August 2, 2017 / 11:09 AM / 2 months ago

Hydro-powered smelters charge premium prices for 'green' aluminum

FILE PHOTO: An aluminium coil is seen during opening of a production line for the car industry at a branch of Norway's Hydro aluminum company in Grevenbroich, Germany May 4, 2017. REUTERS/Wolfgang Rattay/File Photo

LONDON (Reuters) - Producers of “green” aluminum - made using renewable energy rather than fossil fuels - are starting to charge premium prices thanks to rising demand from industrial customers under pressure to reduce their carbon footprints.

Operators of smelters powered by hydro-electricity in the likes of Norway, Russia and Canada are promoting their environmental credentials - and stealing a march on others that rely on coal or gas, notably in China and the Gulf.

The competitive edge lies not in the metal itself, but the fact that its production requires far lower total emissions of greenhouse gases including carbon dioxide.

While they do not use the term “green” aluminum, a number of producers are offering low-carbon guarantees on their metal, although they refuse to say how much more they charge for this beyond saying the premiums are relatively modest.

Those with access to large hydro-power capacity such as Norway’s Norsk Hydro (NHY.OL), U.S.-based Alcoa (AA.N), Russia’s Rusal (0486.HK) and London-listed Rio Tinto (RIO.L) believe the tide is turning in their favor.

Nearly 200 countries have agreed to set targets for limiting CO2 emissions under the Paris climate accord on curbing global warming, although President Donald Trump has decided to pull the United States out of the pact.

This is boosting demand for “green” aluminum particularly from the motor, electronics and packaging industries which need to produce lower carbon goods to satisfy regulators, investors and consumers.

The pressure to make low carbon metal is increasing from all sides, said Kathrine Fog, a senior vice president at Norsk Hydro. “We’ve seen this coming from the market, our customers, shareholders, financial markets, NGOs, you name it,” she added. “That means in the end it will affect the bottom line.”

Making aluminum from bauxite ore requires massive amounts of electricity, so a plant’s energy source is the biggest contributor to its overall greenhouse gas emissions rather than the smelting process itself.

Making one tonne of aluminum at plants using power generated by burning coal, the main source for those in China and Australia, releases up to 18 tonnes of CO2 equivalent.

For gas-powered plants in the Middle East, the figure is between five and eight tonnes, but for those running on hydro-power it is lower still at only around two tonnes.

Aluminum can also be recycled with even lower emissions, although global demand is such that new metal will be required for years to come.

HYDRO SLIPPAGE

While the world is pushing for a lower carbon future, the aluminum industry overall is heading in the other direction.

In 2005, the amounts of hydro and coal power used to make aluminum were roughly the same at around 200,000 gigawatt hours each, according to the International Aluminum Institute (IAI). A decade later the hydro figure had changed little, whereas coal had leapt to around 450,000 GWh.

That was largely due to expansion in China, which now accounts for around 55 percent of global aluminum output. The country’s plants rely on coal for 90 percent of their energy needs.

With gas use also rising due to new plants in the United Arab Emirates, Bahrain, Qatar and Saudi Arabia, hydro’s share of the mix slipped to 30 percent in 2015, according to IAI data. This compared with 59 percent for coal and nine percent for gas, with nuclear energy accounting for the remaining two percent.

But at the same time, companies including iPhone maker Apple (AAPL.O) and Toyota (7203.T) are working to reduce the carbon footprint of their products. A number of aluminum makers are therefore positioning themselves to benefit by offering metal with guaranteed low emissions.

While still low, demand for such guarantees is likely to force more producers to invest and curtail their use of coal - or be cut off from many of the world’s largest buyers and markets as the push for low carbon products accelerates.

By early next year, the Aluminum Stewardship Initiative, a group of producers and consumers, will launch a voluntary certification scheme that includes an emissions threshold of eight tonnes of CO2 equivalent per tonne of new metal.

FILE PHOTO: Members of the media photograph a prototype iMac Pro during the annual Apple Worldwide Developer Conference (WWDC) in San Jose, California, U.S. June 5, 2017. REUTERS/Stephen Lam/File Photo

Smelters above this will be eligible if they show they can bring emissions down over time, but it is almost certainly unachievable for coal-fired plants. Chinese aluminum maker Chalco did not immediately respond to a request for comment. Hongqiao, the country’s largest producer, said it would “continue to invest and advance technological innovation and environmental protection”.

Other firms which run both fossil fuel- and hydro-powered plants see commercial opportunities in the renewable option.

Rio Tinto is already selling branded RenewAl aluminum guaranteeing four tonnes or less of CO2 equivalent. Alcoa launched a product line called Sustana last year that includes Ecolum aluminum offering less than 2.5 tonnes - far below the industry average of around 11 tonnes.

Both companies charge customers a premium for the metal. “We are seeing that yes, they will absolutely be willing to pay for it,” said Rio Tinto Aluminum chief executive Alf Barrios.

Rio would not disclose sales figures or the size of the premium but said RenewAl added $6 million to core earnings (EBITDA) in its launch year of 2015 and sales were growing.

Christine Keener, head of commercial at Alcoa’s aluminum unit, told Reuters: “There is a premium to guarantee that Ecolum is coming from a hydro power smelter.”

Alcoa negotiated premiums with each buyer and their size depended on the customer’s needs and local availability of alternatives, she said.

Keener played down the size of the premium, saying it was “not hundreds of dollars a tonne”. Standard aluminum trades at around $1,900 on the London Metal Exchange. CMAL3

She would not say how much Ecolum had been sold but said interest from buyers was increasing.

Neither Norsk Hydro nor Rusal have launched specific low-carbon brands. Norsk Hydro’s Fog, however, told Reuters the company’s use of hydro-power was “part of our total offering to our customers and therefore is part of the premium that we get”.

Rusal, which makes aluminum by harnessing Siberia’s river systems, said there was no premium but clients nevertheless preferred metal from hydro-powered smelters. It aims to use non-carbon power exclusively by 2020, up from 95 percent now.

RISING DEMAND

Electronics manufacturers, car makers, packaging companies and the construction sector are driving the demand for cleaner metal, aluminum producers, parts makers and buyers said.

The trend is strongest in Europe and the United States where consumer awareness and environmental regulation is greater. However, they said the global procurement policies at multinational companies and tightening environmental rules in countries such as China meant it would spread worldwide.

Demand for aluminum is expected to rise by around four percent a year over the next five years. In the motor industry, the annual growth forecast is 10-20 percent; firms are switching from cheaper but heavier steel to make lighter vehicles consuming less fossil fuel that meet tougher emissions controls.

Many manufacturers are already using aluminum in engine blocks. The metal is also going into the bodies and chassis of costlier models, and this trend is expected to spread to mass market models as the environmental net tightens.

Along with Apple and fellow electronics firm Bosch ROBG.UL, car makers Toyota, BMW (BMWG.DE) and Audi (NSUG.DE) and food packagers Tetra Pak and Nespresso all told Reuters they were moving to reduce the carbon-footprint of their aluminum supplies.

With around 59 million tonnes of new aluminum produced annually, BMW said it used around 600,000 tonnes of new metal each year. Tetra Pak uses 150,000 tonnes each year for its containers that hold the likes of fruit juices and milk.

Apple, which says it aims to use only hydro-produced aluminum, used more than 4,000 tonnes of mostly new metal in its aluminum-clad iPhones alone in the first half of this year, according to calculations based on product specifications and sales figures.

None of these companies would say whether they were willing to pay more for greener metal.

Reporting by Peter Hobson; Additional reporting by Katya Golubkova; editing by David Stamp

Our Standards:The Thomson Reuters Trust Principles.
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