EAA answers questions on Europe's aluminium industry

LONDON, Dec 2 (Reuters) - European smelters are high cost producers and some may disappear over coming years although that process can be slowed if they are able to secure long term power deals at competitive prices. Plants there struggle with among the highest power charges in the world, part of it from heavy carbon dioxide (CO2) costs. While not the solution, European smelters will be keen to see commitments on emissions from major aluminium producing nations at climate change talks in Copenhagen next week. About 15 megawatt hours are required to produce a tonne of aluminium. Once produced, aluminium can be recycled indefinitely with only a small fraction (5 percent) of that energy. It is estimated that about three quarters of all aluminium ever produced is still in use today. Aluminium is often referred to as packaged energy. For story on the survival of Europe's aluminium industry click on Below are some answers from the European Aluminium Association on questions about the industry in the region. Q. What is the future for Europe's aluminium smelting industry? "Europe's aluminium smelting industry can only have a future if there is affordable and competitively priced electricity. "Europe's well diversified energy mix and existing power generation capacity should provide the basis for competitive prices. "Unfortunately, despite a decade of efforts by the EU Commission, there still is inadequate competition within electricity markets and it is very difficult to negotiate long term contracts referenced to base load prices. "Consequently, Europe's electricity prices are among the world's highest. "We welcome the EU Commission's recent recognition of the legitimacy of long term base load priced contracts. "We hope that combined with the transitional measures in the ETS (emissions trading scheme) that this will provide a good basis for continued aluminium production, in Europe..." Q. Could Europe's aluminium smelting industry disappear? Over what time frame and how significant would it be? "Unfortunately, most new aluminium smelting is located in the Far and Middle East, generally, based on high CO2 energy mixes. "Yet, in Europe, several smelters (Steg, Auzat, Lannemezan, Anglesey) have had to close when their historical energy contract ended. "A substantial fraction (+/- 2/3) of the European smelting industry is seriously endangered in the near future as their long term electricity supply contracts end. "They now depend on the limited flexibility of European and National Authorities under competition rules to compensate them for the uncompetitive electricity prices." Q. Why does the European aluminium industry pay higher electricity costs? "High European electricity costs...are the principal reason why European smelters face significantly higher production costs than many of their global competitors. "When heavy CO2 costs, which competitors, elsewhere, do not bear, are layered on top of EU electricity market malfunctioning, the competitive disadvantage is further increased. "Competing countries imposing similar CO2 burdens could to some extent help to reduce this inequity." Q. Will CO2 and trading schemes create a more level playing field and prolong the existence of aluminium producers in Europe? "EU aluminium producers strongly encourage global policy convergence, through a global CO2 market in which competitors face equivalent measures. "To the extent that equivalent CO2 trading schemes (similar provisions for allocation) are adopted by competing countries, the unequal burden will be reduced. "In the meantime, we appreciate the transitional measures provided by the EU Emissions Trading Directive (ETS) for sectors at risk of carbon leakage (displacement to regions without equivalent measures). "This is particularly important for an energy and capital intensive sector, such as aluminium smelting." Q. What, if anything, are you hoping to come out of Copenhagen? What will happen if a greater number of countries adopt such schemes? "We very much hope Copenhagen will result in a strong agreement whereby all aluminium producing regions of the world take comparable commitments, as the competitiveness of the European smelters would greatly benefit from such progress. "However, as even such ambitious objectives would fail to produce level playing field conditions, EU industry will continue to require the transitional measures provided by the ETS, until all competing countries shoulder equivalent burdens." (Compiled by Pratima Desai and Karen Norton; edited by James Jukwey) Keywords: ALUMINIUM ENERGY/EUROPE (pratima.desai@thomsonreuters.com; +44 20 7542 5113)