Aluminium mating season: Three reasons why the 2023 negotiations won’t be like any other

For 35 years, aluminium buyers, sellers and traders from all over the world have come together at the International Aluminium Conference to kick off the mating season. In the lobby and networking spaces of this event, careful negotiations take place between consumers looking to secure supply, traders looking for arbitrage windows and producers looking for long-term deals.

This year’s mating season won’t be like any other. Here are three big reasons why.

1. European supply is tight

Supply of aluminium in Europe tightened significantly at the start of 2022; with capacity cuts and logistics issues are still causing bottlenecks and delays of units.

Labour shortages at the Port of Rotterdam are causing backlogs with sellers unable to unload vessels quickly, strikes across other European ports during the summer and a lack of trucking are all adding to the chaos.

There are aluminium units available, but they are sitting in the wrong locations such as Port Klang in Asia. And logistics issues mean there is little guarantee of them arriving quickly.

The Russian invasion of Ukraine also saw some consumers looking for an alternative to Russian-origin aluminium due to financing issues, which further tightened the available pool of units.

This pushed primary aluminium premiums in Europe up to all-time highs.

With tight supply in Europe causing a deficit market in the region, units were going direct to the consumer with less trader-to-trader business or spare units to flip.

Anyone with units on the ground in Europe is likely to have the upper hand and could hold out until prices are higher. If logistics issues remain a problem and demand in Asia increases, there will still be concerns over securing metal into Europe at a regular pace for 2023.

But over the summer months, we expect to see the usual dip in demand – the question remains over whether the supply story will still outstrip the demand story.

If the logistics issues ease up, it could change the tenor of the negotiations by allowing material to more easily move into Europe. China’s demand picture will also play a key role in the availability of units.

As things stand today, we expect to see traders and consumers competing for 2023 supply contracts, with the whole industry exploring cost-effective and reliable ways of getting their metal to its end destination.

2. Aluminium production could become unprofitable in Europe

At the end of December 2021, we saw the curtailment at Alcoa’s San Ciprian aluminium smelter.

While production cuts were also seen at Hydro’s Slovalco plant in Slovakia and Romanian aluminium producer Alro.

The latest smelter cut took place outside Europe in June with Century Aluminum announcing plans to curtail its Hawesville smelter in the US.

Participants are concerned that there will likely be more cuts over the next few months if high inputs remain a factor.

Energy forwards are high through the summer, with costs likely to rise again as the Northern hemisphere winter begins, meaning there’s no clear path to profitability in 2022 for European aluminium producers.

The London Metal Exchange three-month LME price closed at $2,392 per tonne at the 5pm close on Tuesday, July 6, down from 14% from where it opened on June 1. By comparison, the three-month price was trading above $3,000 per tonne in April.

The big question is at what point the industry could see demand destruction. Could energy, raw materials and logistics costs get to a level that are too high for both producers and consumers? The negotiations all hinge on this delicate balance – if energy costs tip the European economy over into recession, it’s no longer a seller’s market, or anyone else’s.

3. Focus on sustainability grows

The role of ‘green’ aluminium also continues to rise, with a number of consumers looking to secure low-carbon aluminium during this year’s negotiations.

The ‘differential’ charged for low-carbon units has risen steadily over the past few months with the availability of these units also falling. Fastmarkets heard that some offers for 2023 now include up to $40 per tonne upcharge for P1020A units in Europe.

Consumer demand for green units is also now spreading to Asia and the United States too, with the whole supply chain focusing on its carbon footprint.

Register now to kick off the mating season at the International Aluminium Conference 2022. Come to the event and get the latest insights from industry leaders Ron Knapp, Hongqiao Group; Satish Pai, Hindalco; Ali Al Baqali, Alba and more.

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