Europe’s energy crisis battles with base metal demand for center stage:
Soaring energy prices, particularly in Europe, have dominated headlines globally and have had significant impacts on base metal prices, both on the London Metal Exchange and in physical spot premiums
October 20, 2022, By Alice Mason, Yasemin Esmen, Callum Perry
But aluminium and zinc have continued to react differently to the energy crisis over the last few months, with the demand story for aluminium outweighing all other factors. Energy prices have recently fallen slightly with the benchmark Natural Gas EU Dutch Title Transfer Facility (TTF) price at €145.15/Megawatt Hour on October 14, its lowest since July 1. This compares with a peak price of €339.20/MWh on August 26. Despite this decline, fears within the market remain of further potential supply disruption, particularly following the recent explosions at the Nord Stream Pipelines.
Zinc But for zinc, the energy crisis has taken center stage, with premiums rising to fresh record highs amid persistent supply fears. Zinc markets were already forecast to be tight throughout 2022 due to production disruptions at the end of 2021. Following production cuts, some large trading houses were forced to turn to LME warehouse stocks, the so-called “market of last resort” to fulfill contractual agreements and support demand within the region.LME warehouse stocks for the galvanizing metal have decreased by 74% over the course of 2022, from 199,325 tonnes globally at the beginning of the year to just 51,925 tonnes as of October 13. Recent announcements of production curtailments by both Glencore and Nyrstar have only further heightened supply concerns, particularly for Europe.“The situation is much tense now,” one zinc trader said, adding that, “there aren’t LME stocks to fall back on now, so the market will feel any shortage.”Fastmarkets research forecast that the global zinc market will record a supply deficit of 184,000 tonnes in 2022. For the European market, sentiment is split over the apparent “race to the bottom” between supply and demand cuts, with price indications significantly diverging. Right now, supply constraints dominate the physical market spot premiums, which are currently holding at record-high levels. Fastmarkets assessed the zinc SHG min 99.995% ingot premium, dp fca Rotterdam, and the zinc SHG min 99.995% ingot premium, dp fca Antwerp at $500-550 per tonne on Tuesday, October 18. A similar picture has emerged within the United States. Although power has not been an issue in the US, which relies on natural gas and nuclear power for its industrial energy needs, the premium for special high-grade zinc ingots has more than doubled in the past year, rising from 15-18 cents per lb on October 12, 2021, to 35-39 cents per lb on October 18, 2022. This increase in the premium was caused by continued tightness in the availability of the material. The main culprit behind this tightness was transportation bottlenecks due to the limited availability of containers, shippers, and truck drivers, as well as long wait times at ports and other transportation hubs. After peaking at 38-50 cents per lb in June, the premium for the SHG material has since fallen, reaching relative stability in mid-August. Since then, it has kept within that approximate range. Participants in the US market fear that any further production cuts within Europe will cause the material to become very tight in Europe, which will also have psychological spill-over effects in the US and cause premiums to increase, one US-based trader source said.“It affects us more psychologically than anything else,” he said, adding that North American countries do not have the same energy restrictions as in Europe, with the US using nuclear power or natural gas, Canada employing hydropower, and Mexico using a mix of nuclear and fossil fuels.“If production goes down in Europe, then [European consumers of zinc] will scramble to find the material elsewhere and will likely turn to Asia – and then it will affect [the US supply] somehow,” the US trader source added. “But it will not affect all of our supply, because most of our production comes from Canada or Mexico.”
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