INTERVIEW-High power costs threaten European aluminium smelters

METALS-ALUMINIUM/EAA (INTERVIEW) * Long term competive power deals needed to survive * Copenhagen may be first step in long term solution By Karen Norton LONDON, Dec 2 (Reuters) - Two-thirds of Europe's primary aluminium smelters might shut in the near future, because they are struggling with high costs, the European Aluminium Association said on Wednesday. Next week's climate change talks in Copenhagen could be a first step towards a long term solution, but they will not address the present critical situation of most of the region's aluminium industry, Patrick de Schrynmakers, secretary-general of the European Aluminium Association (EAA), told Reuters. "A substantial fraction (plus or minus two-thirds) of the European smelting industry is seriously endangered in the near future as their long term electricity supply contracts end," de Schrynmakers said in an email interview. Analysts also warn of multiple closures in western Europe, which produces around 4.0 million tonnes of the metal. Plants there struggle with the highest power charges in the world, part of which comes from heavy carbon dioxide (CO2) costs, Schrynmakers said. They will be keen to see commitments on emissions from major aluminium producing nations, which could at least help level the playing field. But the main problem is that European producers are unable to get new long term competitive power deals. "Europe's aluminium smelting industry can only have a future if there is affordable and competitively priced electricity ... EU producers strongly encourage global policy convergence, through a CO2 market in which competitors face equivalent measures." Analysts say many European aluminium smelters sit at or near the top of the production cost curve due to high power costs. Power accounts for up to 40 percent of their total costs. Aside from CO2 costs the key issue for many European smelters is that their long-term energy contracts have expired and they are unable to secure new ones at competitive prices. Imperfect market liberalisation is to blame, Schrynmakers said. "Unfortunately....there still is inadequate competition within electricity markets and it is very difficult to negotiate long term contracts referenced to base load prices." In Europe the electricity price stipulated in new contracts for industrial users such as aluminium smelters ranges from 36.80 to 48.60 euros per megawatt hour (MWh), according to the EAA. This includes the CO2 cost pass through caused by the EU's emissions trading scheme (ETS). This price compares with 20 euros per MWh in most of Ukraine, Gulf States and Iceland. Only Chinese smelting average prices come close to Europe with an average of 36 euros per MWh. CLOSURES A number of European smelters -- in Switzerland, France and the United Kingdom -- have already been forced to close in recent years after their long term energy contracts ended. High power costs continue to threaten others. Major producer Alcoa Inc said last month it would idle its two smelters in Italy after the European Commission ordered it to pay back most of the state aid it had received in Italy since 2006. Without the aid Alcoa said the plants were unviable at current Italian power rates. The company has set a deadline of Dec. 21 to know how much power will cost it in 2010. It will then decide whether to stay in Italy. If nothing is done in Europe to reduce electricity costs, inevitably primary aluminium companies will build new smelters in places where there are lower or no emissions costs. This could lead to production and job losses in Europe for no global environmental benefit at all, a trend known as carbon leakage, de Schrynmakers said. (Additional reporting by Pratima Desai) (Editing by James Jukwey) ((karen.norton@thomsonreuters.com: +44 20 7542 3055))