Decarbonisation – A potential opportunity for aluminium producers
Decarbonisation – A potential opportunity for aluminium producers
Aluminium production is one of the most carbon-intensive industries, due to the high levels of electricity required for aluminium smelting. It emits nearly 1.1bn tonnes of carbon dioxide equivalent (t CO2e) globally and is not helped by China accounting for c 55% of global production. 80% of electricity consumed in Chinese aluminium production comes from coal-fired plants, and a majority of these are subcritical (low efficiency). The aluminium industry must reduce its emissions by 77% by 2050 to meet global climate targets. This will largely be achieved through shifting to green electricity and assisted by increasing recycling capacity and efficiency (recycled aluminium uses c 5% of the electricity required for primary aluminium production). The International Energy Agency has called for all subcritical coal plants to be shut by 2030; this equates to the removal of c 60% of China’s aluminium production (c 30% of global supply) in less than 10 years. In the meantime, customers of aluminium are seeking to decarbonise their supply chains on a shorter time frame, due to investor and other stakeholder pressures, and therefore may be willing to pay a premium for low carbon aluminium. This creates an opportunity for aluminium producers that are early movers in decarbonisation. S&P Global Platts has launched low-carbon aluminium price (LCAP) and zero-carbon aluminium price (ZCAP) assessments, starting with the European market. It defines low-carbon aluminium as applying to primary aluminium with a maximum emissions intensity of 4t CO2 per tonne of aluminium at the smelter. On a smelter-level basis, this corresponds to less than a quarter of global supply. We assess latest reported carbon emissions data and emissions reduction targets for listed aluminium producers to ascertain leaders and laggards, which are: Leaders: Rusal and Norsk Hydro (hereafter referred to as Hydro) Transitioning: Rio Tinto, Alcoa and Mytilineos Laggards: Hindalco, Century Aluminum and all other listed and non-listed aluminium producers (which do not provide emission data and emissions reduction targets), equating to c 80% of global supply.

