introducing fastmarkets’ low-carbon aluminium differentials

Introducing Fastmarkets’ low-carbon aluminium differentials

Creating a green supply chain is an important focus for the

aluminium industry. As demand for low-carbon metal has

increased, so has the demand for transparent and methodical

price discovery. Fastmarkets is launching low-carbon aluminium

differentials to meet the markets’ needs.

Fastmarkets 2February 2021

Aluminium low-carbon differential P1020A, Europe, $/tonne

Carbon limit: 4tCO2e per tonne of aluminium produced, Scope 1 and 2 emissions*

Quality: P1020A or 99.7% minimum Al purity (Si 0.10% max, Fe 0.20% max). Ingot

Quantity: Min 100 tonnes

Location: Europe

Unit: USD/tonne

Timing: Within three months

Type: Assessed range

Publication: Monthly, first Friday of the month. 4pm London

Aluminium low-carbon differential value added product, Europe, $/tonne

Carbon limit: 4tCO2e per tonne of aluminium produced, Scope 1 and 2 emissions*

Type: Extrusion billet, primary foundry alloy, wire rod, slabs

Quantity: Min 100 tonnes

Location: Europe

Unit: USD/tonne

Timing: Within three months

Type: Assessed range

Publication: Monthly, first Friday of the month. 4pm London

* Fastmarkets will define low-carbon aluminium originating from smelters that emit a maximum of 4tCO2e per tonne of aluminium produced under Scope 1 and 2 emissions. Scope 1 and 2 includes direct carbon emissions from the smelter itself and indirect emissions from the power source of the smelter.

Market participants are calling for increased transparency in low-carbon aluminium deals as interest in green supply chains increases. Fastmarkets will publish its first low-carbon aluminium differentials for primary aluminium (P1020A) and value-added products in Europe on Friday March 5.

This whitepaper aims to educate the market on the evolution of low-carbon aluminium, how Fastmarkets’ new pricing mechanisms will work and why they will benefit the market. It also gives an update on where the steel market is in its low-carbon journey.

The specifications for the new differentials are as follows:

https://www.metalbulletin.com/Article/3972977/Home/PRICING-NOTICE-Fastmarkets-to-launch-low-carbon-aluminium-differentials.html

https://www.metalbulletin.com/Article/3972977/Home/PRICING-NOTICE-Fastmarkets-to-launch-low-carbon-aluminium-differentials.html

February 2021 Fastmarkets 3

For the past decade or so, parts of the aluminium industry have supported the idea that primary aluminium being produced with lower carbon emissions should command a premium in the marketplace.

And for most of that time, attempts by various aluminium producers to impose a surcharge specifically for low-carbon metal have proven difficult.

Even while demand for low-carbon aluminium gradually increased from downstream consumers, there was still resistance to an upcharge for such material, according to multiple producers at Fastmarkets’ International Aluminium Conference in 2019.

“We have received more detailed inquiries about costs, whilst also hearing about small upcharges being paid,” a market source said.

“Once consumers have a mandate to purchase ‘green’ aluminium, the demand for green aluminium will grow and then it will be necessary for the market to reflect that demand transparently through a price index in the form of a green upcharge,” the market source added.

It was expected that marketplace adoption of low-carbon aluminium trading at a differential compared with non-low-carbon aluminium would grow over the long term while consumer demand increased over time.

Unexpected acceleration The timeline for widespread market adoption, however, unexpectedly accelerated just one year later.

When Covid-19 struck in 2020, countries around the world were forced to shut down large swathes of their economies in order to contain spread of the virus. Global governments, particularly in Europe, began to plan the restart of their economies through the form of infrastructure projects.

The evolution of green aluminium

Aluminium Stewardship Initiative launches

NOVEMBER

Rusal launches ALLOW brand

MARCH

Proposal for a European climate law to ensure a

climate neutral European Union by 2050

MAY

Hydro says consumers are starting to pay a premium for low-carbon aluminium

DECEMBER

Fastmarkets starts official market consultation

NOVEMBER

Alcoa launches Ecolum and Ecodura brands

SEPTEMBER

Consumers not yet willing to pay a premium for low-carbon aluminium

MARCH/APRIL

Covid-19 pandemic spurs green interest

SEPTEMBER

2030 Climate Target Plan presented

MARCH 5

Fastmarkets launches aluminium differentials

The push for low-carbon aluminium has gained traction during the last eight years.

2013

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2015

2019

2020

2021


“From a government point of view, over 180 countries have signed up to the Paris Agreement to tackle climate change,” the market source said.

