Europe’s Energy Crisis Is Hurting Metal Producers In A Big Way

It was only a matter of time, as a fourfold increase in power costs for some heavy consumers, on top of environmental carbon emissions levies, have finally proved too much for some European metals producers.

European power costs squeeze metals producers

Nyrstar, the huge Belgium-based zinc producer, is the first major smelter - but it likely won't be the last - to announce cutbacks. According to Reuters, the group will reduce output by up to 50% from Oct. 13 at its three smelters:  Budel in the Netherlands, Balen in Belgium and Auby in France.

Most heavy users, like Nyrstar, operate on variable power cost depending on the time of day. As such, cutbacks are likely at peak times to manage input costs.

According to a post by S&P Global, Nyrstar's fully electrified zinc smelter in Budel-Dorplein has an annual production capacity of around 300,000 mt, about 2% of global zinc supply. It is one of the largest smelters in Europe. The Balen smelter is one of the world's largest zinc smelters in terms of total production volume, with approximate zinc production of around 200,000 mt/year as well as zinc alloy output of a further 200,000 mt/year.

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The Auby smelter is a mid-scale electrolytic zinc smelter with an annual production capacity of around 172,000 mt. Cutbacks on the proposed scale would have a significant impact on European metal supply. Unsurprisingly, zinc prices moved higher on the news.

Natural gas, coal prices surge

Power prices have been rising all year. The situation, however, has become particularly acute since the summer. Natural gas prices have spiked and coal prices on the spot market have risen strongly.

The shortage of natural gas in Europe has driven the cost increases. Furthermore, it has encouraged power producers to shift to coal, just as global coal prices have surged on the back of output shortfalls in China and India. Those shortfalls have resulted in increased imports by the world's two largest thermal coal consumers.

Steel mills are already imposing power cost increases of up to Euros 50 per ton on long products to cover mostly power-related costs but, to a lesser extent, transport costs within Europe, too. The region is suffering from an acute lack of drivers and transport capacity.

Both production cutbacks and energy-specific surcharges are likely to become an increasing feature of the European metal market this year. They will probably also be a factor into next year, as high electricity, coal and natural gas costs are going to be sustained through the winter season, with little hope that inventory levels will be replenished - and, therefore, easing of prices - before next summer.

By Stuart Burns via AG Metal Miner

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