Good afternoon. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Century Aluminum Company second quarter 2022 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to your host, Peter Trpkovski. Sir, you may begin your conference.
Thank you, Samantha. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer, and Shelly Harrison, Senior Vice President of Finance and Treasurer. After our prepared comments, we'll gladly take your questions. As a reminder, today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with Regulation FD. Turning to slide one of today's presentation, please take a moment to review the cautionary statement shown here with respect to forward-looking statements and non-GAAP financial measures contained in today's discussion. I will now turn the call over to Jesse.
Thank you, Pete, and thanks to everyone for joining. I'd like to start today by following up on our announcement from last Monday and welcoming Jerry Bialek to Century as our new Chief Financial Officer. Jerry was most recently CFO at Cooper Tire, and before that, had an excellent career with Ford and Amcor. Jerry will officially join us later this month, and you can all expect to hear from him directly on our Q3 earnings call. He'll be a great addition to the team. Okay, turning to page three, I'll start by talking about the current macro environment and our operations, and then Shelly will take you through our Q2 results and Q3 outlook before I wrap up. The second quarter proved to be quite dynamic, with market conditions changing significantly over the course of the quarter.
Second quarter adjusted EBITDA was $87 million, with net sales and shipments up 14% and 1%, respectively. LME pricing averaged 2,900 in Q2 versus spot prices of around $2,500. We took a number of actions in the quarter to solidify our balance sheet, including the extension and capacity increase of our revolving credit facility. The term of the facility is now extended through 2027, with a total borrowing capacity of $250 million. We think this is a good level for the business and allows us the flexibility to fully utilize our borrowing base to finance our liquidity needs as they arise. We also used cash from operations to repay $20 million in outstanding borrowings under the facility, giving us strong total liquidity at the quarter end of $226 million.
Earlier this month, we entered into a binding sales agreement to sell the remaining portion of the real property located in the Mount Holly Commerce Park for total consideration of $30 million. As a reminder, we formed the commerce park in the mid-nineties in order to develop excess land at the Mount Holly site and to assist the local community to bring additional business to the area. Over the years, we have sold off individual lots at the site for development. This transaction enabled us to dispose of all of the remaining lots while achieving an excellent sales price for the land. The transaction remains subject to ordinary course conditions and is expected to close in the fourth quarter. The sale does not have any effect on the main 5,000-acre Mount Holly site, of which we remain the sole owner and operates Mount Holly Smelter.
Turning to the aluminum markets. You can see from the balances on slide four, aluminum fundamentals remain strong. We expect that global supply and demand will remain in slight deficit over the balance of the year, which will continue to drive already short inventories of aluminum lower and support regional premiums. While demand in LME pricing will likely remain volatile in the short term, longer term macro trends towards electrification, sustainable packaging, and renewable energy will continue to drive strong demand growth. We expect these trends to remain especially strong in value-added markets, where spot billet prices remain favorable in both the U.S. and Europe in Q2. We are well-placed to meet increased demand for aluminum extrusions and sheet from our two U.S. value-added cast houses, and once complete, the new Grundartangi cast house.
In fact, once the Grundartangi cast house and U.S. cast house debottlenecking projects are complete, we expect that over 75% of our production will be sold at a premium to P1020 in 2024 and beyond. Okay, turning to page five. You can see that the Russian war in Ukraine, paired with Russian curtailments of natural gas flows to mainland Europe, continue to cause turmoil in European energy markets. Flows of Russian gas to Western Europe are now approximately only 20% of their historical average. This has resulted in mainland European power prices spiking to over 300 EUR per megawatt hour in Germany, France, and other regions. High European energy prices have in turn put upward pressure on pricing in the Nord Pool energy market, albeit at significantly lower price levels.
In Q2, Nord Pool energy prices averaged about EUR 120 per megawatt hour, up about EUR 10 over Q1. Fortunately, we have seen Nord Pool prices reduced so far in Q3, with Nord Pool averaging around EUR 90 per megawatt hour in July. Norwegian officials yesterday announced that they will limit energy exports to the rest of Europe when necessary to maintain normal reservoir levels in the Nord Pool system. This should help to reduce volatility in Nord Pool and keep prices at more moderate levels. We are also exploring steps to reduce volatility in our own remaining Nord Pool exposure. As a reminder, only about one-third of our Icelandic energy contracts are paid to the Nord Pool price, with the remaining two-thirds provided under long-term LME-linked power contracts.
