According to data from Samál, the Icelandic Association of Aluminum Producers, the smelters’ domestic expenditures in 2024 came to ISK 135bn, or 43% of export revenues. In recent years, this ratio has ranged between 37% and 48%. As the chart shows, electricity purchases are the largest single domestic cost item, accounting for nearly half of total domestic expenditures. In 2024, the smelters’ electricity purchases totalled ISK 65bn. At the same time, their purchases of goods and services came to ISK 34bn, including everything from shipping to and from the country to food procurement for the smelters’ canteens to the purchase of maintenance and other services. Wages and related expenses totalled ISK 30bn, and levies paid directly to State and local governments amounted to another ISK 6bn.

The impact of the production cutbacks at Norðurál depends primarily on how long the situation persists. For the present, no employees will be laid off, and Norðurál is therefore absorbing the shock that would otherwise hit Icelanders’ wage income. Furthermore, uncertainty remains about whether and to what extent the smelter’s reduced energy use will erode Icelandic energy companies’ revenues. On the other hand, the effects of reduced goods and services purchases are already starting to show; for instance, Eimskip has lowered its revenue projections for shipping of Norðurál products.

Silicon metals production on ice

Excluding the aluminium smelters, the largest share of energy use in the energy-intensive sector is due to the plants at Grundartangi and Bakki, both of which manufacture metal alloys containing large amounts of silicon, for use in a range of industrial applications.

This past July, PCC’s silicon plant at Bakki halted operations temporarily, and over half of its employees were laid off , followed by another 30 redundancies in September. According to a recent interview with PCC Bakki’s CEO, the plant will probably not be rebooted until next autumn at the earliest, and the possibility of its closing permanently cannot be ruled out.

Naturally, the closure of the Bakki plant is a heavy blow to the town of Húsavík and its environs. Not only has PCC been the community’s largest employer, but it has also bought substantial amounts of goods and services from local businesses. Moreover, the closure of the Bakki plant strongly affects Landsvirkjun and Eimskip’s revenues, among other things.

Earlier this autumn, the Elkem plant at Grundartangi announced that it was curtailing production and would shut down one of its three furnaces for about 50-60 days starting in early December, owing to adverse market conditions.

In 2024, gross export revenues from these two silicon metals plants totalled just over ISK 26bn, according to figures from Statistics Iceland (SI). It is therefore clear that cutbacks of the magnitude planned for the near future will significantly reduce Iceland’s net export revenues for as long as the companies continue to operate at lower levels.

Weaker pelagic fish catches on the horizon

News reports about expected pelagic fish catches have been ambiguous in the recent past. For instance, the International Council for the Exploration of the Sea (ICES) recommends that next year’s mackerel quota be set at 70% below the 2025 quota. For blue whiting, the recommended quota is 41% lower. To compensate, IECS offers some comfort in the form of a recommended 33% increase in the quota for Atlanto-Scandian herring.

On the whole, it appears that pelagic fishing will generate slightly weaker export revenues in 2026 than in 2025. Revenues from pelagic product exports were just over ISK 94bn in 2024, or 4.8% of the economy’s total export revenues. It therefore matters when such exports shrink, as they are now expected to do for the fifth year in a row.

Cloudy skies ahead for tourism

Fortunately, this year’s peak season for tourism was far stronger than previously expected. According to Icelandic Tourist Board measurements, nearly 1.8 million foreign nationals departed from Iceland via Keflavík Airport in the first three quarters of the year, an increase of 3% relative to the same period in 2024. Other tourism-related indicators – such as hotel bed-nights and domestic turnover with foreign payment cards – point in the same direction.

The situation in the quarters ahead is more uncertain, however. The collapse of airline Play at the end of September has caused a downturn in flight offerings to and from the country, even though Play had already shifted its focus away from tourist visits to Iceland in the quarters beforehand.

In our opinion, the impact of the airline’s failure on the domestic economy and export revenues beyond the next few months will depend on how tourism shapes up this winter and in spring and summer 2026. If demand is strong, other domestic and foreign airlines will probably fill the gap left by Play, as is already happening in the case of Icelanders’ travels to sunny climes.

On the other hand, media coverage suggests that a number of industry leaders have expressed concerns about the status of bookings for the winter ahead. Presumably, Iceland’s high real exchange rate is an important factor here. Furthermore, there are significant concerns among industry players about how the Government’s levy of higher fees will affect the sector’s competitive position in the coming term. For example, the levy of an infrastructure fee on cruise ships appears to have substantially reduced cruise ship activity in Iceland, thereby cutting into revenues.

Adverse scenario featuring a contraction in exports in 2026

Just over a month ago, we issued a macroeconomic forecast that included a number of assumptions relating to exports. In that forecast, we assumed that exports would grow by just over 2% this year and then by 3% in 2026.

Uncertainty about developments in exports has certainly mounted in recent weeks and months, but even so, our forecast may well hold. That said, our assessment – and presumably that of most other observers – is that the export sector will face an uphill climb because of the setbacks described above.

To take account of this, we have prepared a simplified scenario depicting far stronger headwinds than in the baseline forecast. The assumptions underlying the adverse scenario are that the production cutbacks at Grundartangi will last until mid-2026, PCC Bakki will not operate at all during the year, pelagic fish catches will be broadly as is described above, and tourist numbers will fall in 2026 by 3% year-on-year, to roughly the same total as in 2024. It would surely be possible to design a far more pessimistic scenario, and the impact on the domestic economy would be that much stronger. On the other hand, our scenario does not assume that mitigating measures will be applied to any significant degree; nor does it assume that material amounts of the energy, human resources, and capital that lie dormant because of the contraction in exports will be reallocated to other value creation during the period.

Based on these assumptions, year-2026 GDP growth could end up measuring around 0.8% instead of the 1.7% provided for in our end-September forecast. Total exports of goods and services could therefore contract by 2-3% instead of growing by 3%, as we projected in September. Offsetting this, goods and services imports would shrink under our adverse scenario, instead of growing by 1%, as in the baseline.

Trade-related foreign currency flows would be somewhat less favourable, causing the ISK to be a bit weaker than in the baseline forecast. This would push inflation upwards for a time, but weaker economic activity would curtail demand-driven inflation in the coming term. Unemployment would be higher than in the baseline, households’ activity would grow more slowly, and companies that rely on domestic demand would have to tap the brakes more firmly than they would otherwise.

The impact this would have on the Central Bank’s (CBI) policy rate would ultimately depend on how persistent imported inflation proved to be and, equally, on whether inflation expectations were affected more by the temporary inflation spike or the anticipated reduction in inflationary pressures. One could imagine, for instance, that the CBI would choose to wait a while before unwinding interest rates further, only to lower them more rapidly once the initial exchange rate pass-through effects were in the rear-view mirror.

Fortunately, though, it is more likely than not that headwinds potentially facing the export sector will be short-lived and that the next few years will see the Icelandic economy show once again how flexible it is if and when it is hit by external or internal shocks.