February 28, 2022

Nord Stream 2 AG, which built and would operate the homonymous natural gas pipeline from Russia to Germany, was sanctioned by US President Biden last week. Construction on the pipeline was completed late last year, but flows have not started. These sanctions are meant to further punish Russia for its actions in eastern Ukraine. Europe currently receives approximately 35% of its natural gas from Nord Stream 1 and other pipelines, according to Reuters. Nord Stream 2 would have doubled the amount of natural gas Europe receives from Russia. Gazprom, which is a majority Russian state-owned oil-and-gas firm, is the parent company of both Nord Stream 1 and 2.  Natural gas sales for the Nord Stream 1 pipeline (and potentially Nord Stream 2) are done through Gazprom’s export sales arm, GazpromExport. 

Sanctioning this pipeline could hurt aluminum production in the region. By our calculations, nearly 13.7% of Europe’s annual aluminum production capacity has been taken offline, as high electricity and natural gas costs have made production unprofitable. More production cuts could follow if natural gas flows from Nord Stream 1 or other pipelines cease or slow. European countries have limited supply choices and cannot readily replace the Russian gas. Higher natural gas prices in Europe might lead to more smelter shutdowns. Aluminum prices and premiums, already elevated due in part to low inventories, could go higher if more production cuts occur. TTF and LME Aluminum price volatility can be mitigated through financial hedging for those with such exposure. Please contact AEGIS for specific strategies that fit your operations (2/28/22)

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