We have hedged a little over 60% of our remaining 2022 Nord Pool exposure at an average price of EUR 24 . For 2023, we have hedged 80% of our Nord Pool exposure at an average price of EUR 30 . From 2024 onwards, we do not have any [audio distortion] . Fortunately, the physical energy markets in Iceland are much better supplied than the rest of Europe, with reservoirs at or above average fill levels across the Icelandic system. In addition, Iceland's 100% renewable system avoids the significant fuel cost pressures seen in the coal and natural gas-based systems in the rest of Europe. Turning to the U.S., domestic energy markets have been affected by increased energy exports to Europe and low domestic coal production.
The combination of these factors has led to significant natural gas volatility and higher Indiana Hub energy prices, which average nearly $80 for Q2 and around $90 quarter- to- date. These tight energy markets have also impacted the power provider to our Mount Holly facility, where a force majeure event from their largest coal supplier has left the utility to cover shortages in their coal generation with market power purchases. Under our Mount Holly energy contract, they're allowed to pass a portion of these increased generation costs to us, which will increase our Q3 energy costs in Mount Holly by approximately $10 per megawatt hour over Q2. We expect this will have a negative EBITDA impact in Q3 of $5 -$10 million. Elevated energy prices also resulted in the unfortunate decision to curtail our Hawesville operations.
While this decision was difficult, it was necessary given relatively high energy consumption of the Hawesville smelting technology and lack of value-added cast house, which made the financial economics of continuing to run the smelter untenable at these energy prices. The curtailment was conducted in a manner that will allow for the restart of the smelter if and when market conditions return to more normal accommodating levels. Shelly will walk you through the impact on our Q2 results and going forward. It goes without saying that we are working with federal, state, and local resources to help our affected employees find new employment, including offering jobs at our other U.S. locations where possible. Okay, turning to our other facilities. Sebree has operated commendably through the hot summer weather. Our North American operations have been executing well on their cast house debottlenecking initiatives.
We expect these initiatives to increase 2023 billet production by approximately 10,000 metric tons. Operations at Grundartangi were excellent, with the new smelter now operating at full production. Progress on new billet cast house remains on schedule and on budget. We expect the construction will be completed in Q4 2023, which will allow Grundartangi low-carbon billet to be marketed and sold in 2024. Finally, moving to our other cost inputs. API alumina prices averaged $370 per ton in Q2, and have fallen to a spot price of $330 per ton today. These prices leave a significant portion of alumina producers underwater, and we have recently seen small supply curtailments in Europe and elsewhere.
Given the risk of further alumina curtailment, combined with the price volatility we have seen in the aluminum price, we made the decision to de-risk the majority of our remaining second half 2022 alumina purchases by transaction, transitioning to LME percentage contracts where possible. Given the low alumina price relative to the aluminum price, we were able to achieve percentages that were well below historical levels. This will reduce our exposure to API in the back half of the year and lower our risk of a dislocation between alumina and aluminum prices during this high volatility period. Turning to our other raw materials, we have finally started to see coke prices decline this month after increasing for the first seven months of the year.
We now expect we have seen the peak pricing for both coke and pitch, and should see further declines as we head into the end of the year. With that, I'll turn it over to Shelly to walk you through the financials.
Thanks, Jesse. Let's turn to slide six, and I'll take you through the results for the quarter. On a consolidated basis, Q2 shipments were up about 1% quarter-over-quarter, primarily driven by additional volume at Mount Holly. Realized prices were up 11% compared to prior quarter as a result of higher lagged LME prices and regional premiums. The combination of higher shipments and realized selling prices drove a 14% increase in sequential net sales. Looking at operating results, adjusted EBITDA was $87 million in Q2, and adjusting items this quarter included a $53 million add back for lower cost or net realizable value charges and removal of a $6 million credit for share-based compensation.
