EU metal industry takes stock of high energy costs

Europe's metal industry is taking stock of surging energy costs, with some market participants unperturbed but others implementing or considering output cuts and bracing for a challenging fourth quarter as power prices show little sign of dropping in the near term.

As of yesterday, the Dutch TTF front-month gas market had risen to around €73.750/MWh from around €41.975/MWh at the beginning of August, while the UK NBP front-month market had risen to 186.25p/th from 106.72p/th over the same period. The steep hikes are underpinned by a combination of factors including rising global demand as economies bounce back from Covid-19 lockdowns, heavier-than-usual summer maintenance at North Sea gas platforms and reduced imports of LNG amid unrelenting global competition for cargoes. Furthermore, surging fuel costs have meant that some gas-fired power generation has been slower to rise since August — German gas-fired generation is on course for its fifth month of year-on-year declines, with output averaging 4.7GW, against 7.4GW in all of September 2020.

Meanwhile in the power market, the UK over-the-counter (OTC) base-load day-ahead price stood at £173/MWh (€201.50/MWh) yesterday, down following sharp spikes last week but still up from £113/MWh at the start of August. The German base-load day-ahead price has risen to €152/MWh from €98/MWh over the same period. Power prices are also being supported by other elements, including unseasonably slow wind speeds in September and a fire last week that has knocked out the 2GW IFA interconnector between the UK and France until 13 October.

The rise in energy costs has been so rapid that many metals market participants and manufacturers are still taking stock of the situation — voicing concern but not taking any drastic action as yet. Several market participants told Argus that they are monitoring the situation but so far do not see any major adjustments being made, either to their own operations or those of companies with whom they do business.

A German market participant confirmed that conversion costs for producing ferro-alloys have risen, but said that higher energy costs are only one of the factors at play. For ferro-molybdenum, increased energy costs are "primarily driving the costs for the reducing agents [such as ferro-silicon and aluminium]" but high molybdenum oxide prices relative to ferro-molybdenum prices are also playing a major role in driving the market in the near term, he said.

So far, Europe's silicon and aluminium sectors have been most acutely affected. Last week, Spain's Ferroglobe idled a silicon metal furnace at its Sabon plant in Galicia, in part because of high electricity costs. It does not plan to suspend any other operations, but it is being squeezed and the increased costs are being passed downstream, according to a source close to the company. European silicon metal prices are already surging because of Chinese production cuts, and this additional tightening of regional supply is only likely to add to the upward momentum.

In the aluminium market, producers are voicing concerns about the rising cost of gas for their furnaces and their other power costs — particularly as they are also being squeezed by sharp price hikes for silicon, magnesium and scrap. On 17 September, prices for aluminium wheels scrap jumped to £1,700-1,750/t delivered to UK smelters, up from £1,550-1,650/t a week earlier. Old rolled scrap rose to £1,050-1,100/t from £1,000-1,100/t, and commercial turnings rose to £900-950/t from £850-950/t.

Some UK aluminium suppliers have said they are considering stoppages, but as yet there are no indications that they plan to go ahead with them. That said, they are unlikely to be operating at full capacity.

On the steel side, some UK plants are having to suspend operations because of "extortionate" energy costs, industry association UK Steel warned last week. "While prices have risen across Europe, wholesale prices have quadrupled in the UK and merely tripled in Germany, when accounting for carbon costs," director-general Gareth Stace said. "This exacerbated the already grossly unequal electricity price disparity between UK steelmakers and our European competitors." The situation is increasingly urgent, with spot prices exceeding £2,000/MWh and winter approaching, he added.

Firm 4Q outlook for energy costs

Metal market participants are bracing for the likely continuation of high energy costs for the remainder of this year, based on forward curves and fundamentals.

Uncertainty about fourth-quarter gas availability remains high, with European gas stocks still 22 percentage points lower than a year ago and little clarity about when Russian imports through the Nord Stream 2 pipeline will begin, as a number of regulatory hurdles remain. Even after Nord Stream 2 starts up, it may not bring additional gas to Europe as Russian state-controlled Gazprom could use the link to redirect flows from other routes. In addition, strong global competition for LNG means that European buyers would need to pay a premium to attract flexible cargoes to Europe.

There is limited potential to bring more coal-fired power generation on line, partly because there is less capacity available in Europe after various closures, but also because gas-to-coal switching price levels were passed some time ago. The unprecedented premium of TTF gas prices to coal-switching levels and the size of winter clean dark spreads suggests that Europe's capacity to balance winter power fundamentals with coal has already reached its limit, with the market now signalling that other non-coal related supply and demand responses will be needed if prices are to soften.

Soaring day-ahead power prices mean that the whole German coal fleet — from the lowest 30pc-efficient units to the highest 46pc-efficient plants — have theoretically been profitable to run since 10 September. As a result, German coal-fired generation has averaged around 8.1GW this month — representing around 69pc of available capacity — up from 5.5GW a year earlier and 3.2GW last month.

The greatest unknown is, of course, the weather. European temperatures are above average for the time of year and are expected to remain so in the very near term. If temperatures are higher than expected in the autumn, energy consumption will drop and allow for more gas to be put into storage, potentially softening the pricing outlook.

Conversely, if the winter brings unusually low temperatures, this could encourage some gas-to-oil switching for power generation and industrial use — also pushing up oil prices and related costs. US bank Goldman Sachs estimates that if winter temperatures are below average, European and global LNG markets can manage through gas-to-coal switching and higher supply, but said that gas inventories are so tight that there is a risk that "these adjustments would be insufficient to prevent a stock-out in gas inventories by the end of winter".

The US' National Oceanic and Atmospheric Administration forecasts a 79pc probability of a La Nina weather event in November-January. If this materialises, it would greatly increase the likelihood of cold weather in Asia-Pacific this winter, increasing regional demand for gas and LNG and further supporting prices.

By Ellie Saklatvala

Power prices volatile but trending higher