2020 PREVIEW: Poor demand, tight margins prompt cautious outlook for aluminium supply chain
Participants are taking a cautious approach to the aluminium market in 2020, with poor downstream demand and low product premiums threatening already-tight margins in the industry.
Premiums for downstream products such as aluminium billet in the United States and Europe are both at record lows, forced down by an absence of demand this year - a trend that is expected to continue. The demand drought has primarily been driven by a decline in the global automotive sector, sparked mostly by US-led trade wars.
“The automotive sector remains the key headwind for demand. Transport accounts for 38% of US demand; 31% Europe; 48% Japan. These three markets have all seen contraction in 2019 autos sales - and our global automotive team see further potential downside in 2020,” Morgan Stanley analysts said in December.
Aluminium product premiums have reacted accordingly, with premiums for billet in Europe at record lows.
Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp Italy (Brescia region) at $270-300 per tonne on Friday December 13, down from $280-310 per tonne a week earlier and the lowest since Fastmarkets launched the assessment in 2012.
Fastmarkets’ assessment of the aluminium 6063 extrusion billet premium, delivered Midwest US fell to 6-8 cents per lb on Friday November 22 from 6.5-8.5 cents per lb on November 8, with supply continuing to outpace demand. This too is a fresh all-time low since Fastmarkets began assessing the US premium in March 2010.
The tepid product premiums have other producers scouring for niche markets that could provide better margins.
“Margins don’t work for people and of course people will flick the switch. The P1020 is one stage less already and there is still an oversupply of billet and foundry,” a trader source said. “The end-user markets for them aren’t getting any better, thing need to diversify.”
At current premiums, participants expect producers to switch from value-added product production to P1020, where the opportunity cost to produce ingot is lower.
“When you look at the record-low billet premiums, I don’t understand how any producer can argue for producing more. Some people upped it when the Rusal situation happened but how can you sustain that?” a second trader source in Europe said.
Some point to the recent proposal of a maximum 20% curtailment of Norsk Hydro-majority owned Slovalco, which produces aluminium products, as a symptom of the weak market.
“Finally, producers are thinking about shutting down billet production,” a producer source in Europe said.
Producers Rio Tinto and Alcoa have also launched reviews of their smelter portfolios.
Although P1020 premiums remain muted recently due to the persistent backwardation in London Metal Exchange spreads, the premiums have had a stronger 2019 overall than product premiums.
Fastmarkets assessed the benchmark aluminium P1020A premium, in-whs dup Rotterdam at $75-90 per tonne on Friday December 13. The midpoint of the premium averaged $81.55 per tonne in November, up by 18% from a monthly average of $69.09 per tonne in January.
“Duty-unpaid material can be easier for producers to manage because there are other ways [cash and carry] to make your money and you are less reliant on the end demand being strong,” the first trader source said.
A rise in P1020 production could theoretically be slightly bullish for the duty-unpaid Rotterdam because an inflow of more P1020 supply into the London Metal Exchange could lead to wider contangos in the forward spreads. Higher contangos are supportive of premiums because they cover the cost of carry for market participants, meaning they need a higher incentive to sell their material. Throughout 2019, the duty-unpaid market was well supported when LME spreads were in wide contangos.
Fastmarkets’ aluminium P1020A premium, in-whs dup Rotterdam hit a 2019 high of $105-115 per tonne on September 4, well supported by the $30 per tonne contango in the benchmark cash/three-month spread at the time.
“With the [LME contango], the duty-unpaid premiums will recover quite quickly, the duty spread in Europe will continue to be a bit on the tight side,” a third trader source in Europe said, referring to the theoretical 3% duty that needs to be paid when taking duty-unpaid metal in for consumption in Europe.
Despite tougher market conditions for duty-paid material this year, the premium has also held up better than billet premiums. Fastmarkets’ assessment of the aluminium P1020A premium, in-whs dp Rotterdam averaged a midpoint of $131.11 per tonne in November, up from a monthly average of $123.13 per tonne in January.
And despite margins being squeezed for value-added product production, some producers remain positive that they can still make their money on products in 2020.
“The numbers are tough right now, very tough. But if too many producers go to primary then we will be in the same situation. There is a market for some products, you can make it work, you just have to have the right customers. Billet is painful but things like slab are good,” the producer source said.
The tightness caused in the product market when US sanctions were imposed on Russian producer Rusal in April 2018 meant that several aluminium participants decided to opportunistically trade products.
At the height of billet market tightness, Fastmarkets’ aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region) hit a record high of $560-600 per tonne.
“You can make the premiums on the product; producers will still produce both but it is not a shock if people change their percentages to do more primary. People always want to buy that stuff but we have good contracts and we are able to sign volume,” a second producer source said.
“People are happy if your billet is good, of course you cannot get good numbers for certain origins. Maybe those people who jumped on our bandwagon [in 2018] will stop now,” he added.