During Q2, we also adjusted for two one-off charges related to the Hawesville curtailment, which included a $159 million asset impairment charge and an $8 million accrual for estimated labor costs associated with the WARN notice. Okay, so let me provide a little more color here on the impairment charge. Under U.S. GAAP, the curtailment of the Hawesville facility was a triggering event that required us to evaluate that asset group for recoverability. As a result of historically high forward power costs, it was determined that the carrying value of the Hawesville asset group was not recoverable, and we recorded a charge to write down the asset group to its estimated fair value. Great. Moving on to liquidity. As of 06/ 30, we had liquidity from available cash and credit facilities of $226 million.
This represents a $71 million increase from prior quarter, in part driven by EBITDA generated during Q2 that allowed us to reduce our borrowings under our revolving credit facilities. We also had lower collateral requirements under our hedging agreements as those volumes continue to roll off and based on lower aluminum prices at quarter end. Lastly, as Jesse mentioned, we upsized our U.S. revolving credit facility in Q2, which provided for additional borrowing availability. Returning to slide seven. Here we'll go through the $19 million sequential decrease in adjusted EBITDA. The Q2 realized LME of $3,060 per ton was up $300 versus prior quarter, while realized Midwest and European delivery premiums were both up about $130 a ton. Indiana Hub power prices in Q2 averaged $78 per megawatt-hour, which is up almost 60%.
That's 60% versus Q1. While Nord Pool prices averaged EUR 129 per megawatt-hour. We're up another 6% versus prior quarter. Taking a look at alumina. The lagged alumina index price was relatively flat versus prior quarter, while LME-linked alumina was higher on a lagged basis. Coke and pitch prices continued their upward trends in Q2, with realized prices increasing a little over 20% for each. As I mentioned last quarter, we had deferred maintenance and pot lining activities in Q1 that we caught up on in Q2, which drove a $30 million swing in operating expense from quarter to quarter. Okay, let's turn to slide eight, and we'll take a quick look at cash flow.
Our cash position remains relatively flat, going from $27 million at 3/31 to $30 million at 6/30, as we used excess cash to pay down the revolving credit facility. CapEx spending was $26 million in Q2, with about $5 million of that related to the final spending on the restart at Mount Holly and $11 million related to the Grundartangi cast house. Cash paid for hedge settlements was $15 million for the quarter. We paid about $11 million in interest in Q2 as we made our semi-annual bond payments. Lastly, we had a modest working capital build, which was primarily related to higher inventory based on increasing raw material prices and additional days on hand. With the curtailment of Hawesville, we expect to see a reduction of working capital in the back half of the year, which should turn into cash.
Okay, let's turn to slide nine. I'll give you some insight on our expectations for the third quarter. For Q3, the realized LME price is expected to be down to $2,660 per ton on a lagged basis. The Q3 lagged Midwest premium is forecast to be $660 a ton, and the European delivery premium is forecast to be $600 a ton. Realized alumina is expected to be $470 a ton. As we've discussed in the past, our income statement reflects a three-to-four-month lag in alumina prices, so we expect to see the benefit of lower alumina prices in our Q4 P&L. On a cash basis, we're already realizing the benefit of lower alumina prices.
Taken together, the LME, alumina, and delivery premium pricing moves are expected to decrease Q3 EBITDA by about $97 million versus Q2 levels. From a power perspective, we're assuming a base price of $90 per megawatt- hour for both Indiana Hub and Nord Pool, which is in line with what we saw for July actuals. The net impact of energy costs would equate to a $5 million decrease in EBITDA versus Q2. Coke and pitch prices continued to rise throughout Q2, and we expect those to impact Q3 results by about 5% for coke and 17% for pitch versus the second quarter. These price increases are expected to drive a $10 million EBITDA decrease versus prior quarter. However, we are seeing signs of softening in the coke market now in Q3 and expect to see the P&L benefit from that in Q4.
