On March 15th, the Mozal aluminum plant controlled by South32 officially entered a state of complete shutdown and maintenance. The core of this crisis lies in the complete breakdown of the transnational power supply system consisting of "HCB Hydropower Station - Eskom Power Company - Mozal Aluminum Plant". This event will directly reduce the global supply of primary aluminum by approximately 0.8%, or provide strong support for the aluminum price. Especially in the case of uncertain situations in the Middle East, the production cut at the Mozal aluminum plant may align with the production cuts in the Middle East region, jointly leading to a shortage of aluminum ingots in the European and American regions, and pushing the aluminum price to reach $4,000 per ton.
Event background and current production halt situation
The Mozal aluminium plant is the largest foreign direct investment project (worth 1.3 billion US dollars) introduced by Mozambique since the 1992 civil war. It is also a landmark heavy industry project in the country. The project was put into operation in 2000 and established a significant cost advantage by taking advantage of the extremely low electricity prices (0.02 US dollars per kilowatt-hour) in the initial stage. Currently, the equity structure of this project is South32 (63.7%), South African IDC (32.4%) and the Mozambican government (3.9%).
Due to the failure of the power supply renewal negotiations, South32 decided to put the factory into a "maintenance and repair" state on March 15th. Firstly, reducing production is not without losses for the Mozal aluminum plant. From a financial perspective, the preparation for the shutdown will incur approximately 60 million US dollars in one-time expenses, and an annual base maintenance cost of 500 million US dollars is required thereafter. If it eventually leads to permanent closure and site restoration, the estimated cost will be 119 million US dollars. Secondly, the reduction in production at this plant will also have a considerable impact on the economy of Mozambique. The shutdown will directly affect approximately 4,000 to 5,000 employees, and indirectly affect over 20,000 people. It is expected to cause a significant economic loss equivalent to 3.9% of Mozambique's GDP. However, even though reducing production is not an easy task for South32 and the Mozambican government, due to the irreconcilable conflicts in the interests of the three parties involved in the power negotiations, ultimately all parties could only give up the "optimal solution" of maintaining production.
The core cause of the breakdown of the transnational power grid
The stable operation of Mozal is highly dependent on a cross-border power network consisting of power generation at the base level, cross-border transmission and distribution, and end-use consumption. The systemic breakdown of this structure is the direct cause of the production halt.
The HCB Hydropower Station in Mozambique is the de facto primary power source for Mozal. Due to the isolation of the north-south power grid in Mozambique, the electricity from this station needs to be routed through South Africa for export. The central region of Mozambique has suffered from severe drought for two consecutive years, resulting in a significant decrease in the reservoir water storage. In the next 2 to 4 years, it will not be possible to restore full-load base-load power supply.
As a power resale company, Eskom in South Africa was facing a severe power generation crisis. The available power generation capacity had significantly declined. To make up for the huge financial losses, Eskom planned to significantly increase the electricity price. The only formal renewal offer it provided to Mozal was close to 100 US dollars per megawatt-hour, which was completely outside the reasonable range of electricity prices in the global aluminum industry.
Outside of China, very few aluminium plants in the world can afford electricity prices above $50/MWh. South32 has clearly stated that the maximum price for maintaining operations is $51/MWh. There is a huge gap between Eskom's offer and the cost baseline of Mozal aluminium plant, making it impossible for the business logic to close the loop.
Policy Shift and Regional Geoeconomic Reconfiguration
At the same time as the global power system collapsed, the macro strategic adjustments in Mozambique accelerated the process of its production suspension.
The fiscal and taxation policies of resource-rich countries are tightening: The new government of Mozambique intends to change the old model of providing cheap electricity subsidies to foreign investors. They plan to increase the royalty fee to 3% and restore the corporate income tax rate to 25%, in order to fill the country's fiscal deficit.
Integration of regional power grids and energy flow: Mozambique is committed to increasing its electrification rate and is fully advancing the physical integration of the north-south power grids. The 950MW of electricity released by the suspension of the Mocal plant is expected to be transferred to the regional power trade (SAPP), and will be exported at high prices to the copper and cobalt mining belt in Zambia and the Democratic Republic of Congo. This marks a shift in the country's energy strategy from supporting a single high-energy-consuming export to high-value regional energy output.
Industry Chain Impact and Market Forecast
The marginal contraction of primary aluminum supply will provide strong support for aluminum prices. The suspension of production at Mozal will result in a reduction of approximately 500,000 to 600,000 tons of primary aluminum supply globally each year, accounting for about 0.8% of the global total output. The substantial reduction in supply will provide strong support for aluminum prices. Currently, the situation in the Middle East has greatly impacted the electrolytic aluminum supply chain, and the market is beginning to worry that if the Strait of Hormuz remains blocked for a long time, the depletion of raw material stocks will endanger the electrolytic aluminum production in all the Middle East and Gulf regions. The current reduction and future concerns about the reduction may amplify market panic. At a time when overseas inventories are at a low level, the LME aluminum price is expected to hit the 4,000 US dollar per ton mark.
The gap in demand for alumina and the fluctuations in spot and futures markets. The shutdown of 600,000 tons of primary aluminum production means that the annual demand for alumina imports will drop by approximately 110,000 tons. This portion of the supply that was originally flowing to Mozambique through long-term contracts (mainly provided by the Australian Worsley Alumina Plant) will now flow back to the international market. Moreover, the potential disappearance of the current demand for alumina in the Middle East may have a significant impact on the Australian alumina market. The intensification of the oversupply of alumina overseas and the short-term increase in costs from fuel to shipping fees to mine prices have collided with a fierce logic, and this is expected to amplify the fluctuations in the futures market.
Overall, the shutdown of the Mozal aluminum plant was the inevitable outcome of multiple objective factors such as the expiration of historically low-cost energy agreements, the impact of extreme climate on water power supply, the crisis in South Africa's power system, and the shift in resource policies in Mozambique.
This event clearly indicates that the era when global high-energy-consuming industries relied on long-term fixed-low-price energy agreements is coming to an end. In the future, the survival and expansion of aluminum smelting capacity will increasingly depend on whether they can stably obtain large-scale and cost-competitive clean power resources globally.
