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Metal: Higher energy costs curtail some European capacities, lead to uptick in base metal prices

ICICIdirect Research 18 Aug 2022 DISCLAIMER

What's Buzzing: 

Surging energy costs have induced temporary shutdowns of smelters in European regions thereby supporting the recent uptick in base metal prices. 

Context: 

On the back of supply constraints from the European region, during the last one month, zinc prices have rallied ~21% to ~US$3644/tonne. Furthermore, during this period, lead and copper prices have witnessed an uptick of ~11% each. After the recent rise, currently lead prices are hovering at US$2174/tonne while copper prices are hovering at US$7972/tonne. Aluminium prices have also seen an uptick of ~3% over the last one month and are currently trading at US$2391/tonne. 

Our Perspective: 

Over the last one-month, zinc witnessed the sharpest uptick due to capacity curtailment at some key European zinc smelters. Skyrocketing power prices have spurred suspensions and cutbacks by zinc smelters throughout the European region. Nyrstar, a global zinc and lead player, is planning to put its zinc smelting operations in Budel in the Netherlands on care and maintenance from September 1, 2022. Budel is one of Europe’s largest zinc smelters, with a nameplate capacity of 315000 tonnes per annum (~2.5% of world production but already operating at reduced capacity since last year). Earlier, in October 2021, Nyrstar cut production by up to 50% at its three European zinc smelters viz. Budel, Balen (in Belgium) and Auby (in France) due to soaring electricity cost. Going forward, Nyrstar has indicated while Budel will be put under care and maintenance, Balen and Auby will continue to operate at the curtailed production levels announced last year. In the aluminium space, hydro majority owned Slovalco has decided to close the primary aluminium production at its plant. The Slovalco smelter, which is currently running at 60% of its 175000 tonne annual capacity, is likely to commence closure process shortly. This is likely to be completed by September 2022. The primary production lines at Slovalco will be mothballed and may resume operations at a later stage if the market and framework conditions allow. Hydro also said production at another aluminium plant in Norway would be impacted by a strike starting in August 2022, adding to the strain on supplies. Aluminium prices have only seen a limited uptick due to rising Chinese aluminium exports. However, going forward, over the medium term, aluminium prices are likely to witness traction as it is highly power intensive to produce aluminium while the aluminium market was in deficit in CY21 and is also likely to continue to be in deficit in CY22E.

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