Lastly, we expect to see a net EBITDA benefit of $20-$30 million related to savings from our curtailment at the Hawesville plant, as well as anticipated savings from our global cost reduction initiatives and the catch-up maintenance and pot lining that I mentioned from Q2 that's not expected to recur in Q3, as we should now be back to our normalized levels. In total, we expect all these items taken together will equate to an EBITDA decrease of approximately $80-$90 million from Q2 levels for our Q3 results in a range of -$5 million to +$5 million. From a hedge standpoint, we expect a realized loss of about $0-$5 million in the third quarter, and we expect tax expense to be around $10 million.
As a reminder, both of these impacts will be below EBITDA geographically and will impact adjusted net income. Going forward, we expect to spend less than $5 million per quarter at Hawesville for ongoing costs necessary to maintain that plant in a state that'll allow it ready for a restart when markets permit. With that, I will hand it back over to Jesse.
Thanks, Shelly. Across our asets, we remain focused on consistent and cost-disciplined operations. While the market environment has turned more challenging in the short term, we remain convinced that Century is well-positioned to benefit from the long-term macro trends that make aluminum a vital component of a sustainable future. To this end, we have begun implementing a number of second half cost savings actions to ensure that Century is in a good position to weather this high-priced energy environment. These include actions to cut or defer approximately $15 million in capital projects over the balance of the year. If necessary, we have identified further measures that may be taken in the future to reduce spending should market conditions weaken from here. Combined with our strong liquidity position, these actions should leave us well-placed to continue to execute on our long-term strategies.
Finally, I'd like to take a moment to commend our operations across our assets for an excellent safety performance over the quarter. Safety is a core value for Century, and we work hard to improve each and every day. All of our employees should feel proud of their efforts. With that, we'll turn it over to questions.
At this time, I'd like to remind everyone to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment as we poll the Q&A roster. Your first question comes from a line of David Gagliano with BMO Capital Markets.
Hi. Great. Thanks for taking my questions. I just wanted to ask about the current landscape. Obviously, the Hawesville idling was an aggressive action considering the environment. You know, the question comes up of other assets, Sebree, et cetera. Can you speak a little bit to, you know, if the environment stays the way it is, you know, are there other actions to be taken? Alternatively, you know, what type of environment, you know, roughly would we need to see before we see additional actions that's similar to Hawesville? That's my first question.
Sure, David. Thanks. Yeah, I think as I said at the end of my remarks, you know, we think we've taken the actions necessary to permit us to continue to operate in this footprint, you know, to continue to execute on our long-term strategies. You know, we don't provide guidance on individual assets, of course, but when you look at the remaining assets, you know, they continue to operate at or near 100% production. They've got excellent workforce, more efficient operating technology. They've got value-added cast house or building value-added cast houses. They've got track records of consistent performance and profitability. Then as a company, we've got strong liquidity, and we continue to firmly believe in the macro, the long-term macro backdrop for aluminum. We think we're actually in quite good position.
That said, we recognize this is a very dynamic environment. We started to implement some of these cost savings measures today, to mention the capital deferral or decreases. We've got some additional items that we can take as necessary, some additional levers to pull, if necessary. Right now, we feel pretty good with where we're at.
Okay. Thanks. That's helpful. Just one clarification. I know you mentioned, and I see it in the slides here on slide 16, I think it is, you know, the shift in alumina to more percentage LME versus API for the second half of the year. Just so we, you know, have our models tightened up, is there any API-based, you know, alumina pricing left for 2022? Or is it all percentage LME?
No, there is. It's about 60% LME-linked, 25% API-linked, and 15% fixed in the back half.
Okay.
For the back half, yeah. Just as I said, you know, we made that decision looking at what's a relatively good relationship, at the time, still is a relatively good relationship. Given the volatility on both sides, you know, potential impacts, especially on the alumina production side, it made sense to just take a little risk off the table, lock in what it was a good relationship historically, when compared to historical levels, and, sort of de-risk the alumina supply chain a little bit for ourselves.
Okay. Is that a similar, you know, plan for 2023? Should we assume a similar type of dynamic, 60, you know, 2025, et cetera?
Yeah. Some of those contracts are long-term contracts, so you're always gonna have some API built into there. Some of the LME-linked contracts are also long-term contracts. We'll go out there as well as the fixed price. There's just a little bit on the margin that can move either way, that we'll enter into as we sort of get into the beginning of Q4, probably start to lock that down, so we'll have, you know, better guidance for you on the next call.