In Europe, those infrastructure projects also had the extra element of tackling climate change by lowering carbon emissions in line with the European Union’s New Green Deal first proposed in 2019. In March 2020, the EU proposed eliminating carbon emissions by 2050.

The EU’s actions in 2020 spurred an increase of material demand for low-carbon aluminium.

From the second quarter of 2020 onward, market participants throughout the supply chain started to report an uptick in demand for low-carbon aluminium.

Many started signing up for Aluminium Stewardship Initiative’s (ASI) various sustainability accreditations throughout the year to showcase them to downstream consumers.

ASI’s membership has grown from 13 members when it was founded in 2015 to more than 150, with a bulk of new members joining in 2020.

Demand for low-carbon, transparency Market participants in Europe also began reporting signing long-term deals for aluminium produced with lower carbon emissions. But

many noted achieving an upcharge, even a slight one, remained a challenge with consumers still skeptical about where exactly low-carbon aluminium was trading.

“Part of the challenge is to reduce carbon emissions. In order to reduce carbon emissions, investment is required to change company procedures or develop technology. Value is needed to incentivize investment,” the market source said.

Skepticism remains in the market that a differential is just a unique selling point for hydroelectric aluminium producers. But demand for low-carbon aluminium remains and market participants acknowledge the need for such a material to sell to consumers who have carbon emission goals to meet.

That has led to widespread demand from the market to price-reporting agencies such as Fastmarkets to launch price discovery in the market to explore just how differently low-carbon primary aluminium is trading compared with its more carbon intensive alternative. nJUSTIN YANG


The differential pricing mechanism will allow Fastmarkets to bring transparency as to whether low-carbon aluminium is trading at an upcharge, discount or in line with current aluminium premiums.

Launching these new prices does not ultimately mean that there is a “green upcharge” available in the market.

The use of a differential instead of an all-in low-carbon premium also will help to protect the underlying liquidity of Fastmarkets’ benchmark premiums, which are used in physical contracts.

This is especially important for Fastmarkets’ P1020A Rotterdam premium suite, which are the settlement prices for exchange contracts on the Chicago Mercantile Exchange and London Metal Exchange. The CME’s contracts have been trading since 2015 and are an integral part of aluminium trading.

“A low-carbon differential does not undermine liquidity on the current premiums, and it enables market participants to better manage their price risks by hedging underlying legacy premiums, including the Rotterdam duty-unpaid and paid,” a market source said.

“We would recommend and support a differential in order to maximize liquidity in these markets and accurately capture trends,” a producer source said.

The pricing methodology will be the same as Fastmarkets’ existing assessments. Fastmarkets aims to engage a broad and balanced range of physical market participants in the provision of data, including producers, consumers and traders who are selling or buying aluminium.

Once data collection is complete, Fastmarkets reviews the data points, applying its methodology and its expert judgment to set the price range to reflect the representative spread of prices at which business has been transacted, offered or bid, or indicated in the absence of business.

In the case of a low-carbon differential, the reporter will ask whether there was a low-carbon pricing element included. If no, the deal will

be submitted into the premium assessment as normal.

If yes, the reporter will ask for the breakdown of this deal and correctly input the low-carbon differential into the new price and the rest of the deal into the underlying premium category to which it relates.

Other forms of data such as estimates, bids, offers and deals heard will also be included in the assessment.

Fastmarkets will individually assess the P1020A and the value-added products (VAP) markets and their low-carbon differentials separately.

“I think a differential makes sense because otherwise there is a worry that deals will be double counted and ranges on the underlying premiums could widen artificially, which would cause a problem,” a trader said.

When could it be a discount?

Fastmarkets chose the pricing mechanism of a differential because it allows and implies that the market could trade above or below existing premiums.

Although many currently see low-carbon aluminium trading at an upcharge or parity to non-low-carbon aluminium, market participants say that all hinges on government policy.

For example, if the European Union subsidizes production of low-carbon aluminium or encourages the consumption of low-carbon aluminium, it could make low-carbon aluminium trade lower than non-low-carbon aluminium. The trade bloc could also implement a duty on higher-carbon aluminium, making it more expensive compared with low-carbon aluminium.

A differential allows for Fastmarkets to accurately capture these potential trends should they arise.

What are the specifications and how does the differential work?


