Europe Al market exposed, falls to come

The European aluminium market has held in an uneasy equilibrium through July so far, with increasingly negative demand signals stemming from a deteriorating macroeconomic picture clashing with high energy costs and other supply risks to limit movements in premiums that remain at historically high levels, despite some recent dips. But the balance is starting to swing towards an inevitable and swift fall in premium levels as demand drops further amid a significant economic slowdown.

The Argus weekly assessment for the duty-paid P1020 ingot premium in-warehouse Rotterdam reached $480-540/t this week, down from $500-550/t, where it had held through July to that point. While recessionary fears continue to impact industrial activity, high costs and logistical issues are slowing the pace of the falls. But market sentiment is now shifting towards expectations of more aggressive drops to come, as evidenced by the CME's European aluminium premium futures contract being significantly backwardated, with contracts for January next year trading around $200/t below current premium levels.

Demand levels are not justifying current premiums. Automotive markets remain shackled by supply issues, with the semiconductor shortage a feature of that industry since manufacturing activity recovered from the initial Covid-19 lockdowns in 2020 and a shortage of wire system parts caused by the war in Ukraine. Construction activity in Europe is also slowing as a result of high costs and a weakening economic picture, and high inflation and hiking interest rates are hitting all manufacturing markets.

The foil to a weakening economic environment has so far has been supply risks and high costs, which have broadly maintained premium levels this month. But global supply levels are not expected to fall alongside demand through the rest of the year. Global aluminium production climbed higher on the year in June, and at a faster rate than May's increases. Both months saw higher output from China, also at an accelerating rate.

With demand in China still suppressed by lockdown restrictions, and further hampered by a burgeoning mortgage bank crisis, forecasts for China's aluminium surplus next year are at 1mn-2mn t.

While rising Chinese production is not as immediate a threat to western markets as it may have been in the past owing to a swathe of anti-dumping duties imposed against imports of Chinese aluminium products, rising output overall will continue to pressure markets exposed to weak demand dynamics, and none is so exposed as Europe.

The European Commission announced on 8 July that it will impose definitive anti-dumping duties of 14-25pc on imports of aluminium flat-rolled products from China. But a delay to the duties' implementation has seen a rush of such products enter Europe ahead of the duties, analysts say. High European premiums continue to attract international metal, while huge inflationary and energy cost pressures are threatening all manufacturing operations. Europe is also dealing with the loss of Russia as a trade partner.

"Sooner or later, all regions will be dragged into the spiral of falling demand, but Europe is the most exposed to high inflation and rising interest rates," an analyst said.

Other geographies may be in a better place regarding current demand levels, but that looks unlikely to last. Falling aluminium output in the US over the previous few months may appear bullish for prices, particularly against a somewhat healthier automotive market owing to a focus on premium, aluminium-intensive cars, but there is a strong expectation that the US will remove its section 232 import restrictions next year, inviting large volumes of cheaper imported metal.

Demand is falling, global supply is rising and incidents of regional tightness will be overcome, even if continuing logistical difficulties make it a slower process than it otherwise would have been.

"There are a lot of puzzles, but whatever happens there is going to be a large surplus of aluminium," a second analyst said.

By Jethro Wookey

Public link

Please use the above public link if you want to share this noodl on another website.