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How to Profit From the EU's High Energy Costs

Running for the Shelter of My Nearest Smelter

Posted August 30, 2022

The aluminum shortage is coming.

You may have heard about the shortage of cans to use for beer and soda. This has been blamed on pandemic supply chains and people drinking at home. It explains the surge in aluminum prices last year and has abated somewhat this year.

What you may not know is that there will soon be another global shortage of the metal that is used in everything from Ford F-150s to spaceships. And while supply shrinks, demand is increasing because you can’t have an eclectic vehicle or a solar panel without lightweight aluminum.

Energy Hog

The problem is aluminum is an energy hog. To turn bauxite into aluminum requires temperatures of about 1,000 degrees celsius (1,832 fahrenheit) and a tremendous amount of electricity. And as you know, electricity is getting very expensive, is in short supply, and in many places burns coal to produce.

The backstory is that China took over the aluminum business about two decades ago and took the bottom out of pricing by using cheap labor and dirty brown coal. Furthermore, many countries subsidized aluminum production to keep people employed. This means that the price is about the same as it was in 1989.

But as Dylan sings, the times they are a-changin'.  

Now China is hit with the triple whammy of trying to reduce pollution and reduce energy costs all while paying higher wages.  Recently, the Sichuan province shut down all aluminum production during a heat wave to make sure residents had power.  

The high cost of electricity in China, which imports most of its fuel, means the country will have to cut back on aluminum production.

Natty Gas Goes Nuts

Meanwhile in Europe, which has seen the price of electricity rise 10 times, companies are announcing aluminum smelter closures until further notice.

Bloomberg writes: 

Aluminum smelters have been hit particularly hard as it’s one of the most energy-intensive metals to make. If the 65 million ton-a-year aluminum industry was a country, it would rank as the fifth-largest power consumer in the world, and further production cuts could make a sizable dent in Europe’s overall electricity usage.

The Slovalco aluminum plant said last week that it would halt production in September.

Aluminum producer Speira is considering cutting production at its German smelter to 50% of total capacity in response to surging energy costs.

Even the U.S., with its comparably low electricity costs, is having disruptions. The Century Aluminum plant in Hawesville, Kentucky, is stopping work and blaming high energy costs.

And It’s Cheap

The good news is that the price of aluminum is down after surging last year. The price has fallen from $1.90 a pound to around $1.20 a pound. The market thinks we are heading into a massive global recession and has sold off all commodities.

As a contrarian, I see an opportunity to profit. The lack of supply will trump the lack of demand, and those companies with low energy costs will make out like bandits.

Aluminum is selling at 1989 prices while supply is getting cut all over the world. China has vowed to cap its smelting capacity due to the environment, but it might not have a choice due to electricity prices.

I’ve found one company with some of the greenest production, lowest costs, and new technology. I’ll be writing it up in this month's Bull & Bust Report. Join us. You won’t want to miss it. It will be a barnburner.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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