INTERVIEW: EU's aluminum sector needs pragmatic approach to energy transition, rethink of CBAM – Mytilineos

The pressure of the energy transition is adding to the "existential" challenge Europe's aluminum sector faces and the EU's incoming Carbon Border Adjustment Mechanism (CBAM) is not fit for purpose to protect the continent's aluminum producers from international competition as they decarbonize, according to Evangelos Mytilineos, CEO of diversified Greek metals and energy company Mytilineos.

Faced with subdued end-user markets amid low economic growth, notably in Europe's biggest market Germany, high energy prices and growing pressure to reduce carbon emissions, European aluminum producers are struggling to adapt, Mytilineos said.

His company, he said, was one of the first to understand that the synergies between the energy and metals sectors could make the company more resilient amid the costly race towards decarbonization. According to Mytilineos, the company has one of the lowest production costs in the industry due to its synergies with the energy business and positioning as the largest vertical aluminum producer in the EU.

Consequently, Mytilineos' aluminum business, Aluminum of Greece -- while not immune to the weak demand situation and volatile prices -- was able to operate its alumina refinery and aluminum smelter at full capacity in 2023. The company produced a total of 239,000 mt of aluminum in 2023, up 1% from 2022, including 183,000 mt of primary aluminum and 56,000 mt recycled. Alumina production was also up 1% year on year at 869,000 mt in 2023.

CBAM rethink needed

Discussing the difficult situation for EU producers, Mytilineos noted that "demand for aluminum is very low in Europe because the European economy is not doing well," and noted that energy prices will remain a key challenge for the industry as electricity accounts for around 40% of the total cost of producing primary aluminum.

Mytilineos also warned that the EU's incoming CBAM will not achieve what it is designed to do -- level the playing field for the bloc's industries as they decarbonize more rapidly than other parts of the world.

"From the start, we've argued that CBAM isn't a proper or effective carbon leakage tool; it's basically a duty at the border which does nothing to offset the disastrous hit resulting from the ETS [EU Emissions Trading System] on the production costs of EU industries," he said, meaning that European producers will struggle for competitiveness.

Mytilineos suggested that Europe needs to rethink the CBAM approach and look across the Atlantic at the US Inflation Reduction Act, and form a "climate club" with other countries to drive decarbonization.

"Industries operating in countries within the climate club would all face identical carbon costs, if any," Mytilineos said.

And while the industry is grappling with the expected increase of carbon costs on top of energy prices and a tepid demand situation, the market for lower carbon emission aluminum has not yet taken off. According to Mytilineos, the market has to look at its "existential" problems first.

Nevertheless, the company is long-term expecting a growing market driven by the electric vehicle industry and renewables market, and is looking to primarily run its smelter with renewable energy, targeting 3.4/mt CO2e emissions per mt of aluminum produced by 2030, down from 11.3 mt of CO2e in 2023.

Mytilineos' idea to spin off the construction business and focus the company on energy and metals came to him during the pandemic. "It took our European competitors two or three years to realize that the energy landscape has changed somewhat during the crisis [of high prices]," said Mytilineos, adding that big consumers such as aluminum smelters need "special advice" on how best to arrange their energy supply and not every energy company can do that.

The synergies are now so apparent due to the record prices for power seen in 2022 across Europe that German steelmaker Thyssenkrupp is looking to reciprocate the synergies between metals and energy.

Thyssenkrupp CEO Miguel Angel Lopez Borrego said at the German company's last annual shareholder meeting Feb. 2 that the preferred option for the struggling steel unit would be a joint venture with Czech energy provider EPH. "The energy question is the key question," said Lopez.

Pragmatic transition

Aluminium of Greece came out of a 60-year power supply service with Greek power utility company PPC at the end of 2023. The company had a fixed price contract with PPC and when prices jumped in 2022 they were hedged against wholesales prices, which at points surged to above Eur400/MWh.

Now the PPC contract has ended, the company is further focusing on reducing carbon emissions to achieve net zero by 2030. In January this year, 8% of the energy mix for the metals business was renewables. By the end of the year, Mytilineos told S&P Global, this will probably reach 20% in the mix, and by 2030 Aluminium of Greece will cover all its electricity needs from its renewables power plants.

At the moment, the typical megawatt-hour in the wholesale is about Eur70-80/MWh. "But even that for metals companies, it's a lot," said Mytilineos. "Our Metals division reflects 6% of the total grid consumption in Greece and it is by far the largest energy consumer."

Despite his company's move towards renewables, Mytilineos is joining a growing number of industry stakeholders advocating a more pragmatic approach to decarbonization.

"In Europe, the focus has been exclusively on aggressively pushing for the decarbonization of energy, taking reliability and affordability for granted; we were painfully wrong," said Mytilineos.

The pandemic, the Ukraine war and the conflicts in the Middle East have proven that supply dependencies need to be diversified, and that fossil fuels will be needed to bridge the shift to green energy.

"This is the only way to avoid massively compromising the transition itself; if we ask companies to invest only in projects with challenging economics, sooner than later the path will fail."