2017 PREVIEW: Dwindling availability in Europe could see Al premiums spike again in year ahead

Backwardations and good supply levels have made for a calm European aluminium market in the final weeks of 2016, but some are now predicting a squeeze in the new year that could lead to spiking premiums for which many buyers seem unprepared.

Metal Bulletin’s European duty-unpaid and duty-paid premiums have been broadly flat through the fourth quarter, and the spot market has been quiet as buyers and sellers have been discussing longer-term contracts for 2017 business. Such discussions have generally lasted longer this year than last.

“There’s still a lot of business to be done for the first quarter, the first half, and the full year 2017,” a trader said. “We have six or seven different offers [for 2017] that we’re working on. There’s a lot still cooking.”

Some of the delay can be explained by a later conference schedule this year, with the traditional mating season events of Metal Bulletin’s International Aluminium conference, LME Week, and the Dusseldorf Aluminium Messe all landing significantly later in 2016 than in recent years, while forecasts for lower London Metal Exchange prices next year are encouraging consumers to wait before buying.

“Consumers have looked at current prices and don’t want anything to do with them,” an analyst said. “A lot of the recent rally was driven by higher Chinese coal prices, but they’re falling now and aluminium prices have also started to fall in Shanghai and London. Why would you buy now if you think the price might ease?”

Uncertainty reigns
High levels of uncertainty over real market prices are also contributing to the muted buying season, with backwardations on nearby dates adding to the confusion. Dec-Jan was trading in a $6 per tonne backwardation on December 7, and there are backwardations from December on dates across the first quarter.

“We’re absolutely seeing [limited buying activity] across the whole chain, through to remelt and value-added products,” a second trader said. “Consumers don’t know what to pay and are playing it safe.”

But sellers have still expressed surprise at the amount of buying that is being left over, to be concluded on contracts signed next year or in the spot market.

“I’ve been very surprised by how many units are being left for the spot market next year,” a producer said. “Some buyers are just buying for the first quarter, confident that there will be enough metal in Europe for next year.”

Nearby backwardations are nothing new to the aluminium market this year. Almost every premium move this year has followed a shift in nearby spreads, as a more conservative type of purchasing director has been happy to simply buy at the market level when approaching the spot market in 2016.

Rather, it is availability that has been the chief concern of buyers in 2016. And in that area it has been a relatively easy year.

“Because of the backwardations and the high stockpiles in Europe, consumers have become used to just picking up the phone and buying whatever they want,” a third trader said, adding that many are of the belief that the market will show a similar level of availability in 2017.

The fourth quarter was not the busiest for consumers, and many may be carrying stocks over the year-end. The disgorging of stocks from warehouses in Vlissingen will also continue in the new year, with that material typically changing hands below spot market levels.

“Demand is maybe not so fantastic on the consumers’ side, and they don’t want to be stuck with too much stock,” the second trader said. “There is so much availability that they can just buy when they want.”

End of Vlissingen stockpile?
But the Vlissingen stockpile is due to expire in the third quarter of 2017, and comparatively low premiums in Europe are not likely to attract much in the way of imports of metal that can instead be sent to higher premium markets elsewhere, even after the implementation of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU.

“Stocks are being slowly whittled away, and there’s no metal coming into Europe,” the third trader said. “There will be a shock, it’s just a matter of when.”

If Europe finds itself short of available units, and consumers are still buying high volumes of metal in spot market deals – many of which are likely to be done on a formula basis rather than following a period of negotiation – then the market could see a sharp correction upwards in premiums, potentially with the precipitousness of the early 2014 spike, if not its extent.

“After the second quarter, the game will become substantially different, when the Vlissingen queue is gone,” the second trader said. “Premiums will rise at some point in Europe.”

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