Okay. Thanks very much.
Thanks.
Your next question comes from a line of Lucas Pipes with B. Riley Securities.
Hey, good afternoon, everyone. I also want to ask about Sebree because it also, like Hawesville, has Midwest power. I wondered if you could maybe hone in on what makes this asset different. Thank you very much.
Sure, Lucas. Yeah, it'll be a little bit of a repeat from what I just mentioned to David, but specifically, you've got one of the big aspects of the smelter technologies is the amount of energy that they consume per aluminum produced. You know, Hawesville unfortunately was the highest of the assets in the amount of energy necessary to produce a ton of aluminum. Sebree, on the other hand, is quite a bit better, which provides you know a big difference in high energy price environments like we find today. When you combine that with a value-added cast house, especially in a period where we have record value-added premiums on the billet side especially, you've got another income stream, additional source of margin for Sebree that you don't have at a Hawesville-type asset.
I think just the third piece to touch on is when you look at Sebree's history, it's been a very well-run smelter, very consistently run, and very profitable over a lot of different conditions. As we look forward, we can be quite confident that it will return to profitability, and we'll continue to get returns on the investments that we make there. High level, that's the difference.
Very helpful. In terms of the power intensity at Sebree, is there a way to quantify that vis-à-vis Hawesville?
No, we don't really disclose individual asset breakdowns in terms of that level of detail. You can just judge based on our actions that it's fairly material.
I appreciate the three points you highlighted. Very helpful. Thank you. Staying on the power side, with Mount Holly, could you remind us where power prices stand there today and to what extent power prices at Mount Holly might move within a higher-priced power environment? Thank you.
Sure. Thanks, Lucas. Yeah. Just as a reminder, the Mount Holly power contract is different than the Kentucky Power contract in that it's a cost of service-based energy contract. It's a three-year contract through 2023. A portion of the energy is fixed, and a portion is subject to our energy provider's fuel costs. Due to the force majeure they experienced, their fuel costs have been higher, and they've had to source some market energy to make up for the coal lost in the force majeure of their supplier. Overall, the blender rate is still lower than the prices we're seeing in Kentucky and really elsewhere today. Just to give you a little more sense, Lucas, you know, it's about a $10 MW increase from Q2.
We don't disclose the actual power price due to some confidentiality provisions. You can look to about a $5 -$10 million EBITDA impact in Q3 over Q2.
Superb. Really appreciate the detail. I'll try to squeeze in a last one. The Inflation Reduction Act, I believe includes some measures to support domestic manufacturing, including aluminum. Have you had a chance to look at that and what might be the benefits to Century? Thank you very much for your perspective.
Sure, Lucas. Great question. It's a 750-page bill, I think, so I haven't been through every detail, of course, and the bill is still not passed as far as I'm aware, so still subject to changes. Based off our early understanding, we do think the bill will have a positive impact, both directly and indirectly. As we understand it, the bill will continue renewable energy subsidies, which should drive primary aluminum demand as wind and solar generation assets, as well as the transmission lines to connect them, are aluminum intensive. Renewable energy also tends to drive down energy prices as a whole. They tend to be the lowest cost source of generation in today's markets. That's another positive.
Second, the bill provides for further electric vehicle subsidies, which, as we discussed, use 400 pounds more primary aluminum value-added products than an internal combustion vehicle. That's another measure that should help demand, which is already, you know, it has been and continues to be strong on the growth potential, but we see this as a real positive to continue to drive that growth. Finally, the bill provides dollars for further supply chain resilience in critical minerals, of which primary aluminum is defined as one. There may be further opportunities there that we'll, you know, continue to look at and discuss once the bill is passed.
Super helpful. I appreciate the color and best of luck. Thank you.
Great, Lucas. Appreciate it.
Your next question comes from the line of John Tumazos wit Very Independent Research.
Hey, John.