Subscribe to receive related content

Alcoa Corporation Century Aluminum Hindalco Industries Mytilineos* *Edison client
Norsk Hydro Rio Tinto Group United Company RUSAL
An enormous challenge for global aluminium supply
Due to the high levels of electricity required for aluminium smelting, aluminium production is one of the most carbon-intensive industries. It emits nearly 1.1bn t CO2e globally (with more than 75% of this from aluminium smelting), according to the International Aluminium Institute (IAI), and China accounts for c 55% of global production. To put it into context, China used 485TWh of electricity in aluminium production in 2020, of which 80% (c 390TWh) was from coal-fired plants, and a majority of these are subcritical (low efficiency). This resulted in 667Mt of CO2e emissions from Chinese aluminium production, which is almost double the UK’s entire CO2e emissions (c 370Mt) and higher than all but the top seven CO2-emitting countries globally.
Exhibit 1: Primary aluminium smelting power consumption by source in 2020 (GWh)
Primary aluminium smelting power consumption by source in 2020 (GWh)
Source: Edison Investment Research analysis of latest available data from International Aluminium Institute (IAI),
The rest of Asia, which is mostly India, produces nearly all its aluminium using coal-fired power generation, and Oceania, which is mostly Australia, produces roughly two-thirds from coal-fired power. China, India and Australia were notably absent from the coal phase-out commitments made at the recent COP26 in Glasgow. On the other hand, Europe, North America and South America (which account for c 20% of global output) produce more than 80% of their primary aluminium using low-carbon (hydro, renewable energy or nuclear) power generation. We estimate that roughly a third of global primary aluminium production uses low-carbon power sources and could potentially be classified as ‘low-carbon’ aluminium according to S&P Global Platts’ pricing classification. S&P Global Platts’ ‘low-carbon’ aluminium classification applies to primary aluminium, with maximum emissions from smelting of 4t of CO2e per tonne of aluminium. Excluding China, where supply chain verification is sometimes more challenging, potential ‘green’ aluminium accounts for a quarter of global production. The aluminium industry must reduce its emissions by 77% by 2050 to meet global climate targets, according to the IAI. This will largely be met through shifting to green electricity and assisted by increasing recycling capacity and efficiency (recycled aluminium uses c 5% of the electricity required for primary aluminium production). The International Energy Agency has called for all subcritical coal plants to be shut by 2030; this equates to c 60% of China’s aluminium production (c 30% of global supply) in less than 10 years. China has put caps on production but will need to take drastic measures to comply with global climate targets.
Increasing demand exacerbates the challenge
This enormous decarbonisation challenge for the supply side, which the IAI estimates could cost $0.5–1.5tn, is exacerbated by strong demand for aluminium due to the energy transition. Aluminium is a lightweight material used in electric vehicles, for ‘green buildings’ and power cabling. Based on the IAI’s projections for a sub-two degrees global warming scenario, consistent with the Paris Agreement (Beyond 2°C Scenario or B2DS), demand (including recycled aluminium scrap) could increase by 80% to c 170Mt by 2050 (from 95Mt in 2018). The IAI suggests that secondary aluminium (including recycled scrap) production will increase its share from a third in 2018 (31Mt) to nearly 50% (c 80Mt) by 2050, and that up to a 40% increase in primary aluminium production is required (from 64Mt in 2018 to 90Mt in 2050), albeit produced using green electricity sources.
Carbon emissions analysis for aluminium companies
The challenge for the aluminium industry to decarbonise is exacerbated by only c 38% of global aluminium production residing with 10 pure-play listed aluminium producers, as well as Rio Tinto (a diversified miner), Hindalco (an aluminium and copper producer) and Mytilineos (diversified industrials). These are the companies most accountable to investors (and other stakeholders) for reducing their carbon emissions. Of the 13 companies, only seven provide emission-related data and six of these, accounting for c 19% of global production (13.6Mt in 2020), provide carbon emissions reduction targets.
Exhibit 2: Listed aluminium producers that set a CO2e emissions target
Listed aluminium producers that set a CO2e emissions target
Source: Company data, Edison Investment Research. Note: *Edison rough estimate (as data not provided by company). **No group-level target; one of its four smelters provides its own targets.
Exhibit 3: CO2 emissions intensity and targets analysis
CO2 emissions intensity and targets analysis
Source: company data, Edison Investment Research. Note: *From aluminium smelting in t CO2 per tonne of primary aluminium produced (see paragraph below for explanation on <4t, >4t and >>4t classifications and limitations). **From various baseline years. ***Equity basis. ****Rio Tinto’s target is for absolute emissions not emissions intensity *****Mytilineos’s target is per tonne of aluminium produced (primary & secondary).
Exhibit 3 is intended as a rough guide for assessing the ambitions of those listed companies that provide emission-related data. These include many of the best-in-class aluminium producers. The remaining listed companies and other non-listed companies, comprising almost 80% of global production, typically do not provide relevant emissions-related data and emissions reduction targets. In addition, there are nuances relating to data consistency for the reported emissions intensities and corresponding emissions reduction targets. Thus, in Exhibit 3, we classify CO2e emissions intensity from aluminium smelting (normalised by primary aluminium production) according to three buckets:
  1. <4t CO2e/t, which potentially equates to ‘low-carbon’ aluminium;
  2. >4t CO2e/t, which indicates average emissions intensity above that required for ‘low-carbon’ aluminium; and
  3. >>4t CO2e/t, which indicates average emissions intensity significantly above that required for ‘low-carbon’ aluminium and would apply to companies reliant mostly on coal-fired generation, which can equate to emissions intensities of above 15t CO2e/t.
