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European Commission

MEMO

Brussels, 6 November 2013

The state of aluminium production in Europe

This memo presents the main findings of the report issued today which analyses the burden of regulations imposed on a sample of 11 EU aluminium plants, the Assessment of the Cumulative Cost Impact (CCA) for the Aluminium Industry. The report, created by the Centre for European Policy Studies (CEPS) on behalf of the European Commission, analyses EU regulations in the context of the aluminium market and also describes the industry's economics, strategic importance and close links to many downstream industrial sectors such as transport, construction, engineering and packaging. The report, however, does not assess the costs and the benefits generated by the relevant EU legislation and thus it differs from a full-fledged “fitness check”, in so far that an assessment of the appropriateness, effectiveness and efficiency of the relevant legislation falls is not taken into account.

Demand for aluminium in the EU has recovered well since the onset of the crisis and the report reveals in no uncertain terms that with the right policy mix the aluminium industry could have a bright future in Europe. But the report reveals that the current EU regulatory burden can have a negative impact on the industry's international competitiveness. At the same time the cost deriving from EU rules is not the sole cause of the loss of competitiveness of the aluminium industry in the EU.

Conclusions derived from report

The report is based on hard-data collected from 11 EU plant in the period ranging from 2002 to 2012. It does not include a prognosis of the future of the industry and refrains from making policy recommendations. However, the following conclusions can be drawn from the study:

  1. It is possible to produce aluminium at competitive level in the EU, but

  2. Primary aluminium producers that buy electricity in the current market are at risk of not being competitive since today's electricity prices would reduce their margins to an unsustainable level.

For some companies the existing long-term energy contracts will expire in the coming years, these producers will have to buy electricity on the market at spot prices.

  1. Therefore without an improvement in the power market conditions or without EU or national policy addressing these issues, more producers might be at risk of closing down.

EU primary aluminium plants vary widely in competitiveness

The table below summarises one scenario of cumulative costs of EU regulations for the EU's aluminium industry1.

Cumulative regulatory costs for EU primary aluminium production: Intermediate scenario (2012, €/tonne)

 Policy area

 

 Cost typology

Full Sample

Subsample 1

Subsample 2

ETS (pass-on rate = 0.8)

Indirect

59.99

0.00

90.50

Sub-Total

59.99

0.00

90.50

Energy2

Transmission

26.24

0.00

48.67

RES

27.29

5.30

46.09

Sub-Total

53.53

5.30

94.76

Environment (65% of costs due to EU rules)

Direct

Investment

3.70

3.70

3.70

Financial

1.70

1.70

1.70

Operating

11.10

11.10

11.10

Administrative

0.38

0.38

0.38

Sub-Total

16.88

16.88

16.88

Product

Administrative – REACH

1.34

1.34

1.34

Sub-Total

1.34

1.34

1.34

 

Total

131.73

23.52

203.47

Source: CEPS, Assessment of the Cumulative Cost Impact for the Aluminium Industry

The scenario presented in the table assumes that 80% of the cost of the EU's Emission Trading Scheme (ETS) is passed on from the producer to the consumer of energy, and that 65% of the cost caused by environmental regulations is due to EU rather than national or regional rules.

The main cause of the difference in cumulative regulatory burdens for the different samples used in the table is that Subsample 1 smelters procure energy via old long-term energy contracts or through self-generation while Subsample 2 smelters buy electricity on the market.

Consequently, Subsample 1 plants do not have to bear the indirect cost of the ETS through energy prices if they have self-generation or long-term energy contracts. Furthermore, they avoid certain other costs as well due to this sourcing. In contrast, those plants in Subsample 2 bear a burden of almost 95€ per tonne.

Three main conclusions can be drawn from the cumulative cost impact:

  • Cumulative regulatory costs are high: in this scenario €131 per tonne, and - depending on the assumptions used for the ETS pass-on rate and the share of environmental regulatory cost attributable to the EU - ranging from €114 per tonne to €149 per tonne.

  • Electricity is one of the key factors affecting the competitiveness of the EU primary aluminium industry, as it represents over a third of total production costs. Consequently, EU and MS policies affecting the energy price have the greatest impact. 45% come from the increase in energy prices due to the effects of the ETS. EU environmental regulations are responsible for 13% of the burden.

  • The regulatory burden imposed on producers in Subsample 1 is strikingly different from the one imposed on Subsample 2: €23 per tonne vs. €203 per tonne; this has a major impact on their relative performance. Aluminium smelters in Subsample 1 are among the most competitive in the world, while those in Subsample 2 figure among the least competitive, as shown in the graph below.

Business costs per tonne of aluminium ($2012)

Source: CEPS, Assessment of the Cumulative Cost Impact for the Aluminium Industry

The magnitude of the regulatory burden placed on producers in Subsample 2 is clearly demonstrated by the table below, where it is presented as a percentage of different financial indicators. The table also shows that in 2009 and in 2012 the industry would have lost profitability even without any regulatory costs.

The impact of cumulative regulatory costs (2002-2012, intermediate scenario for subsample 2)3

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Price-Cost Margin

103%

235%

111%

100%

39%

61%

587%

-92%

344%

-3753%

-71%

EBITDA

48%

70%

54%

50%

27%

35%

74%

987%

65%

79%

-568%

Price-Raw Materials

16%

18%

17%

16%

11%

12%

14%

19%

14%

13%

14%

Production costs

14%

15%

15%

13%

11%

11%

10%

12%

11%

10%

9%

Market price

12%

14%

13%

12%

9%

9%

10%

14%

11%

10%

10%

Source: CEPS, Assessment of the Cumulative Cost Impact for the Aluminium Industry

The different performance of the two subgroups has also a qualitative component. The production of aluminium is a long term business: plants are active for decades. Therefore, investors are reluctant to commit themselves to build a plant if they know that they would have to buy energy on the market at a variable and unpredictable price. As electricity is a major cost, the stability of its price is as important as its level. Primary smelters built in the past had access to a predictably priced electricity source, and the disappearance of this factor has been a major factor in plant closures in the EU over the past decade.

Importance of the EU's aluminium industry

It is important to maintain a significant capacity of primary aluminium production in the EU for the following reasons:

  • World demand is increasing and secondary production, i.e. recycling, is not able to satisfy demand. A high share of existing aluminium will not be available for recycling for decades as it is currently in long term use, for example in buildings and vehicles.

  • Primary production is often connected to the specialized, high-tech use of aluminium downstream (e.g. in the mechanical industry). By losing it there is the risk of losing the whole value-chain.

  • The shift of production abroad could lead to higher global emissions as foreign producers can often be less energy efficient than EU producers.

Aluminium imports to the EU are increasing, EEA MS accounting for 45% of share

The following graph, based on data from the European Aluminium Association (EAA) clearly shows that in 2013, for the first time, imports accounted for more than half of the EU's consumption of aluminium. The loss of competitiveness depicted in today's report, due in good part to EU regulatory costs, is clearly the source of this trend.

Source: EAA

1 :

A full quantitative cumulative cost assessment was possible only for primary smelters (plants which extract aluminium from its basic source material alumina), because of low/uneven response rate to the survey on which the report is based and also because of confidentiality issues in the case of secondary (recycling) and downstream production. For the latter the study performed a qualitative assessment, which concluded that the burden they face from EU regulations is considerably inferior to that of primary smelters. This is due to the fact that the regulatory burden is mainly shouldered through energy prices, and secondary and downstream production are much less energy intensive.

2 :

Electricity transmission costs and Member States RES support costs are not EU regulatory costs; they are costs that are incurred at Member States level.

3 :

On negative margins.


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