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LCAP climbs higher on growing popularity for low-carbon aluminum

Highlights

Drive to reduce emissions pushes LCAP higher

Low-carbon demand impacted by market volatility

  • Author
  • Khaula Bhatti    Charles Thompson
  • Editor
  • Richard Rubin
  • Commodity
  • Electric Power Energy Transition Metals

The EMEA low-carbon aluminum premium monthly average reached over $22 in July over increased demand, a wider volatile aluminum price and a continued debate over the role of certification

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Now equivalent to an upcharge of $20-$30 above the P1020 Rotterdam premiums, the monthly average differential rose from $12.50 in June, and has more than doubled since the beginning of the year on reports of an influx of enquiries and growing interest for low-carbon material. Participants further noted an increasing shift towards sustainable practices as the market becomes more focused on reducing emissions.

To bring clarity at a time where companies and stakeholders are looking to develop their understanding of "green metal," Platts launched two new assessments in April 2021: Low-carbon aluminum price and zero-carbon aluminum price, both of which are assessed as a daily premium above the LME cash price for duty paid and duty unpaid P1020 units.

There has been gradual differentiation for a low carbon premium over the standard duty paid and duty unpaid assessments, with the majority of sources now in consensus that the LCAP is no longer zero dollars. Since 2021, various contractual agreements and pledges announced by aluminum players in favor of low carbon has fueled the higher premium, stimulating growth in the space and raising demand. Climbing from $5-$20 in June, expectation remains that the LCAP will continue its upwards trajectory as customers work on expanding their green portfolio.

"Green metal is picking up for next year, inquiries are coming in earlier," said a trader. "Demand is there."

The trader said the current low-carbon premium is at least $20/mt on a prompt basis, further suggesting it could double to $40/mt in 2023.

Another source echoed this sentiment, say his firm was charging $20/mt and would offer higher next year.

Despite the market now steadily beginning to acknowledge a low-carbon setting, one consumer claimed that the subject is still in its infancy amid widespread uncertainty stemming from soaring energy costs and ongoing availability issues. The consumer highlighted a lack of urgency to purchase low-carbon, stating that at present, priorities lie in simply obtaining metal given the current climate.

"Traditional costs in the market for things like energy and magnesium need to be swallowed by the customer," the consumer said. "The consumers are not in the best position. The journey to green will continue, but for the time being we need to make sure we have any metal to consume."

Volatility in primary aluminum, stemming from a lack of supply and an unfavorable economic and geopolitical situation has further complicated the progression of the low carbon market. A wider P1020 premium has created fluctuations in the LCAP, and little cohesion among participants suggests an unclear path ahead.

Citing these dynamics, a second trader added: "Infrastructure isn't ready – there is not enough aluminum, let alone green aluminum. It is too soon for low-carbon; people have the right intention but it costs too much and market conditions are not right.

"If China opens up [from lockdown], if there are production curtailments due to rising energy costs, that hampers the green," the trader said.

The trader, while recognizing consumer demand for certification, additionally proposed raising the upcharge to drive greater investment towards green technology and further stimulate participation from producers.

"Consumer wants green certified but only three producers have certification," the trader said. "If Europe wants green, they need to raise upcharge. This will incentivize producers to invest in producing green, for example through technologies such as solar panels."

Indicating a current upcharge of $40/mt, the trader claimed to have heard offers in the market above this as well.

Low-carbon certification

The physical certification of the aluminum of low carbon (an industry method of verifying carbon content per ton of metal) and the associated premium remains a nuanced debate within the market, especially as legacy, low-carbon producers (e.g. smelters with a hydro-powered energy source) gradually transition towards offering certification, at an additional cost.

Industry willingness to pay the additional upcharge continues to be conflicting, and demand elasticity varies amid those unwilling to hold an additional cost burden in a volatile market. Nonetheless, as the drive towards green practices continues, the market generally recognizes the existence of a low-carbon differential for which there is good, upcoming demand.

"You need verification, and you are paying for a certificate," said a market participant. "Our customers need to prove to their customers what the carbon content is."

A second source described the low-carbon market to have a three-tiered structure: regular aluminum, low carbon aluminum and low carbon aluminum with certification, but said pricing mechanics are unclear.

The source mentioned averaging a $12-$20 upcharge on low-carbon aluminum deals last year, and at present offering up to $40.

Platts has been assessing the low-carbon upcharge since April 6, 2021, with the European low-carbon duty-paid aluminum premium and European low carbon duty-unpaid aluminum premium most recently assessed at LME cash plus $570-$610 in-warehouse Rotterdam, and LME cash plus $475-$515 in-warehouse Rotterdam.