Thank you there. Hi. Thank you for filing the full 10-Q and the more detailed disclosure. It might be more than we can read in 45 minutes, but it's better. Thank you very much for Shelly for the explanation of the accounting for Hawesville, which I think was very clear. Now that the aluminum price has fallen and the Midwest premium has fallen and you've had this big hedge cost reversal or credit to income, is this a good time to close out hedges so that you don't have as many assets committed to collateral? Maybe six months ago, the hedges felt like a big headache, and maybe it's a good time to get rid of them.
Yeah, it's a great question, John. You know, if you just look at the hedge books that's on page 16, you can see that the majority of the hedges, vast majority of the hedges are gonna roll off at year-end in any event. You'll see the Midwest position in its entirety will be gone at the end of the year. You'll be down to sort of very low levels of LME hedging. I think naturally that hedge position is almost finished now. We'll be back to a position where the only hedging, you know, sort of material size really is on the energy side, and especially on that Nord Pool side. Yeah, if you look at-
The energy side has been great. They've been profitable.
Yes. Yes, sir.
When Alcoa idled in Spain, they locked up some renewable energy for two years out to restart in 2024. Clearly, the Indiana Hub electricity price is very volatile, as is natural gas. My clients that share their energy view with me would probably expect $25 or higher Henry Hub gas or much higher spot electricity prices. I don't think I know any investor who thinks we're gonna go back to historical prices for gas or spot electricity, given that we're exporting 10%-12% of gas output now. Some people believe that the shale gas fields are maturing and could decline, and our president's promised so much gas to Europe because of their bind. Why not lock in a renewable power contract for one or both Kentucky smelters?
I don't wanna say regardless of price, but I can't imagine a bad price for renewable power.
Yeah, we do think the renewable pricing is going to be very attractive over the long term here. I think we've talked about in the past that is something we're looking at and considering and continue to look at and consider and could very well see us do in the future. I would just say to some of the other commentary, I agree with you. I mean, we've obviously seen very volatile energy prices over the past year coming out of a very long period of very stable, both Indiana Hub and natural gas prices. I think, you know, we do see some signs of relief. If you look at gas generation in the U.S. over the past several weeks, they've been hitting sort of record production levels, which is great to see.
Forward prices, you know, continue to backwardate increase significantly into 2023. Back to your core point, I think we agree. We're very big fans of wind and solar. As Lucas mentioned, I think the Inflation Reduction Act will help to continue to foster additional renewable resources in the U.S., which should provide us good opportunities to take advantage of that in the future, whether Kentucky, South Carolina, or Iceland for that matter.
Thank you.
Your next question comes from the line of Timna Tanners with Wolfe Research.
Yeah. Hey, good afternoon, everyone.
Hey, Timna.
Thank you. I wanted to ask a little bit more on power prices, but I had to join late. Maybe I missed it. From when you announced the closure of Hawesville, if anything, the MISO has been a lot less scary than we had seen in the forward curve at that time. Actually, the Nord Pool forward price, if we get into first quarter, or actually December through February, is above EUR 300. I guess I just wondered if we've talked enough about Nord Pool and about how you're thinking about managing through that and how you make decisions to shed. You know, is it just looking at an extended period of time, or how much confidence do you have in these forward curves given the volatility?
Yeah, it's really interesting, Timna, because I think you're right. Actually, on both Indiana Hub and Nord Pool, when you look at the forwards and then you look what the spot prices that have actually occurred, in other words, if you look at our realized energy prices, again, on both Indi Hub and Nord Pool, you've actually seen levels significantly below the forward curve. What that tells me is there's certainly a huge risk premium being bid into the forwards, and you know, provide some hope that we'll continue to see that occur. With Nord Pool specifically, we've seen pretty strange pricing outcomes over the course of Q2 and into Q3, where you have some very high price days and you have some days that are less than $10 per MWh.
We think is going on there is you have a lot of wind generation in Nord Pool, which is on high wind generation days, it's sort of creating a situation where you're not seeing sort of the contagion from the mainland entering into the Nord Pool market. That's significantly lowered our realized Nord Pool prices. Just speaking about going forward and decisions and focusing on Nord Pool, just as a reminder, we're 60% hedged for the balance of the year, and that's 60% hedged on only one-third of our energy that's exposed to Nord Pool. It's really a very small portion of our overall energy mix at Grundartangi that's exposed to Nord Pool.