Fastmarkets low-carbon di erential

Additional freight, payment terms, logistics

Fastmarkets premium

LME aluminium price

+ +

+

+

+

+

The di�erentials can be used on top of Fastmarkets’ underlying European P1020A and VAP premiums including, but not limited to:

MB-AL-0346 Aluminium P1020A premium, in-whs dup Rotterdam, $/tonne MB-AL-0004 Aluminium P1020A premium, in-whs dp Rotterdam, $/tonne MB-AL-0316 Aluminium P1020A premium, fca dp Italy $/tonne MB-AL-0319 Aluminium P1020A premium, fca dp Spain, $/tonne MB-AL-0300 Aluminium 6063 extrusion billet premium, ddp Italy (Brescia region), $/tonne MB-AL-0302 Aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region), $/tonne MB-AL-0002 Aluminium 6063 extrusion billet premium, in-whs dp Rotterdam, $/tonne MB-AL-0299 Aluminium 6063 extrusion billet premium, ddp Spain, $/tonne MB-AL-0339 Aluminium primary foundry alloy silicon 7 ingot premium, ddp Germany, $/tonne MB-AL-0340 Aluminium primary foundry alloy silicon 7 ingot premium, ddp Eastern Europe, $/tonne

The low-carbon VAP assessment could also be used as an upcharge for other aluminium products, such as slab and wire rod, which Fastmarkets does not currently price.

Deal for green brand at $120/t

Does it include low-carbon di erential?

Inputted into P1020A premium as normal

($120/t)

Underlying P1020A premium

($110/t)

Low-carbon di erential

($10/t)+

Fastmarkets aluminium P1020A premium, in-whs dup Rotterdam, $/tonne

No Yes

Deal for green brand at $500/t

Does it include low-carbon di erential?

Inputted into billet premium as normal

($500/t)

Underlying billet premium

($480/t)

Low-carbon di erential

($20/t)+

Fastmarkets 6063 extrusion billet premium, ddp Italy (Brescia region), $/tonne (N60)

No Yes

Source: Fastmarkets ©

* Figures used here are for illustrative purposes only and are not indicative of actual deals reported to Fastmarkets.

What goes into a low-carbon aluminium contract and how is it assessed?

Examples:


Why a 4-tonne carbon limit?The specifications for the low-carbon differentials will have a carbon limit of 4 tonnes of carbon dioxide equivalent (4tCO2e) per tonne of aluminium produced under Scope 1 and 2 emissions.

Scope 1 and 2 includes direct carbon emissions from the smelter itself and indirect emissions from the power source of the smelter.

During the consultation period, the majority of feedback received by Fastmarkets was in favor of a 4tCO2e carbon limit.

“In my opinion, with approximately 68% of ex-China aluminium under 8 tonnes of carbon and 90% of European aluminium already under 8 tonnes of carbon per tonne of aluminium… a differential of green aluminium produced with 4 tonnes of carbon or lower would give a more accurate representation of what level of green aluminium is in demand,” a second trader said.

“I think 4tCO2e produced under Scope 1 and 2 emissions is the most aligned definition for Europe and will highlight the possible differential. We are supportive of bringing transparency to the whole market even if for now the differential is zero,” a third trader said.

There were also discussions around higher carbon limits such as 6tCO2e to 8tCO2e, but the majority of feedback was that this scope would be too wide to bring transparency to a true differential level in Europe.

Other discussions surrounded a limit below 4tCO2e or using a wider Scope 1-3 to account for emissions produced from all processes, including alumina refining.

Fastmarkets believes that over time the requirements for this market and the carbon limits will change to include emissions produced further along the supply chain. But including Scope 1-3 in the specifications at this early stage would

severely restrict the number of brands included in the assessment.

Alcoa launched the first low-carbon smelter-grade alumina brand in September last year, called EcoSource.

EcoSource is produced with no more than 0.6tCO2e per tonne of alumina. This measurement includes Alcoa’s direct emissions from the bauxite and alumina refining process and indirect emissions from the energy consumers in the process.

But the industry average is still said to be around 1.2tCO2e. Sustainability developments for the whole alumina and bauxite industry are still in their early stages.

Future developmentsNot only will the carbon limit specifications be constantly tracked by Fastmarkets and possibly adapted while the market develops, but other areas will also be closely monitored.

Firstly, the frequency of the prices may increase from monthly if liquidity in either the P1020A or the VAP market significantly booms. Fastmarkets adapts pricing frequencies to match market demand and liquidity, and to ensure it can capture possible times of volatility.

