Aluminium has an important role to play as the world transitions to a low-carbon economy. The metal is light, durable, corrosion resistant, ductile and easily recyclable. These inherent qualities make it suitable for a wide range of applications: for transportation, packaging, lightweight construction and as a key component in solar farms and wind turbines.
Aluminium is already the second most widely used metal globally after steel. It accounts for nearly one percent of global GHG emissions, with 80 percent of that contributed by the aluminium smelting process. Aluminium smelters use a huge amount of electricity and are often hydro powered to reduce the overall carbon footprint of their production process. There are, however, a number of smelters that continue to reply on coal-fired power.
The continuing growth in demand for aluminium has made reducing carbon intensity a critical goal for the industry. There is widespread acceptance of the need to shift to low-carbon forms of production, but industry agreement on what this means is more elusive. A market-wide consultation on proposed specifications for low-carbon aluminium, including pricing mechanism, products and locations, is now underway, but as yet there is no agreed definition.
Trafigura recognises the urgency of the task. As one of the world’s leading aluminium traders, we are not waiting for consensus to emerge. We are taking decisive action to accelerate the uptake of low-carbon aluminium.
Demand for low-carbon aluminium is already rising, with manufacturers, particularly in the packaging and European automotive industries, seeking to reduce GHG emissions across their value chains. These companies are prepared to pay premium prices for low-carbon aluminium brands. They are at the cutting edge of a growing trend.
Alert to this market opportunity, primary producers are pursuing multiple initiatives that limit CO2 emissions, by sourcing renewable energy, incorporating more recycled materials or through breakthrough technologies that eliminate carbon dioxide from the smelting process.
In 2019, we became the first commodity trader to establish a low-carbon aluminium trading desk. Trafigura’s trading desk is building links between these producers and consumers to strengthen and solidify this increasing emphasis on low-carbon production.
We are continuing to innovate to encourage growth in the sector. In 2020, in another global first, we announced a USD500 million low-carbon aluminium financing platform designed and structured in partnership with two of Trafigura’s longstanding financiers, Natixis and Rabobank.
This facility has several goals:
- To meet the growing demand from downstream manufacturers and to support upstream producers in accelerating their transition to low-carbon technologies;
- To develop access to preferential financing terms for transactions that involve qualifying low-carbon aluminium brands; and
- To identify eligible low-carbon aluminium by evaluating specific brands and their smelters’ CO2 emission performance against industry benchmarks provided by independent consultants. Eligible brands typically come from smelters that rank in the top 10 percent globally for CO2 emissions performance.
Incentivising producers with reduced cost financing
We invite producers to validate this external data with their own written statements and, where possible, seek third-party confirmation of the results. We share all this information with our banking partners, who conduct their own independent evaluation before assigning ‘lowcarbon’ status to a brand. Transactions involving brands that have been verified as low-carbon aluminium attract preferential financing. We will continue to work with smelters over time to ensure that their certification is renewed and audited regularly
We have developed a methodology that sets out clear parameters for low-carbon aluminium production. This draws on existing recommendations and standards, such as those formulated by the EU Technical Expert Group on Sustainable Finance and the Aluminium Stewardship Initiative. It combines limits on direct and indirect emissions for primary aluminium production, the amount of electricity used in manufacturing and the carbon intensity of that electricity.
The reduced financing cost allows us to pay an additional premium for low-carbon brands. The extra premium both helps incentivise smelters to transition more quickly to low-carbon production methods and enhances Trafigura’s long-term competitiveness in this space.
It is likely that low-carbon eligibility criteria will be tightened in future as global standards develop. This ratcheting up of the criteria will help to incentivise continued progress by smelters, thus accelerating emissions reduction for a material that is a key enabler for the transition to a low-carbon global economy.
Trafigura’s USD500 million low-carbon aluminium financing platform
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