Aug 18, 2022
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Who will benefit from the shutdown of factories in Europe

There are more and more reports from Europe about the forced closure of industrial plants, although winter is still far away. But exorbitant prices for gas and electricity are already making their work meaningless. Producers of aluminum and zinc, whose products are needed for the automotive and construction industries, were the first to be hit. How does this threaten the EU economy and who will benefit from the troubles of the Europeans?

Soaring electricity prices in Europe forced the Norwegian company Norsk Hydro ASA to announce the closure of an aluminum plant in Slovakia at the end of next month. The smelter was already operating at 60% of its annual capacity of 175,000 tons, but now, if it continues to operate, it will suffer huge losses.

“The decision to stop aluminum production is the result of constantly rising electricity prices and the lack of compensatory measures from the state. The Slovalco plant is one of the most environmentally friendly and modern aluminum plants in the world, as well as one of the largest employers in the Central Slovakia region. We are very sorry that as a result of government inaction, the more than 70-year tradition of aluminum production in our city will come to an end,” said Slovalco CEO Milan Vesely.

Recently it became known that exorbitant gas prices are also forcing the closure of the Budel smelter in the Netherlands, controlled by Nyrstar, part of the Trafigura Group. The smelter will be put on maintenance from September 1 “until further notice,” the company said in a statement. Zinc surged 7.2% on the London Metal Exchange on the news.

Earlier this month, leading zinc producer Glencore warned that the energy crisis in Europe was a major threat to supplies. Metallurgical plants in the region operate on the verge of profitability, and the Nyrstar plant with a capacity of 315 thousand tons per year has been operating in the mode of reducing output since the fourth quarter of last year.

Aurubis AG, Europe’s largest copper producer, said earlier this month that it aims to minimize gas consumption in Germany and pass on rising electricity costs to its customers as the region’s energy crisis deepens.

Europe’s industry, from fertilizer to aluminum, has already been hit hard by soaring energy prices. Many people may not make money this year, because as the heating season approaches, gas prices promise only to rise. They have already risen above $2,600 per thousand cubic meters. And in winter, as Gazprom expects, prices will rise to more than 4 thousand dollars per thousand cubic meters (and this is still a conservative forecast).

“Recession risks in Europe have risen. The decline in production will primarily hit the metallurgical sector. The decline in production is gaining momentum along with rising gas prices, which have already broken the March record,” said Vladimir Chernov, an analyst at Freedom Finance Global. However, ordinary Europeans are unlikely to see a noticeable shortage of goods on the market, he said. But they will see it all in price terms: an increase in the cost of goods by 5-15% will surely follow, says Chernov.

The fact is that the same Slovak plant is a large enterprise for Europe, but there are larger players on the world market – these are the same China or Russia. It is they who will benefit from the fact that the metallurgical industry in Europe will rise.

The closure of the Slovak plant may force European companies to turn their attention to the products of Rusal, which will easily replace the entire volume of the closed plant. Russian aluminum was not subject to sanctions.

The Slovak plant can produce 175 thousand tons of aluminum per year, but recently it has produced no more than 100 thousand tons. Whereas Rusal sells about 3.6-3.9 million tons of aluminum per year. If the entire falling volume of Slovalco is compensated by purchases from Rusal, then the additional demand for the products of the Russian company will be 2.9% of the current sales level, Veles Capital analyst Vasily Danilov told RIA Novosti.

Chinese companies can also win. There are many large metallurgical plants in the Celestial Empire, whose capacities start from 1 million tons of aluminum per year, and in total Chinese companies produce almost 40 million tons of aluminum annually.

It is curious that on the news of the closure of the Budel enterprise in the Netherlands, which produces up to 315 thousand tons of zinc per year, the shares of the Russian Electrozinc plant in North Ossetia grew by a quarter. Europe will also have to look around the world not only for aluminum, but also for zinc.

For the EU, all closed factories are important, since aluminum is used to make cast parts for cars, extrude aluminum profiles for windows and doors. Galvanized steel is also required for the automotive industry and for the construction industry. In addition to the fact that Europeans are losing their jobs in enterprises and the unemployment rate is rising, Europe is waiting for the inevitable rise in prices for cars and building materials. After metallurgists, other plants will also go downhill, in particular, chemical (plastic, etc.) and manufacturers of fertilizers and plant protection. In a spiral, this will increase the unemployment rate and increase prices.

At the same time, the European authorities are already suffering from high inflation due to the energy crisis – high prices for fuel of all kinds. Annual inflation in the euro area in June reached a record 8.6%, while energy prices rose the most – by 41.9% in annual terms. The closure of the industry will only lead to a new round of inflation. The lack of room for monetary action to stop inflation will inevitably mean a recession in the EU.

“We expect a recession in the EU in 2023. The exit of the EU countries from it will take, in our opinion, from two to five years,” says Vladimir Chernov from Freedom Finance Global.

The risk of the EU economy falling into recession in the next 12 months has reached 60%, the highest level since November 2020. Prior to the start of the special operation in Ukraine, the risk was estimated at only 20%. This is reported by the American agency Bloomberg, citing experts. The recession means that the economy and production in the region has been falling for two consecutive quarters. However, under the current conditions, even the largest economy of the European Union – Germany – already in this quarter is at risk of stagnation, experts warn.

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