
to the unfolding green revolution, not just for its role in
transport but also for its use in renewable energy sources,
particularly solar panels.

The problem is that making aluminium can be a
carbon-intensive business. The sector accounts for almost 3% of
global emissions.

The race to produce low carbon aluminium is now on as
producers look to differentiate their product in a shifting
consumer landscape.

But this widening rift between "green" and "black" aluminium
risks fracturing the market's current pricing model because a
"green premium" is not only coming much faster than many
industry players think, it may already be here.

THE ROCKY ROAD TO ZERO

Aluminium smelting is an energy-intensive business, each
producer's carbon footprint is primarily determined by which
power source it is using. Hydro scores low. Coal scores high.
Gas is somewhere in the middle.

The average comes in at around 10 tonnes of carbon per tonne
of aluminium produced but the global range can be anything from
4 to 18 tonnes, according to Antti Koulumies, Vice President for
the aluminium line of equipment supplier Metso Outotec
.

The sector's energy efficiency has deteriorated this century
as ever more of the world's aluminium production has migrated to
China, where coal is the predominant power source, Koulumies
said.

He was speaking at this week's CRU World Aluminium (Virtual)
Conference, where producers lined up in something of a low
carbon beauty parade.

Alvance, the aluminium business of British commodities
tycoon Sanjeev Gupta, is rapidly growing via the acquisition of
low-carbon smelters such as Lochaber in Scotland (hydro) and
Dunkerque in France (nuclear). It's on the lookout for more.

India's Hindalco starts from the disadvantage of
being coal-dependent but is building supplementary solar supply
at its smelters with a target of 100 megawatts by March 2021,
according to managing director Satish Pai. It's a relatively
low-cost way of reducing the carbon count per tonne of metal.

Hongqiao, one of the world's largest producers,
has gone for the very Chinese solution of dismantling two
million tonnes of capacity in Shandong province (coal) and
building a new smelter and "green" aluminium hub in
hydropower-rich Yunnan.

The move will be completed in super-fast time by the end of
Q1 2021, according to Ron Knapp, previously head of the
International Aluminium Institute and now special adviser to
Hongqiao's chairman.

The industry's ultimate goal is carbon neutrality by 2050, a
target that may require redefining the Hall-Heroult smelting
process itself.

ELYSIS, a joint venture between Rio Tinto and Alcoa
is already there, using a process that eliminates all
direct greenhouse gas emissions from smelting. Apple, a
partner in the project, has already made its first purchase,
according to Tolga Egrilmezer, head of Rio's aluminium marketing
division.

However, many producers, particularly those in China, are
going to find the road to zero emissions a long and winding one,
if not impossible.

The emerging split between "green" and "black" aluminium is
only going to widen.

SPLITTING THE MARKET

Despite the rush by (mainly hydro) producers to
differentiate their product, a "green premium" has so far proved
elusive.

That's partly down to a lack of agreement about how exactly
to calculate "green" metal. Low-carbon producers are mutually
wary of each others' methodologies.

More fundamentally, there is not yet sufficient demand to
generate a physical premium.

Western consumer brands such as Apple and Tesla are
relatively well-supplied with low carbon aluminium from Canadian
and European smelters.

Left to market forces, it's uncertain how long it would take
for demand to grow to the point that buyers need to pay a
physical premium to secure supply.

However, it won't be left to market forces.

"Astute and forward-looking policy makers are considering
shifts to government procurement practices in order to value low
CO2 materials (and) green borders," Jean Simard said. Simard is
head of the Aluminium Association of Canada, which gives some
clue as to which policy makers he may have in mind.

But it is the European Union which is leading the way both
by accelerating its carbon reduction strategy and looking at
ways of penalising imports of high carbon products as a way of
preventing "carbon leakage".

SPLITTING THE PRICE

While a "green premium" may not yet have traded in the
physical aluminium market, it is starting to take shape in the
financial market, which is anticipating the forward curve both
of carbon regulation and consumer demand.

Trade house Trafigura has just announced a low carbon
aluminium financing facility of up to $500 million with the
backing of Natixis and Rabobank. Interest will be "at a
preferential" rate, which allows Trafigura to pay low carbon
producers a premium for their product.

The facility will likely also be used to finance inventory.
Aluminium is a metal that has historically carried high stocks,
which are financed via the London Metal Exchange (LME) forward
curve.

Such deals can last just a few months or they can be
structured over years, in which case financiers are now facing a
dilemma.

"Trading houses, which are running the bulk of
cash-and-carry deals, are conscious that high-carbon products
may trade at a discount to their low-carbon peers when these
deals are unwound in 1-2 years," explain analysts at Citi.
("Metals Weekly", Sept. 8, 2020).

As carbon rapidly moves up institutional investors' agenda,
"Western banks may, over time, become more constrained in
financing high-carbon materials", according to Citi.

That differential in stocks financing requirements will be
tradeable on the spot platform the LME is launching next year.
The initiative complements a move towards voluntary reporting of
a metal's environmental foot-print.

It's a neat way of dealing with the complexity of competing
"standards" in a fast-evolving aluminium market. The hope is
that the market itself will standardise the premium for low
carbon metal over time.

But with different regions moving down the carbon-reduction
road at different speeds, it seems unlikely there will be a
single global "green premium" but rather a series of regional
low carbon premiums trading in tandem with existing, traditional
regional premiums.

Aluminium pricing looks set to become a lot more complex.

Trafigura claims it was the first trading house to set up a
low carbon aluminium trading desk in 2019.

It won't be the last.

(Editing by Emelia Sithole-Matarise)

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