Terrible end-user demand for aluminium continues to push duty-paid premiums in Europe lower, but strong contangos on the London Metal Exchange allow unpaid premiums in Europe to remain high.
In typical market conditions, there would be a 3% duty spread between the two premiums.
Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam, at $140-145 per tonne on Tuesday March 24. If the 3% duty was in place the premium would be around $153 per tonne mid-point.
“Duty-paid keeps falling and shows no sign of stopping. There is material everywhere,” a European trader said.
“A few months ago, I would have thought $30-per-tonne duty-spread was ludicrous; now it is nearly reality,” the trader added.
For much of 2020, the Rotterdam duty-paid premium has been trading below the 3% duty-spread, but the differential is closing significantly. Traders told Fastmarkets if the supply and demand picture does not change, the two premiums could end up close to parity.
The Covid-19 pandemic has caused disruption to supply chains and logistics, leading to a series of plant closures among aluminium end-users, further dampening an already bleak demand picture for aluminium.
Fastmarkets research now forecasts ex-China demand to fall 3.5% in 2020 to 27.20 million tonnes, compared with a previous forecast of a 1.0% increase.
“In times of crisis, duty-paid will be everywhere and worthless,” a second trader said.
“If someone offered me to take a lot of duty-paid off their hands, I would bid flat to unpaid or maybe $10-per-tonne upcharge. Because I don’t want it and its value diminishes every day,” he said.
Since Fastmarkets published the Rotterdam duty-paid premium on March 24, deals have been reported below the range, with some business as low as $135 and $130 per tonne.
“The premium is going to fall again. There are all different types of brands floating about and more material to come,” the first trader added. “It could genuinely be a reality where there is no duty-spread if the situation continues.”
So far for March, the difference between the Fastmarkets Rotterdam duty-unpaid and duty-paid premium averages at $42.84 per tonne.
This compares with an average of $53.29 per tonne in March 2019 and $65.60 per tonne in March 2018.
During the 2008 global financial crash, the Rotterdam premiums were both at a mid-point of $15 per tonne.
The differential remained close to 0 for a number of months. In July 2009, the duty-paid premium was still only $10 per tonne higher than unpaid. The typical 3% spread did not recover until 2010.
While oversupply and near-zero consumer demand for duty-paid aluminium in Europe is one of the main reasons for the narrowing of the duty-spread, market participants said concern around the duty-spread becoming non-existent also centers on the duty-unpaid premium’s resilience throughout the coronavirus outbreak.
“A big issue with the spread is that unpaid is not buckling. Duty-paid is falling and it is not even following,” the second trader said.
“Duty-unpaid gets support from a wide contango. Duty-paid doesn’t have that benefit of the contango; it’s more a supply/demand kind of thing,” a third trader said.
Fastmarkets last assessed the aluminium P1020A premium, in-whs dup Rotterdam, unchanged at $100-110 per tonne on Thursday March 26. The premium has held steady at those levels since March 10.
A wide contango on the LME aluminium cash/three-month spread, trading at around $30.75 per tonne on Thursday, is helping participants cover carry costs and in some cases generating a profit. That gives little incentive for holders of metal to liquidate at aggressively low premiums.
“I’m picking up tonnes of contango. There’s no reason for any trade,” a fourth trader said.
Market participants looking to take advantage of the contango and expand their carry positions, have found it difficult to purchase metal in order to do so. Throughout the past week, multiple participants have said holders of metal have been hesitant to meet bids below the $100-per-tonne mark.
“The carry incentive on unpaid metal is insane. I am asking producers for tonnage and they won’t budge,” the third trader continued.
“I don’t blame them though, because you’d have to bid pretty high to incentivize me too right now,” he added.
Deliveries of metal into the LME continue to bolster the contango, with more than 167,000 tonnes of metal delivered in since March 19.
Fundamentally, duty-unpaid metal in Rotterdam is relatively tight, which is also supportive of the premium, according to market participants. The majority of metal delivered into the warehouse network has been in Port Klang, Malaysia, and Singapore.
On-warrant stock in LME warehouses in Rotterdam were at 71,500 tonnes on Thursday, down from 87,200 tonnes at the start of the year.
Potential smelter shutdowns due to the spread of the coronavirus and expensive container costs could further tighten duty-unpaid stock levels in Europe and support the premium, market participants said.
“If freight goes up, premiums can go up,” a fifth trader said.
Whether duty-unpaid's stability has longevity remains to be seen. Sentiment throughout the commodity complex remains bearish.
On the CME’s forwards, the duty-unpaid premium has been trading lower at $90 per tonne for the rest of 2020 in recent days.
“Of course, the premium staying high isn’t reflective of actual demand; it is all a financial play. It is probably the only premium in any commodity that is holding right now. It is not reflective of how terrible the aluminium market really is,” a sixth trader said.
Others in the market expressed concern that holders of metal that do not see aluminium as a core business could liquidate their inventory to raise cash to keep their core business afloat.
“Are they going to face pressure to lighten the balance sheet?” the first trader said about holders of metal with other key focuses.
“Aluminium is not a core business for some. It’s also the most liquid asset. If you’re a cfo, [liquidating your aluminium assets] is the easiest way to raise cash,” he added.
The differential between duty-paid and unpaid aluminium in Rotterdam continues to narrow, leaving market participants wondering if the two premiums could end up close to parity.