Is Energy-Intensive Metals Production in Europe Coming to an End?

The extremely high natural gas prices this past winter have left many Europeans reeling. At the time, the increased costs were blamed on a shortage of Russian supplies. Today, many are wondering if the restrictions on gas exports by Russia were intentional. A reminder to Europeans of their vulnerability prior to the invasion of Ukraine, perhaps? It’s debatable. Still, the shuttering of smelters across the continent has had a dramatic effect on metals production. As we’ll see, this may only be a small sign of things to come.

Ending Europe’s Decades-Long Reliance on Russia

There’s no denying that Europe has been perilously reliant on its increasingly aggressive neighbor these past few decades. If anything, the war in Ukraine has only served to further emphasize this weakness. In fact, the realization proved so alarming that there is now a unanimous agreement to wean the continent off Russian oil, natural gas, and coal.
The UK made the first move, stating that it would cease all Russian energy imports by year’s end. It seems like a bold stance at first glance. However, it’s worth noting that the UK imports relatively little from Russia. In fact, it gets the majority of its gas and oil from the North Sea and Norwegian pipelines.
The rest of Europe doesn’t enjoy such luxuries. Therefore, the consequences of abandoning Russian energy sources are much more significant. Not surprisingly, views on the pace of the change vary widely across the continent. Countries like France, with Europe’s largest store of nuclear power, have pushed for an early embargo on Russian imports. Countries like Germany and Italy, meanwhile, have been much less gung-ho.
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 Russian goods could be cut off at any time.

The Search for New Sources of Coal and Oil

Whatever the timeline, it’s possible that Europe will soon enact a total embargo on Russian goods and services. This is only made more likely by the increasing reports of atrocities committed by Russian troops in previously-occupied areas of Ukraine. Already, active steps are being taken to make up for lost coal and oil.
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By all accounts, the region will find it much easier to replace coal imports. Reports show that the USA, South Africa, Indonesia, and Australia could all increase exports to help make up for lost supply. Crude oil, on the other hand, would present a challenge. Specifically, it would be hard to locate the right types of crude and get the supplies to the refineries that need it.
There is also the question of refinery locations. Indeed, Germany is not the only nation to position its major refineries near the Russia-Europe pipelines. Multiple countries built their entire refining infrastructure based upon heavy use of Russian and Siberian crude.

Russian natural gas piplines are key to European metals production.

Difficulties for European Natural Gas Production

Most experts agree that Europe’s biggest challenge will be substituting Russian natural gas supplies. This will prove particularly true during the winter months, when it is used for both industrial power production and home heating. Estimates indicate that an outright embargo would result in a loss of some 10% of primary energy demand. This, in turn, may force rationing among larger users.
Though chemicals (at 15%) account for the majority of natural gas usage, metals production would be close behind. And since Russian natural gas is cheap to supply via established pipelines, all other sources are going to be more expensive. The fact that the world is currently experiencing a severe shortage of LNG carriers isn’t helping. This would limit the rate at which alternative suppliers could deliver gas even if it were plentiful (which it isn’t).
To make matters worse, much of existing LNG production is already contracted to Asian markets. Moreover, Europe itself has limited scope for degasification. Even if shipments did increase, it would be some time before the continent could process it all.

Metals Production in a Post-Embargo Europe

All in all, it’s pretty much inevitable that Europe will experience a prolonged period of high energy prices and constrained natural gas supplies. This raises questions as to how viable energy-intensive industries like metal smelting, refining, and EAF steelmaking will be in the coming years.
At the end of March, Capital Economics predicted that crude oil prices would remain around $100 per barrel and natural gas at €120 per MWh through 2022. This week, those estimates increased to $130 per barrel and €150 per MWh. To top it off, the firm stressed that these prices will likely extend well into 2023.
It’s a sobering reminder of just how seriously the situation is deteriorating.
Could winter price spikes cause output reductions or closures at multiple aluminum and zinc smelters? How will prolonged periods of high energy costs affect the investment and profitability of those that remain? How will this all affect global metals production? These may be big questions, but there are clear answers just yet.
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