“For now and to protect liquidity, the VAP basket is a good idea – but in a few years maybe the liquidity on low-carbon contracts for billet will take place on a more regular basis and there will be quarterly and monthly liquidity, while slab contracts are annual,” a second market source said.

There is also a possibility that the P1020A and VAP differentials need to be priced on a different frequency if one market is more liquid than the other.

Fastmarkets will closely monitor its VAP basket differentials. Should there be a divergence in price between some value-added products, Fastmarkets will look to launch separate pricing mechanisms.

All changes will be subject to a market consultation, and Fastmarkets invites market participants to provide regular feedback on the specifications. nALICE MASON

“We are supportive of

bringing transparency to

the whole market even if

for now the differential is

zero.” – a trader


While demand for low-carbon aluminium grows throughout Europe, so does the number of opportunities for participants throughout the supply chain.

Demand in Europe, generated through economic recovery programs with a focus on lowering carbon emissions has opened up a variety of opportunities for producers, consumers and traders.

The rise of low-carbon aluminium presents a unique selling point and a differentiating, competitive feature, helping some justify a further upcharge for their products.

For others, the metal helps provide cheaper and more accessible financing channels, potentially improving margins.

Unique selling points For primary aluminium producers with access to lower-carbon power sources like hydroelectric, wind or solar, the rise in demand for low-carbon aluminium allows those producers to sell their units easier, potentially at an upcharge compared with competitors who are attached to power sources like coal.

Producers and traders with offtakes from low-carbon aluminium smelters have been keen to

highlight booking long-term green aluminium supply to consumers.

Several such deals have already been signed in early 2021 alone.

Emirates Global Aluminium announced in February that it had signed a deal with German automaker BMW for 43,000 tonnes per year of its solar-power produced CelestiAL brand.

Also in February, Swiss miner-trader Glencore and producer Century Aluminum Co reached a deal for the sale of 150,000 tonnes of Natur-Al brand aluminium to Austria-based Hammerer Aluminium Industries (HAI). That deal will run over the course of five years.

The demand for sellers to show customers they meet low-carbon standards in the aluminium industry boomed throughout the past year, best reflected in the surge of Aluminium Stewardship Initiative (ASI) memberships.

ASI, which initially had 13 members when founded in 2015, grew to more than 150 members throughout 2020.

Low-carbon aluminium presents opportunities throughout supply chain

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June

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Aluminium P1020A premium, in-whs dp Rotterdam($/tonne)

Source: Fastmarkets


Despite the recent volumes signed and the rush to obtain low-carbon aluminium credentials, market participants say it is still difficult to achieve an upcharge due to the market’s lack of maturity for now.

“The market is at a stage where the need for low-carbon is not across the board, it’s in its infancy,” a market source said. “You’re going to have sellers who have low-carbon material who have the advantage of getting a sale. As demand increases then a differential will come around.”

Much of the focus on low-carbon aluminium is focused upstream and whether producers and sellers can achieve an upcharge. But downstream market participants also see opportunities selling products at a premium to end consumers while demand for products with a lower-carbon footprint increases over time.

Financing accessibility

Financial institutions are also looking at financing low-carbon aluminium as a way to meet environmental, social and corporate governance (ESG) goals.

As a result, market participants expect growing access to financing lines for investments related to low-carbon aluminium.

“These [ESG] mandates mean there are preferential financing rates for green aluminium, or if banks do pullback there are more selective decisions made, which favor green aluminium lines,” a second market source said. “This will improve demand for green aluminium.”

Last September, trader Trafigura formed a low-carbon aluminium financing platform of up to $500 million with the support of Natixis and Rabobank.

Transparency needed to take advantage

Market participants, whether to meet downstream demand for low-carbon aluminium or to access preferential financing rates, agree that a robust transparent pricing mechanism is required for a functioning low-carbon aluminium market.

“It will be necessary for the market to reflect [low-carbon aluminium] demand transparently through a price index in the form of a green upcharge,” the second market source said.

Fastmarkets’ low-carbon aluminium differentials aim to do just that when they launch on Friday March 5. nJUSTIN YANG


Steel production accounts for around 7% of global greenhouse gas emissions. In Europe, the European Commission aims to be climate neutral by 2050 and reduce emissions by 55% by 2030 - in line with the Paris Agreement.

For many of Europe’s largest steelmakers, the race is on to cut carbon emissions and reduce expenditures on emissions allowances under the European Union emissions trading system (ETS), which is set to become more expensive as the permitted level reduces each year.

