European Aluminum Industry Faces Existential Threats
The European aluminum manufacturing industry is under attack from two short- and medium-term threats, both of which have the potential to significantly impact aluminum consumers across the region.
Threat #1: Potential Russian Aluminum Ban, Aluminum Manufacturing Shortage
The first threat is the widely debated possibility of the EU banning Russian aluminum. While the UK has already banned imports of Russian primary and semi-finished aluminum, the EU has left it up to member states and their consuming industries to self-sanction. According to a recent Reuters article, this resulted in a sharp decline in volumes starting in 2022, with imports dropping from 19% in 2018 to just 8% in 2023.
While the Middle East remains the largest supplier to the region, it would struggle to fill the gap left by a Russian ban. Europe also has some idled aluminum manufacturing capacity. However, producers remain hesitant to bring it back online as it’s uneconomical to run them at current prices.
A Russian ban would immediately spike physical delivery premiums as consumers scramble for non-Russian alternatives. It would also cast doubt on the validity of the LME price, as over 90% of the metal on the exchange is of Russian origin. While the EU continues to downplay an outright ban, the risk and repercussions remain significant.
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Threat #2: The Carbon Border Adjustment Mechanism (CBAM)
The second threat, and one that is perhaps even more serious, is the upcoming implementation of the Carbon Border Adjustment Mechanism (CBAM). This is a carbon tariff on carbon-intensive products, which includes aluminum, imported into the European Union. It currently remains set to take effect in 2026. But unlike the Russian ban, this threat has the backing of both politicians and aluminum producers, who see it as an integral part of Europe’s efforts to decarbonize its economies.
Europe is not alone in its pursuit of carbon taxes on imports, but it is further ahead than most other major economies. Companies are already repositioning their supply chains to accommodate the impending costs. Some recently began directing supplies to producers with low or zero carbon footprints, such as those based on hydroelectric power. Others began switching to suppliers using scrap aluminum instead of primary aluminum, as scrap has a significantly lower carbon footprint.
The market is already responding to the rising demand for aluminum scrap, with prices firming and scrap consumption increasing rapidly. However, there is a real possibility that scrap-based semi-finished aluminum will eventually cost more to produce than the primary route. Additionally, market pressures on aluminum manufacturing companies to appear green could force consumers to absorb these cost increases.
This combination of the carbon tax and market pressure presents major challenges for countries like India, which have limited domestic scrap supplies and rely heavily on coal-fired power generation for aluminum manufacturing.
For Europe, the cost implications are clear. Whether it’s carbon taxes, reduced supply options, or both, a price increase is highly likely when demand begins to recover. As the CBAM deadline approaches, Europe’s aluminum prices could decouple from the rest of the world. This would be similar to what happened with steel and aluminum prices in the U.S. after the Trump administration’s Section 232 tariffs.
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