No metals crisis in Europe but a power crisis

In La Tribune 14/09/2022

A Plant manager recently told me that there was no more copper; yet at $8,000/t the price of the red metal has been steadily deflating since its Ukraine peak of over $10,000/t and is below its November 2020 quotations. Similarly, after their Ukraine peaks, aluminum prices are at March 2021 levels, zinc has returned to October 2021 prices, nickel has passed through its November 2021 quotations, and lead has returned to its March 2020 prices. Beyond these base metals, deflated iron ore prices are back to June 2020 levels, as is steel to December 2020 levels; minor metals are experiencing the same paradigm: cobalt is back to March 2021 levels, magnesium to August 2021, manganese to May 2021. Precious metals are in the same act: gold is at the March 2021 level, silver metal at July 2020, platinum at November 2020, palladium and rhodium are in retreat and already passed through the September 2021 prices.

The fact is that after the inflationary Peak-Ukraine linked to fear, all these metals are down due to Beijing’s management of the covid. Like the sharpness of a Chinese calligraphy would be speckled after the passage of an impressionist painter, the upward curve of China’s core economy is stained by the recurring itinerant stippling of the Covid containment of this or that city or region

Another factor is weighing on prices. Contrary to popular belief, weighing on prices is expanding mining, so at the current rate copper and nickel are heading for surplus years in 2022 and 2023.

Finally, Chinese metallurgical production is weakened by insufficient Chinese electricity production, especially hydroelectric, which, by increasing production costs, destroys industrial demand for metals. The European energy crisis and the industrial recession on our continent are also weighing on demand for metals. Only in the United States does the metal industry not suffer from the war in the Ukraine – quite the opposite for gas – unlike Europe, nor from the covidian shocks like China.

It is therefore particularly inaccurate to speak of a metals crisis to justify this or that. On the contrary, it is mainly the energy crisis that is causing a slowdown in the consumption of metals in Asia, just as it is the European energy crisis that is causing the closure of factories because of its inappropriate or naive policies.

Inappropriate or naive, because although European electricity production has heterogeneous prices, the rule of the electricity market imposes on the whole continent that the highest marginal cost of production is the market equilibrium point, i.e. the price of gas-fired power plants. This is a classic market mechanism, the same rule balances all natural resource markets. When the market is expanding, the most expensive copper mine gives the tune for the price of copper, but if the price of copper falls, the most expensive mine will close first.

This rule was inappropriate and naive for the European electricity market because the market rules are distorted by the ARENH, the price of electricity of EDF reserved for its 40 biggest European customers. They have the privilege of buying electricity from EDF at the lowest price, the ARENH price, and selling it immediately at the market price, i.e. at the moment at the price of gas power plants. This is pure trading: they buy at €42/MWh and then resell it at the market price, i.e. €540/MWh, whereas it was over €1,100/MWh at the end of August. The problem is that EDF, having less capacity, will buy electricity at €540/MWh from its own traders and sell it back to them at €42/MWh. This trading in an expanding market, as the European electricity market has been since the end of 2020, distorts the price signal, as it can only go up mechanically.

But in the strangled European market that we are experiencing, this is undoubtedly the source of a trading scandal initiated in the name of free competition. How do you expect EDF, or the French finances since there is an energy shield, to get by selling at 42€ and buying at 540€? Because the European metallurgical industry is a major consumer of electricity, it is facing production cuts or plant closures: zinc at Nyrstar, aluminum throughout Europe.

How to remain competitive? It is likely that without the ARENH the price of electricity would be pure and lower than the current price, then the industry would be better off, as is the case in Spain and Portugal; these two countries have disconnected from the rule of the European market and strengthen their industrial competitiveness. Moreover, it is clear that there is no real European market for electricity, otherwise how can we justify the fact that at the same time its price is 537€ on the French network, 459€ in Italy, 455€ in Germany and 129€ in Spain?

This is why Brussels decided to impose a maximum price for Russian gas since it regulates electricity. It is a kind of “consumer price” in the same vein as when the large-scale distribution imposes a price to the producers of milk or ready-made meals. Unfortunately, we will probably have to wait until the balance of power becomes more favorable to the European gas consumer, until Moscow is on its knees and stops its horrors in Ukraine. A producer and a consumer are not always made to get along, and given its accumulated jackpot, Moscow has time to develop new marketing outlets for its hydrocarbons in Asia and India.

Contrary to a growing doxa, if there is less aluminum or cheap steel, it is not the fault of mines, but of energy policies. The European electricity crisis is the result of bad policies, the causes of which are now known. It will undoubtedly transform European metallurgy as never before, because the war-inflation pairing always leads to innovation and substitution.