Industry push for greener aluminum production drives need for transparent price references

Metals and energy have a complicated relationship.

Ferrous and nonferrous metals-making requires lots of energy, while melting and smelting generate significant CO2 emissions. Oil, gas and electricity can't get where they're needed without metal pipes, containers and conductors to transport them.

They clearly depend on each other, but how will their roles change over time, and how will their coexistence adapt as the global energy transition progresses?

Those questions, among others, led S&P Global Platts to announce earlier this month it will launch new daily low-carbon aluminum price (LCAP) and zero-carbon aluminum price (ZCAP) assessments, starting with the European market.

The aluminum industry averages some 16.7 metric tons (mt) of CO2 emissions per mt of aluminum produced, on a cradle-to-gate basis. A handful of producers, including Alcoa, Rusal, Rio Tinto, Century and Hydro, have been leading the charge in reducing their carbon emissions.

All of them have released low-carbon product lines in recent years, with guarantees of less than 4 mt of CO2 per mt of aluminum produced, based on smelter emissions.

The International Aluminium Institute released a report on March 16 outlining what it called "three credible and realistic approaches to emissions reductions for the aluminum industry" over the next three decades.

In Aluminium Sector Greenhouse Gas Pathways to 2050 the organization highlights electricity decarbonization, direct emissions reduction and recycling and resource efficiency as potential solutions.

"Decarbonized power generation and the deployment of carbon capture utilization and storage (CCUS) offer the most significant opportunity to reduce emissions to near zero by 2050," IAI said.

Low-carbon producers have sought not only acknowledgement of their CO2 reduction efforts, but also premiums over the prices for standard, higher-carbon material.

At the same time, a growing number of end-users, from Audi, BMW Group, Chrysler and Honda to Apple, Coca-Cola and Nestle, have sought out suppliers whose material has been made with renewable energy or comes from low-carbon energy sources.

Much of the ability to reduce carbon at the smelter stage is due to substituting green energy sources, such as hydropower, for coal. Even solar power is fueling a portion of Emirates Global Aluminum's production, encouraging BMW to sign a supply contract with EGA for such material as part of the automaker's effort to reduce the CO2 emissions of its supplier network by 20% by 2030.

Standards and transparency

At a time when ESG is fast becoming a core strategy for companies worldwide, the case for low-carbon aluminum pricing tools is a compelling one. However, a lack of transparency—as well as consensus—regarding the definition, quantification and understanding of low-carbon aluminum's value have proven to be formidable obstacles.

That lack of clarity and transparency were behind Platts' decision to launch its LCAP and ZCAP assessments. The prices—effective from April 6—complement existing offerings for high-grade primary aluminum, while helping market participants quantify cost, manage risk and spot opportunities associated with the growing focus on carbon-reduction strategies.

The LCAP applies to primary aluminum produced with a maximum emissions level of 4 mt of CO2 per mt of aluminum at the smelter. Only aluminum with Scope 1 and 2 emissions certified by an internationally accepted independent organization will be included in the assessment.

The ZCAP utilizes Platts' recently launched CORSIA-eligible carbon-credit (CEC) price assessments to calculate the voluntary cost of offsetting the carbon emissions of the LCAP assessment to zero.

CORSIA, the Carbon Offsetting and Reduction Scheme for International Aviation, is referenced by a range of non-aviation industries to voluntarily curb carbon's role in climate change. Under CORSIA, a host of environmental organizations certify credits generated by projects aimed at avoiding, reducing or removing greenhouse gas emissions.

The Platts CEC launch marked the world's first voluntary carbon credits assessments. Similarly, the LCAP and ZCAP launch marks Platts Metals' first formal pricing foray into the ESG/energy transition space.

The LCAP and ZCAP assessments reflect the European market's embrace of carbon emissions reduction strategies across supply chains. However, Platts will not limit its coverage of the emerging low-carbon metals space to just one region or material. Research is under way for additional low-carbon price and cost references throughout the metals and raw materials value chains.

As energy and metals sectors seek certainty regarding their roles in a fast-changing environment, pricing transparency will be a pre-requisite to make decisions with greater clarity and confidence.