EU aluminium industry suffers from regulatory costs Published on: 08/11/2013, Last update: 27/11/2013
European Commission Vice President Antonio Tajani, Commissioner for Industry and Entrepreneurship, said: "Restoring the aluminium industry to competitiveness is an urgent issue. We need to carefully consider the effects of all relevant EU policies on this sector. As producers need to be able to source energy at affordable costs, I look forward to the next Competitiveness Council in December addressing the issue of energy costs".
In spite of increasing global demand for aluminium, since 2003 ten primary aluminium smelters have closed in the EU, while none have opened or are planned to open. Therefore, a new Commission study looks at the situation in the aluminium sector and how its competitiveness is affected by regulatory costs.
The study indicates that the high cost of energy is the main driver of costs, which in turn are mainly influenced by national rather than EU policies and regulation. The study looks at the costs associated with EU regulation, and estimates that these are approximately 8% of total costs over a ten year period. The Commission is committed to look at how these costs can best be reduced.
The study also looks beyond the issue of regulatory burden and makes the case that, under certain conditions, it is possible to produce aluminium competitively in Europe. It is important to bear in mind, that while the study looks more narrowly at costs, it does not set out in detail the benefits of targeted EU regulation, which are required to respond to technological change, recycling or access to the EU internal market.
Cost of EU regulations for aluminium industry
The study indicates that the costs generated by EU rules represented on average 8% of total production costs for the aluminium industry over the entire period concerned (2002-2012). For the majority of plants surveyed, EU regulations which cause the highest burden (around 86% of the total burden) are those affecting energy prices, either directly or indirectly through the Emission Trading Scheme (ETS). These are followed by environmental regulations, and, with a much lower impact, product regulations.
Energy costs are the key
Up to 40% of the cost of producing aluminium comes from electricity prices, which are higher in Europe than competing regions. But aluminium producers cannot pass on high or fluctuating energy costs to end-users as aluminium's global price is fixed on the London Metal Exchange. Therefore, producers in third countries where electricity prices are much lower than in the EU have a distinct competitive advantage.
However some European primary aluminium producers rank among the most competitive in the world. These producers either create their own electricity or can rely on long-term contracts for purchasing energy (similar in length to the time frame of their investments). By generating electricity or relying on energy contracts that were signed before the introduction of the ETS, they are not exposed to its indirect cost (about €90 per tonne). As a result, their cumulative regulatory costs represent only 4-5% of their profit margin.
In contrast, producers without these advantages, including those whose long term energy contracts have expired, must source electricity from the market. As a consequence they lose more than half of their profit margins. This has to be seen in a global context where many third countries can anyway produce aluminium at a much lower price per tonne thanks to lower electricity prices.
State aids create uneven market conditions across the EU
Some of the most competitive producers are also located in EU countries that do not pass on to them the full cost of EU energy laws – as a result they pay on average only an additional €5.30 per tonne of aluminium produced. But plants that do not benefit from state intervention and bear the brunt of energy regulation costs have a cost burden of roughly €95 per tonne.
Exploring lower energy costs though recycling
Aluminium will be increasingly used as our economy moves towards resource-efficiency: it is light, endlessly recyclable, and has outstanding thermal qualities. While its primary production is energy intensive, aluminium is endlessly recyclable without any loss of quality. Up to 95% of the energy that would be used in primary production is saved by recycling. The steadily growing use of scrap in production therefore results in significant energy savings and more sustainable growth. The EU actively encourages recycling through the EU waste legislation and the EU research programmes. A growing share of the aluminium produced in the EU now originates from recycled raw materials; however, primary production is still essential, as demand is increasing and much aluminium is trapped for decades in long term use such as in buildings.
The aluminium industry has a strategic place in Europe's economy. It has an annual turnover of €39.7 billion and directly employs 255,000 people, with more than 1 million others indirectly employed. Aluminium is used in many and diverse sectors, ranging from transport to packaging through to high-tech engineering and construction.
The study examines the cumulative cost of EU legislation on the aluminium sector, as part of an overall "fitness check" to identify any excessive administrative burdens, regulatory overlaps and inconsistencies. The study was based on plant level data and carried out by the Centre for European Policy Studies (CEPS) on behalf of the European Commission.