Once you hit 2023, which is when you start to see those really high forward Nord Pool prices, the hedge actually goes up to 80% of the exposure. Now you're down to very few megawatt that are actually exposed to Nord Pool going forward. It's difficult to imagine a situation for Grundartangi where that type of exposure would be put in the smelter at risk.
Okay. If I'm reading between the lines as I'm trying to do, sorry, I don't wanna put words in your mouth, but if this situation prevails where the price does more than double from recent levels, then it would really just be the period of time until 2023 kicks off, at which point you're more hedged and you feel comfortable that you could manage through that given what we know today. Is that fair summary of what you were saying?
Even for the balance of 2022, we're 60% hedged for our exposure. Which is only again, one-third of the total energy for the contract. Even for the balance of 2022, that's not a huge exposure. I'll just say and finish with, we are looking at ways to sort of decrease that volatility, if we can over for the balance of the year, and then the balance of 2023 if we get a chance to do that.
2024 and beyond.
Shelly is gonna just remind us that beginning in 2024, we have no Nord Pool exposure. It goes to a fixed price energy contract. That portion of the energy goes to a fixed price energy contract for the next three years. Starting in 2024, you'll have two-thirds of your energy at LME percentage, which is a long-term contract, as it's always been for Grundartangi, and the remainder will be fixed price.
Okay, excellent. Thanks for that clarification. It seems like Europe is gonna be heading into a challenging period for electricity prices, broadly speaking. I mean, have you any insights from your customers there on, you know, rationing of power and any impact or thoughts or impact into the back half of the year from that?
It's a great question. I think everyone obviously is paying attention, but we haven't seen the demand deteriorate in our actual orders yet. Yeah, maybe just leave it at that. I think people recognize there's a risk. People are quite uncertain as to what that rationing may look like. It's actually interesting when you look at storage levels of natural gas in Europe today. They're actually above five-year averages. Obviously the concern is that remaining gas flow from Russia is shut off and the LNG imports that are coming in is not enough to replace it. Right now, you know, if nothing else is going on, you look at the storage levels and you'd say they're in a decent spot. We all recognize there's further risk in the future.
Got it. Definitely challenging things for you to navigate, not trying to take it lightly and appreciate all your candor on the comments. Best of luck. Thanks.
Thanks, Timna Tanners.
You have a follow-up question from David Gagliano with BMO Capital Markets.
All right, great. Thanks for taking my questions. I'm gonna preface it with admitting that this is a bit of a nitpicky question, so take it for what it's worth. I am curious about the answer. When I look at the slide 16, the financial hedge landscape, and I compare it to the prior quarter, there's a couple of things that I wanted to ask about. Number one is the you know, percentage hedged, you know, take the volumes divided by percentage hedged, and it implies volumes in 2023 and 2024. It's kinda like 750,000 tons. That's down from prior quarter of 900,000 tons implied volumes. Is there any going on other than assuming Hawesville is out for that entire period, or is that the reason for that decline?
That's my first question.
Yes, that's the reason, David.
Okay. The second question, not a lot, obviously, but you know, the volumes hedged did go up a little bit in 2024 for the LME. It went from 29,000- 35,000 tons. I just heard your commentary about not hedging. I'm just curious, you know, what is the reason for that admittedly small increase in hedges, and how should we expect that to change on a go-forward basis for the LME volumes hedged into 2024?
Yeah. Great question, David. Great catch. Yeah, all that is that small, I think it's 6,000 metric tons that you're mentioning is the difference. That's just some LME that we hedged against the fixed price power contract that's replacing the Nord Pool power contract. When we saw some of those really high LME levels, we saw the opportunity to sell just a small portion of the metal against that fixed price power contract from 2024, 2025 and 2026, which creates a synthetic LME percentage that looks like the remaining power contracts. We'll give some more guidance as we get closer there, but you can start to think about that fixed price exposure, even as low as it is being de-risked further and creating a nice LME linkage similar to the other Grundartangi power contracts for the period.
