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 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.