How energy costs affect the aluminum foil production process
To understand how energy affects the price of aluminum foil, it is important to examine the production process. Key steps in relying heavily on energy include:
Aluminum ingot production: Aluminum ingot is the raw material for foil rolling, which requires a large amount of electricity to refine aluminum oxide into metallic aluminum through electrolysis. Europe and the United States import most of their steel ingots from overseas due to declining domestic production.
Aluminum foil rolling: Aluminum ingots are heated to around 500 degrees Celsius and rolled between powerful rollers to form aluminum foil sheets. Hydropower and natural gas are the main energy sources for the rolling mill.
Annealing: Thin foils are annealed in a kiln to soften and stabilize the material, making it easy to roll further or convert into finished foil. Natural gas furnaces are often used.
Packaging and Distribution: Further processing, packaging the foil into rolls, and shipping/shipping to customers all consume fossil fuels.
Every step along the way has exposed aluminum foil companies to fluctuations in global energy markets. Soaring gas and electricity prices in Europe have created a double whammy, with both direct costs and an indirect hit from rising raw material import costs.
Rising steel ingot prices impact retail industry
With energy now taking up a larger share of production budgets, aluminum ingot suppliers have no choice but to charge more for the rolled aluminum sheets they sell to foil processors. Industry publication MEPS reports that annual average global steel ingot prices will rise by more than 40% in 2022.
For aluminum foil brands, higher aluminum ingot costs translate directly into upward pressure on wholesale and retail prices. Most analysts believe that the minimum requirement for aluminum foil manufacturers to maintain operating margins next year is an additional 10-15% price increase given the current runaway energy situation.
As a result, grocery shoppers can expect to pay significantly more for popular household aluminum foil brands by 2023. Bulk commercial buyers such as food manufacturers will also face steep surcharges. One mitigating factor could be a fall in oil and gas prices from recent record highs, thereby easing cost inflation across the board. But most experts expect the volatility and rise in energy prices to continue until next year.
European producers hardest hit
The largest increase in aluminum foil prices is expected to be in Europe due to its high reliance on energy and direct exposure to soaring gas and electricity prices. European wholesale gas prices soared by more than 500% last year, while electricity markets hit new highs.
Major foil rolling facilities in Germany, Italy, Spain and Eastern Europe are facing double or triple electricity bills in some cases. Even with government aid, incremental costs will always be passed on to retailers and consumers through the aluminum supply chain.
The European Aluminum Association is lobbying governments for emergency support, but financial constraints are limiting the aid. Therefore, against the backdrop of energy inflation rising several times, producers have no choice but to increase selling prices to maintain profits. Most industry observers believe that European household aluminum foil prices may increase by more than 20% on average in 2023.
The impact in North America is more modest but still significant
Energy costs for North American aluminum foil roll manufacturers are slightly lower compared to Europe, thanks to abundant domestic natural gas supplies and a more self-sufficient power grid. However, they still face significant risks from rising global commodity prices, especially imported aluminum ingots.
U.S. natural gas prices have more than doubled this year, and the electricity market has also seen double-digit growth. While not as extreme as in Europe, the North American aluminum industry is forecast to see energy bills rise 10-15% next year.
Aggressive monetary policy tightening could also tip the economy into recession and dampen demand. Modest positives from lower domestic fuel prices and potential recessionary impacts are likely to limit average U.S./Canadian household foil price increases to a range of 10-15%. But further inflationary shocks or lingering supply chain difficulties remain major uncertainties. Commercial bulk buyers will still face higher surcharges.
Outlook remains highly uncertain
Overall, the aluminum foil industry faces a very challenging 2023 due to extreme volatility in energy, commodities and economic prospects. While some adjustment in oil and gas prices could ease cost pressures, most experts caution against assuming the current crisis has peaked. Geopolitics and uncertainty surrounding European energy security further increase risk factors.
Aluminum foil producers will therefore plan carefully for continued inflation and build flexibility into their pricing methods. Frequent contract renegotiations, quarterly surcharges, and flexible formulas linking prices to key inputs may become standard industry practice. Consumer aluminum foil price increases may be smaller, but commercial and industrial buyers will face higher surcharges.
Consumers can also expect more promotions and loyalty programs as retailers work to limit pass-through fillers. With global factors beyond the control of any single player dominating the short-term cost outlook, ambiguity and volatility appear to be inevitable features of the aluminum foil market in 2023. At best, stabilization may occur in the second half of the year, depending on macro trends. But for now, inflation remains the main driver affecting industry strategy and consumer budgets.
In summary, soaring energy prices pose ongoing significant challenges to global aluminum foil producers. With costs rising across the board, further increases in retail prices appear inevitable in 2023, despite efforts to minimize the impact. European markets are expected to experience the largest increases, but North American consumers are also bracing for significant growth. With global economic headwinds hitting suppliers and consumers alike like never before, the exact scale remains difficult to predict. Agility is critical on all fronts to respond to ongoing turmoil.