Okay. On a go-forward basis, will we see more of that flowing into the hedge book in 2024? Or is that kinda it?
I mean, it's pretty small amounts that you need to hedge because it's not that much power. We've done, I would say, the majority of what we've done there. If anything, it's gonna be a few thousand tons here or there just to offset the remaining fixed price exposure.
Got it. Okay. Thank you.
Yep.
Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. You have a follow-up question from the line of John Tumazos with Very Independent Research.
Hey, John.
Hey, Jesse. I know that you don't really wanna talk about business by asset, but if someone is worried that $9 or $11 or $13 spot gas, if it bounces that high, that you could slow down at Sebree, is there any comfort that you could give us or guidance regarding how high a gas price or spot power price is too much for Sebree to swallow?
Yeah, I'm not gonna go to the individual asset guidance, John, but what I will say is I think you can tell by our approach to date and also sort of our track record over time. We've been very cost disciplined, and when it's been necessary to take action, we've taken that action. We've also managed to, you know, keep our production running through some very difficult commodity price environments. What we've tried to do is to act early rather than late, so that we've put ourselves in a position where we don't have to curtail production. Obviously, this recent action at Hawesville, unfortunately we weren't able to do that. When you look at our track record over time, I think we've done that, and then we've been cost disciplined where necessary.
Maybe I'll just leave it at that, but hopefully that gives you a sense of, you know, how we intend to continue to operate the business, to ensure that we get to what we continue to believe is a very positive, future given the macro setup for aluminum.
Jesse, in terms of marketing, there's certain customers like Tesla where the cars have to be aluminum because the batteries are so heavy. You've got customers like Ball that are building two different billion can plus can plants. I'm sure Anheuser-Busch doesn't want to switch back to steel cans. Why not go to important customers with long-term cost plus contracts like you've given the power utility in South Carolina? Because clearly those customers need the aluminum and don't have anywhere else to go domestically. I hope scrap recovery increases, but that's awful slow.
Yeah. I think you're right about the long-term trends, right? We see some key industries that our focus is for the U.S., both the government and industry itself, that are gonna increase aluminum penetration over the next year, two years, five years, 10 years. We know these trends are out there, whether it's EVs, light weighting, sustainable packaging, renewable energy, all of these things. We think that continues to support the need for domestic industry here. You can just see it when you look at the balances that are on our earlier slides in the deck, that the U.S. remains the shortest market for aluminum in the world.
If we see things like we see in the Inflation Reduction Act that recognize these critical minerals and speak to rebuilding domestic supply chains, it's clear that aluminum will be a part of this. As we sort of start to build that out, I think that raises some of the commercial opportunities like the one you talked about. Without sort of commenting on any specific negotiations, I think we always try to be creative in the way that we sell our aluminum. Certainly we're committed to servicing the domestic industry and are well situated to with our value-added cast house that we have that produce the extrusions and sheet that are necessary for the very applications you're talking about.
You know, we think that commercially should be a very valuable proposition, and intend to pursue it.
Jesse, if I could ask one more, and thank you for your patience with me. I don't know anything about this Inflation Reduction Act, except it's got a goofy name. I try not to read a lot of the crap from Washington. Wouldn't the fine print or any print be so good to give optimism?
Well, I think if you just look, again, I haven't been through the full thing. It still hasn't passed the full Congress and still hasn't been signed into law. We're all still looking at it. If you look at the broad strokes of the bill and the focus, there are some very positive things for aluminum, including renewable energy subsidies, which I think can help produce some of the renewable energy contracts and developments like we talked about earlier, including the EV subsidies, which again should produce additional demand for EV, which, as I said in the past, are much more aluminum-intensive than internal combustion engine vehicles. Specifically, increases demand for sheet and extrusions, which demand the billet and slab that we produce in our U.S. value-added cast houses.
Finally, it may provide some direct support for critical mineral industries like aluminum. Aluminum is specifically defined as a critical mineral in the Act. We'll have to see. But we think, as a whole, and obviously focusing on the aluminum aspects of it, the bill should be a positive for us.
Thank you.
Okay. With that, thanks everybody for joining the call, and we look forward to talking to you after Q3.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.