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Energy costs for fan fire sky-high under aluminum and zinc prices

Aluminum blocks are seen at the Wagner automotive industry in Gradacac, Bosnia and Herzegovina on February 8, 2022. REUTERS/Dado Ruvic/Illustration

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LONDON, Aug 12 (Reuters) – Slow economic growth is weighing on industrial metals prices but zinc and aluminum are likely to prevail if sky-high energy prices force European smelters to cut output further, leading to bigger deficits.

Metals prices, including copper, aluminum and zinc, have fallen between 20% and 50% from record highs in March, as rising interest rates tip the world toward recession and weak demand for metals.

But the price of energy used by smelters has risen, particularly in Europe, where Russia has less Russian gas and oil after its invasion of Ukraine, and further price rises are expected in the winter. ,

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The smelting of aluminum used in the transportation, packaging and construction industries and the zinc used to galvanize steel require large amounts of electricity.

Between August 2021, when energy prices first started to rocket, and early March, aluminum prices rose by 60% and zinc by 65%.

Glencore ( GLEN.L ), the biggest zinc producer in Europe, recently said high energy prices made production “very challenging”. In the first half of this year, Glencore produced 350,900 tonnes of zinc in Europe.

Energy now accounts for about 80% of the cost of producing aluminum and zinc in Europe, up from historical averages of 40% for aluminum and 50% for zinc, analysts at Macquarie said.

“Aluminum looks fundamentally good to us,” said Macquarie analyst Marcus Garvey.

Smelter closures in Europe could cut aluminum capacity by 750,000 tonnes and zinc production by 150,000 tonnes this winter, on top of cuts of around 800,000 tonnes for aluminum and 138,000 tonnes for zinc, as fuel prices have risen since the start of 2020.

Additional cuts, which Macquarie estimates this year at 800,000 tonnes in the 70 million tonne aluminum market and 200,000 tonnes in the 14 million tonne zinc market, could worsen the shortfall.

“It’s probably just a matter of time before zinc rallies again,” said Sucden analyst Geordie Wilkes, pointing to a disconnect between falling metal prices and rising gas and electricity costs.

Gas prices are skyrocketing in Europe. Zinc and aluminum lag behind.

Stockpiles of both metals are low, adding to supply fears.

Aluminum stocks in the London Metal Exchange (LME) warehouse system were less than 300,000 tonnes from around 1.3 million tonnes a year ago.

LME zinc stocks have fallen to around 75,000 tonnes from 240,000 tonnes a year ago – and about a third are already scheduled for delivery.

However, analysts said a sharp economic downturn in Europe and the United States later this year would reduce demand for the metals, potentially offsetting supply cuts and reducing their impact on prices.

Higher energy prices – or even energy rationing in Europe in winter – could curtail demand.

“Manufacturers who consume metals are also subject to sanctions, which could cause a shock to demand that completely offsets or drowns out the closure to supply,” analysts at JP Morgan said.

Less and less aluminum and zinc are available in the London Metal Exchange warehouse system.
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Report by Peter Hobson; Edited by Pratima Desai and Elaine Hardcastle

Our criteria: Thomson Reuters Trust Principles.

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