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European primary aluminum market faces uncertain start to 2023

Highlights

Demand outlook remains contingent on impact of year-end destocking

Curtailed European production continues to be highlighted as concern

Debate over market receptibility of Russia-origin aluminum continues

  • Author
  • Charles Thompson    Khaula Bhatti
  • Editor
  • James Leech
  • Commodity
  • Natural Gas Metals

Mixed outlooks and cautious optimism set the tone for the primary P1020 European aluminum market this year, following 12 months marked by overbooking and volatile supply, which have resulted in a more wary tone and altered buying habits.

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European duty-paid premiums were assessed unchanged through the week ended Dec. 30 at London Metal Exchange cash plus $240-$270/mt in-warehouse Rotterdam.

This reflects a decrease of 60% at the midpoint since May 2022, where duty-paid premiums surged to record highs in the spot market -- reaching $630/mt May 5 as consumers rushed to secure material amid fears of further price hikes, as crippling energy costs and logistical bottlenecks likewise supported bullish trends.

The market has since undergone a downward trajectory, with demand softening and participants forced into a "wait and see" mode until there is greater visibility on Europe's economic plight.

One trader highlighted a recent uptick in demand for the Q1 period, after customers returned to the market for last-minute buying.

"Nobody bought previously and now they are, right before they go on holiday. It's not a sign the market has changed, just that the demand has concentrated," the trader added.

Maintaining a bleak outlook, the trader predicted a bearish market for Q1 and Q2.

A second trader emphasized that the pace of destocking would likely determine the direction of the market, with many customers carrying over stocks into Q1 and looking to offload material, but unable to do so amid poor demand.

Acknowledging positive long-term forecasts for the global aluminum market and reasonable end-user demand heading into the new year, the same trader offered cautious optimism and speculated that recovery will commence from the middle of Q1.

Sources are additionally hoping that implementation of a European gas price cap may help solve demand woes, suggesting that greater clarity on energy costs may strengthen consumer confidence and spur buying.

"Come the new year, when contracts expire, customers will be forced to make decisions and we could see a huge wave of demand sweep across Q1. The European gas cap will grant more clarity to consumers, and with this they can start hedging energy and start buying metal," said one market participant.

Global demand

According to a study conducted earlier in the year by CRU International on behalf of the International Aluminium Institute (IAI), global aluminum demand is expected to increase by almost 40% by 2030 -- with transport, construction, packaging and the electrical sector cited as key drivers.

Statistics outlining nearby trends, however, are not as positive. The S&P Global Aluminium Users PMI for November pointed to deteriorating conditions across all three monitored regions, noting the steepest downturn since May 2020 with purchasing activity falling for the third time in four months, likewise at the fastest rate since May 2020

Conversations have revealed faltering confidence by market participants in the construction sector going forward, which appears to have taken an extensive hit and subsequent recovery is predicted to be slow. On the contrary, demand stemming from the automotive and aerospace sectors is largely expected to be firm and stable.

One trader told S&P Global Commodity Insights: "We have decided to increase exposure to the automotive sector and increase our volumes. Even with a recession, we won't feel it for at least six to seven months due to the backlog of orders."

Citing tightening monetary policy, another source claimed that the current interest rate environment will not support even the strongest of demand sectors, with the automotive industry among others likely to suffer despite an existing backlog.

One source reiterated this concern over specific demand sectors.

"Automotive is still a bit of a question mark, you hear a range of opinions on what the market is doing but these guys are still working on a backlog," the source said.

Regarding future premium movements, the source said: "We're offering higher in 2023 and If I was running a factory I'd buy in January for $280/mt."

Supply hangs in the balance

Soaring energy costs through the year have battered European production and inevitably raised questions on future supply. Fuelled further by the Russia-Ukraine conflict, past months have seen a number of large industry names fall victim to the crisis -- with a string of curtailments announced across Europe as smelters fight to maintain profits under strained margins.

"Europe has lost 1.4 million tons due to production cuts, plus another 1 million tons of Russian flow has been diverted to Asia. Europe is a deficit market and is pushing itself in a corner -- when demand returns, there will be big trouble," said one market source.

Russian producer Rusal accounts for 6% of all global aluminum output, however widespread sanctioning has pushed this material away from Europe and limited availability in domestic markets.

While concerns linger as to how supply levels will cope once demand eventually bounces back, another source predicted that the situation may not be as dire.

Reflecting on the LME's decision against banning Russian-origin material from its warehouses, the source said that "there is a growing interest from consumers to buy Russian. It could be that with the new year, if customers believe that there won't be sanctions and the metal will tradeable, then the customer base accepting metal will grow. This is already happening."

An Italy-based trader highlighted a reluctance to hold stocks of any origin, due to the incoming economic environment.

"We want to hold lower stocks, as it's a new environment. If you sit on stocks the price to hold these is much higher, compared to where interest rates were much lower," he said.

"We are usually stock-holders to provide a bit of a buffer [for customers] but to do this you pay more. Europe and US will hit a minor a recession, we are certainly feeling it and this will have a big factor on demand and premiums."