We note that even within these buckets, an averaging effect over the entire company can distort the fact that some production facilities are below 4t CO2e/t and others are above 4t CO2e/t. For example, Rio Tinto provides enough information for us to infer that its aluminium business is split between Atlantic, mostly Canada, where emission intensities at production plants are below 4t CO2e/t, and Pacific, where emissions intensities are on average above 4t CO2e/t. Other large aluminium producers, with production plants split across geographies, do not provide this level of detail. Alcoa’s production facilities are based in areas including Canada, Iceland and Norway (as well as the United States and Australia), so we believe some of this production is likely to be below 4t CO2e/t despite its average emissions intensity currently being above 4t CO2e/t. Indeed, both Rio Tinto and Alcoa already have their own low-carbon branded aluminium, as do Hydro and Rusal. Nearly all of Rusal’s aluminium production likely qualifies as ‘low-carbon’ as it uses 98% renewable energy (mostly hydro). Rusal is seeking to demerge its few higher carbon aluminium smelters, along with alumina refineries and bauxite mines and rebrand the remaining low-carbon business as AL+. A significant portion of Hydro’s and Alcoa’s production also likely qualifies, as they use 70% and 81% renewable energy, respectively, although there might be potential to increase the portion as they deliver on their emission reduction targets. In particular, we note that Alcoa has production facilities in the United States and Australia that run on coal. Likewise, Rio Tinto has further scope to increase its portion of ‘low-carbon’ aluminium as it delivers on its emission reduction targets, potentially reducing the carbon exposure of its Pacific aluminium business. In addition, Rio Tino, in partnership with Alcoa, is working on an inert anode technology (branded ELYSIS) that eliminates all direct (Scope 1) emissions from the aluminium smelting process. We estimate that both Rio Tinto and Alcoa, on a group-wide basis, will be close to average emissions of 4t CO2e/t by 2025 but not necessarily <4t CO2e/t. Hydro is exploring three technology pathways towards almost ‘near-zero’ aluminium, including carbon capture and storage (CCS) for existing plants, its ‘HalZero’ technology, which reduces Scope 1 emissions, and a number of initiatives relating to aluminium recycling. Hindalco has significant potential to decarbonise as it is currently fully exposed to coal. However, its 25% emissions reduction target is from a 2012 base year, and it has already achieved an 18% reduction since 2012 (without moving away from coal, through measures including efficiency saving). Century Aluminum does not provide a carbon emissions reduction target (at the group-level) or explicitly state the percentage of electricity consumed from renewables. However, the largest of its four smelters (Nordural, based in Iceland) sources its electricity from hydro and geothermal sources; based on this we estimate at least 37% of electricity, at the group-level, is from renewables. Furthermore, Nordural already produces low carbon-branded products as its carbon intensity is <4t CO2e/t and has its own smelter-level target to further reduce greenhouse gas emissions by 2030. Century Aluminum’s other three smelters are based in the United States, with two of them in Kentucky, which generates c 70% of its electricity from coal. In the absence of a clear plan to decarbonise these three plants (ie through captive renewable plants) it does not seem likely that Century Aluminum will achieve group-wide carbon emissions <4t CO2e/t by 2030 and thus we classify it as a laggard. Mytilineos has set by far the most aggressive target of a 75% reduction in emissions intensity (normalised by primary and secondary aluminium production) by 2030. From 2025, we estimate that Mytilineos will qualify for S&P Global Platts’ ‘low-carbon’ classification for its entire aluminium production, as it increases its share of electricity generation from renewables to 70% (mostly from low-cost solar photovoltaic (PV) in Greece). Furthermore, based on our review of sustainability reports for emissions reduction targets, Mytilineos appears to be the only company that is planning a material increase in secondary aluminium production. We estimate that its secondary aluminium production will increase from c 20% of total production in 2020 to 40% in 2030. This report does not address the economics of renewable power generation and thus potential margins from low carbon aluminium. For instance, Mytilineos is securing low-cost solar energy due to very favourable conditions in Greece; in many markets the cost of solar is significantly higher. Low-cost energy combined with the CO2 EU compensation scheme makes Mytilineos a beneficiary in the current higher energy and carbon price environment, maintaining its position at the low end of the cost curve.

In summary

A ‘low-carbon’ aluminium classification could potentially support above-average long-term pricing premiums as customers are increasingly willing to pay a premium for low-carbon products and services, which can in turn help them achieve their own emissions reduction targets and/or make their products more attractive to environmentally conscious consumers. Whether premium prices lead to premium profits depends on the potential to source renewable electricity from lower-cost projects/regions. Leaders and laggards are: Leaders: Rusal and Hydro Transitioning: Rio Tinto, Alcoa and Mytilineos Laggards: Hindalco, Century Aluminum and all other listed and non-listed aluminium producers (which do not provide emission data and emissions reduction targets), equating to >50% of global supply.

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services. Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note. No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors. Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison’s policies on personal dealing and conflicts of interest. Copyright: Copyright 2022 Edison Investment Research Limited (Edison).


Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for “wholesale clients” within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “FPO”) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document. This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the “publishers’ exclusion” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt


London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia


Seven things every investor should know about Unbound Group

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free