With margins on aluminium, particularly in the primary ingot market, so tight trading houses have been increasingly heard trying to diversify their exposure to the market by securing long-term supply, sometimes via direct asset purchases or indeed through commercial off-take or marketing contracts.
Premiums for aluminium metal are close to all-time lows and while some market participants are bullish on some areas of the market for next year, no immediate recovery is largely seen to be in the pipeline.
Outright prices have provided some respite to many producers of the metal – the three month London Metal Exchange aluminium price is up 18% this year and up around 23% from the seven-year-lows hit in November 2015 – but traders continue to feel the pressure, sources said, and with new physical shops popping up all over the world, competition is only likely to increase.
“There are too many physical traders in aluminium right now and margins are too tight. You need an edge now – that’s why you’re seeing traders move into the asset game,” one large trading house source told Metal Bulletin.
Asset gains in Europe, USA
The trend has focused primarily on Europe and the USA, where assets across both key regions of aluminium supply and consumption have become increasingly distressed. With prices low, energy costs high and oversupply an ever present issue, many producers and asset owners have spent the past few years looking to consolidate their books, whilst distressed assets, such as smelters operating at high production costs, are often the victim of such consolidations.
This September, Swiss trading house ARG International, formed by former Glencore traders Matt Lucke and Zach Mayer in 2013, bought the New Madrid smelter in Missouri for $13.7 million. The smelter was closed by bankrupt Noranda in March and had an annual nameplate capacity of 263,000 tonnes of primary aluminium, although it will likely take a sizeable increase in the aluminium price above $2,200 per tonne to see the smelter restarted.
The three-month LME aluminium price was $1,711-1,712 per tonne on Monday December 19.
A closure of a number of facilities across the USA means there is now a deficit market there that needs to import larger amounts of supply. High power costs, low outright prices and cheap cost-of-production regions, such as China, have forced a handful of companies and smelters offline over the past few years.
Still, ARG likely also investigated the value of scrapping the smelter before buying it. Multiple sources confirmed to Metal Bulletin sister publications AMM that they received a request for a quote on about 15 million lbs of aluminium bus bar coming from the New Madrid area. This material, believed to be sourced from the smelter if it were scrapped, could be worth some $12 million to $13 million.
Elsewhere, SIMEC – a sister company of Liberty House Group in the UK – reached an agreement to buy 100% of Rio Tinto’s shareholding in the Fort William aluminium smelter in Scotland for $410 million.
The sale of the last primary aluminium smelter in the UK, which has capacity of 47,000 tpy, includes the operating smelter, hydroelectric facilities and all associated land, the company said in an announcement to the London Stock Exchange on Wednesday November 23.
Apart from the high value of the hydroelectric facilities, the associated land – over 100,000 acres – makes SIMEC one of the largest land owners in the UK and certainly mitigates some of the risk attached to purchasing the facility at such a cost.
“Money is cheap and even cheaper if you have good contacts in the finance industry,” a large aluminium consumer told Metal Bulletin. “Anyone can be a trader these days, but if you want to be a real player in the market you need to firm your supply on a long-term basis – maybe being in the asset game is that play.”
“Is there a role for the pure trader? Absolutely there is, but maybe you do need to have an edge with an asset or a commercial supply contract,” he added.
Alongside the two major purchases for the year are those that have yet to secure buyers or indeed those plants that are privately bid on.
“The problem with the assets that people might be interested in is that they always offer unreasonably and that puts people off. People want assets, sure, but there’s only so much their willing to pay. So yes, they might be interested but they’re only willing to do it a fair price,” a trader in Europe told Metal Bulletin.
Opportunities in the Balkans
Turning to the Balkans, where there are currently five smelters producing over 600,000 tonnes of aluminium combined per year, there has been a raft of discussions throughout the year regarding their futures, particularly as some are producing at losses in the current environment.
High power costs and low aluminium prices mean many of these smelters have turned their attention to upstream production in an attempt to gain added value from the market. But with low LME prices, the rumour mill has been in overdrive regarding potential suitors or indeed how traders offering cheaper energy costs can become involved.
Alro in Romania, controlled by Vimteco; Aluminium of Greece; Talum in Kidricevo, Slovenia; Kombinat Aluminijuma Podgorica (KAP) in Montenegro; and the latest to be built in 1981, Aluminij Mostar in Bosnia and Herzegovina, all operate in the region.
The last of the Balkan smelters, Mostar, is 44%-owned by the federal government of Bosnia and Herzegovina, 44% by existing and former employees of the smelter and 12% by the Croatian government.
The smelter has been producing at a loss in recent years, leading to a public statement from the country’s prime minister earlier in the year that it planned to privatise its stake in the smelter – the second such time it has planned to do so following a process later retracted in 2007.
KAP in Montenegro also garnered some interest before its sale in 2014 to local company Uniprom, after several years of loss-making production. Rusal’s Kubal plant in Sweden, which at one stage the company was looking to idle according to media reports at the time, also drew interest. Several traders around Europe did suggest this is an asset that would garner some interest from those looking to purchase assets, although there has been no indication from Rusal that it intends to sell the plant.
Spanish asset sales
Looking elsewhere, earlier this year, it was reported that in Spain, Alcoa was looking to sell its remaining Spanish aluminium smelting operations at San Ciprian, La Coruña and Avilés and is sounding out potential buyers, according to Spanish news sources.
The news comes after years of wrangling between Alcoa and the Spanish government over lower energy tariffs for La Coruña and Avilés, which were extended in January last year amid the threat of closure and the consequent loss of over 800 jobs in Spain’s Galicia region.
Capacity at San Ciprian is 228,000 tpy of aluminium ingots, slabs and billets while La Coruña smelts 87,000 tpy and Avilés 93,000 per year. As well, La Coruña and Avilés have a combined idle capacity of 53,000 tpy.
Still, outside of asset purchases, commercial offtake and marketing contracts have also been increasingly popular. Rusal continues to have its large offtake deal with Glencore, as do other producers around the world with other trading companies.
This year has also seen Vedanta tendering its marketing in Europe, USA and Mexico for a large billet marketing contract – which was fiercely battled for by a host of trading houses on both sides of the pond. Likewise, Noble’s energy contract with the Aldel smelter in the Netherlands will also likely be challenged by a select few traders when it comes to its expiry next year.
“I don’t think there’s this situation where all the traders are looking to buy up assets, but I would agree margins are tight and you do have to find new ways of making money as a trader,” a trader in Europe said.
Looking forward, until there are sizable increases in either premiums or the outright price of the metal – both of which are not likely to happen until the significant oversupply in the aluminium market begins to reverse – then the trend will continue, market sources said.
But with increased competition for sales in the industry, material is often being sold below the prevailing market premium in an attempt to garner market share – will producers simply choose to market their own material instead entering of large offtake or commercial agreement contracts?
“Maybe traders do need to get into the asset game to be able to compete or perhaps some form of commercial agreement with a producers, but that will change too,” a major aluminium producer told Metal Bulletin. “If we don’t like what we see with the traders marketing our product, then we will do it ourselves,” they said.
This year has seen an increase in physical-focused trading houses, particularly those operating in the mid-tier of the aluminium market, looking to obtain assets in a bid to increase their margins.