The price has risen continually from around €5 ($6) per tonne of carbon dioxide in 2017 to €38 per tonne in 2021, making it increasingly hard for European steelmakers to compete with imports that are cheaper to produce outside of Europe.

With the future of the industry under threat, steel companies have set themselves targets to reduce carbon emissions and eventually become carbon-neutral producers, with some - such as LKAB and GFG Alliance/Liberty Steel - adjusting their company strategy to meet these goals.

GFG Alliance is aiming to achieve this by 2030 while SSAB aims to be fossil-fuel free by 2045. ArcelorMittal is targeting 2050 to achieve this.

While the aluminium sector might have brought a price to the market for its green offering first, this reduction in emissions currently covers output from the smelters. The steel sector is going several steps further with a full production overhaul.

Green steel and its eco credentials appeal to sectors that are cutting emissions from their supply chains, such as the automotive sector, where 17% of emissions come from the manufacturing stage, which includes upstream emissions, such as by suppliers, according to CDP, formerly the Carbon Disclosure Project, a non-profit that helps companies disclose their environmental impact.

The recently launched SteelZero initiative aims to bring together the leading organizations in

the sector to speed up the transition to a net-zero steel industry, working in partnership with Responsible Steel, a global certification program that involves all stages of the steel supply chain, civil society and downstream users to help reduce environmental, social and governance risks and meet the sustainability needs of their customers.

The initiative says there is a growing expectation of the automotive, construction, energy, infrastructure, packaging, transport and white goods sectors to use materials such as steel that are responsibly sourced and produced.

Members include many of the world’s biggest steelmakers and automotive producers.

Steel market participants are exploring a variety of options through which to cut, reduce or capture their emissions: some are in the early feasibility study stages, while others are starting to bring “green” products to the market.

Methods to reduce carbon emissions, ranging from a change of feedstock, renewable power, carbon capture and storage (CCS), to the use of green, blue or grey hydrogen, are among the popular options being explored so far.

Green hydrogen is made via water using renewable power; grey hydrogen, where many will start out, is hydrogen via fossil fuels such as natural gas; blue hydrogen is when emissions are captured and stored underground via industrial CCS.

Some companies have opted for renewable power, using solar and wind technology.

Salzgitter, going a step further, is constructing seven wind turbines for its wind hydrogen project, for use in its steelmaking operations, under its Salcos project.

Green steel to undergo full value-chain revolution to reach carbon targets


In rankings by CDP, seven of the 20 world’s largest steel companies have set up Power Purchase Agreements (PPAs) to utilize renewable energy in steelmaking operations.

For European producers, it highly ranks SSAB, ArcelorMittal, Tata Steel and Thyssenkrupp. Chinese, Russian and American companies are lagging behind European and other East Asian peers on environmental performance and transparency, the CDP says.

While renewable power and CCS are attractive options, there are two main pathways for the steel industry to pursue.

One is via feedstock changes to use recycled steel scrap in an electric-arc furnace (EAF), which produces lower emissions versus producing steel traditionally in a blast furnace (BF), the second option is using hydrogen in a BF.

The use of recycled scrap buys into the circular economy. An example of such a change in feedstock is Liberty’s green rails that are produced using EAFs and steel scrap, while still producing the same high-grade product that is traditionally made in a blast furnace. Liberty claims this method produces rails with 90% less carbon dioxide.

But it would not be possible for the whole industry to switch to EAF steelmaking due to a lack of scrap, as well quality requirements for primary steel products.

The use of hydrogen in BFs is via water electrolysis to be used as the reductant agent in place of coke and coal which produce carbon dioxide.

Voestalpine, Thyssenkrupp, Salzgitter, Tata Steel, Rogesa and ArcelorMittal are all exploring the use of hydrogen in steelmaking, as is Hybrit, a joint project by LKAB, SSAB and Vattenfall to create the world’s first fossil-fuel-free iron ore pellets.

There are barriers to these schemes: hydrogen technology remains in the pilot and testing stages of development, and in some places, the infrastructure does not currently exist or needs scaling up substantially in addition to the required volumes of hydrogen being abundantly available at a competitive rate

These schemes require large investments. The cost of the European steel industry becoming carbon neutral is estimated at €10-15 billion over the next 10-15 years.

Most of the funding comes from the companies themselves and their investors, while the rest comes from a mixture of government funds, and specific European funds for green projects.

Calls for further government policy and framework to support steelmakers undertaking these large investments continue to emerge. nCARRIE BONE

introducing fastmarkets’ low-carbon aluminium differentials

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