Eight things we learned at the Dusseldorf aluminium trade show
Here are eight key things Fastmarkets MB learned at the aluminium trade show in Dusseldorf on October 9-11 and during LME Week in London.
Market cautious on spreads, Rusal
Market participants are watching the developments in the aluminium market in the coming months with caution, due to uncertainty about spreads and the future of sanctions against UC Rusal.
Should the United States remove sanctions against aluminium produced by Rusal, the additional material available on the spot market could cause premiums to plunge. Conversely, if these sanctions remain indefinitely, premiums could rise sharply due to the reduced usable supply.
Meanwhile, intermittent backwardations, which incur more expensive carrying costs, have made participants more hesitant about holding metal heading into next year.
The London Metal Exchange December/three-month spread was recently at $16.50 per tonne backwardation.
In light of these uncertainties, the strategy among more cautious market participants will be to carry less stock in 2019 and ink more deals on a floating basis rather than on a fixed premium next year.
Few long-term deals signed
Deals for the first quarter are usually already concluded by the end of LME Week and the Dusseldorf aluminium trade show, but both aluminium ingot and product market participants told Fastmarkets MB buyers are still taking a wait-and-see approach due to Rusal and are continuing to hold off on concluding long-term deals.
The US government extended for a second time the deadline for participants to unwind their positions with Rusal from November 12 to December 12, Fastmarkets MB reported on Friday October 12.
“There won’t be any deals on billet concluded in Dusseldorf; people are waiting,” an aluminium billet consumer said at the trade event last week.
Pent-up demand expected
But participants holding off on purchasing aluminium ingot and products can only take the wait-and-see approach for a limited time. Sellers of metal told Fastmarkets consumers will have sign deals in the coming weeks, and certainly before the end of the year.
“People are running out of time to confirm [material] for the first quarter or sign long-term deals. You can’t hold out until the end of the year - that would be suicidal. So people will have to take a leap into the market at some point,” a trader in Europe said.
Alumina less of a concern
Hydro announced on the Saturday before LME Week that its Alunorte alumina refinery will not shut down its operations as earlier announced, following an intervention by the Brazilian government.
The news came as a relief for the aluminium industry that said alumina prices will decline over the coming months as a result, and alumina supply will not be a high concern.
Fastmarkets MB’s alumina index fob Australia rallied to a high of $707.75 per tonne in April this year following a 50% production cut and force majeure at Alunorte, causing high raw material costs to squeeze smelter margins. But alumina prices are now on a downward trend following a lessening of supply worries.
“It looked like alumina was going to be the high talking point when Alunorte was going to shut down – but now that is back at 50% [output], the market can breathe a little bit easier,” a trader said.
“There is a more bearish outlook for alumina prices next year – and hopefully, political tensions aside, we will have more steady raw materials prices,” a second trader said.
Stock levels remain a worry
There have been constant deliveries out and cancelations of LME aluminium stocks throughout the year, and the low stock levels remain a concern for the market.
Aluminium stocks declined for 59 trading days in a row as of October 15, but there was a huge delivery in of 75,575 tonnes on Tuesday October 16. Despite the large delivery into the exchange, stocks remain at round their lowest in a decade with under 700,000 tonnes on-warrant.
“There isn’t enough stock left in the exchange – these low levels leave us very susceptible to backwardations. And backwardations could hurt the market,” a trader said.
“The market needs metal and the LME’s price needs to reflect to low levels – and although it isn’t right now, soon the price could boom,” a market source added.
The LME three-month price was most recently trading at $2,025 per tonne, down 25% from the year high of $2,718 on April 19 following the announcement of US sanctions on Rusal.
China production slowdown in the spotlight
The most constructive supply development for aluminium prices so far this year has been the large downgrade in Chinese primary aluminium production, according to Natasha Kaneva, executive director of global commodities research and strategy at JP Morgan
Speaking on the metals debate panel at the LME seminar in London, Kaneva said there were expectations that production growth would increase this year, but the reality has been a different story.
In December 2017, JP Morgan estimated that there would be nearly 36 million tonnes of Chinese aluminium produced in 2018, but it has since removed around 2 million tonnes from that estimate.
Foundry hit by falling automotive demand
Aluminium foundry premiums are under pressure from weaker demand in the automotive industry, with market participants saying premiums are dropping from the 2018 peak of $420-460 per tonne in June amid sanctions against Rusal.
Aluminium foundry is used in the production of alloy wheels. Bottlenecks from the worldwide harmonized light vehicles test procedure (WLTP), an emissions test introduced in the European Union in September, has resulted in a drop of car sales. German automaker Volkswagen reported a 36.5% drop of car deliveries in Europe in September year on year.
Fastmarkets MB’s aluminium foundry premium in Germany fell for the first time since February 2018 on Friday October 12 to $410-450 per tonne compared with $420-460 per tonne the week before.
Participants who were previously holding out for cheaper material are now buying for the fourth quarter to ensure they have stocks to hand.
“The quantity we are buying is quite big because I have no time to wait anymore. If the sanctions are not lifted it could be a big risk for all parties,” an aluminium foundry trader told Fastmarkets last week.
Drop in automotive demand hits secondary aluminium market as well
Weak demand in the automotive sector continues to pressure the secondary aluminium market in Europe.
Fastmarkets MB last assessed the price of diecasting ingot DIN226, duty-paid delivered in Europe on Friday October 12 at €1,500-1,550 ($1738.27-1796.22) per tonne, down 15% since the start of the year.
“The automotive issues are even worse. They need less products. We’ve had to reduce production [of ingots],” a secondary aluminium producer said.