Is Europe still attractive for aluminium imports despite falling premiums?
Spot demand for aluminium is softening and Rotterdam premiums now, at the end of September 2022, are at a nine-month low, so market participants are considering whether Europe remains an attractive destination for imports
European premiums have come under pressure from a wave of imports, negative economic sentiment, and growing fears of a recession across the continent. Despite this, premium levels remain higher than those in Asia, with enough demand to convince some market participants that the region is an attractive destination.
Others, however, have told Fastmarkets that long-term buying interest from consumers will have to increase to ensure that Europe remains a natural home for units.
Fastmarkets most recently assessed the aluminium P1020A premium, in-whs dp Rotterdam, at $365-400 per tonne on September 23, falling from $400-440 per tonne the previous week and at its lowest level since December 2021.
But the premium had reached a record high of $600-630 per tonne in May this year, following the Russian invasion of Ukraine. And a wave of European production cuts meant that imports into the region were welcomed because nearby supply was constrained.
“It’s no surprise that United States and European premiums are in freefall when the next best market is MJP [main Japanese ports],” one European trader said. “If the market there remains around $85 [per tonne], it still makes sense to send [material] to the West.”
Fastmarkets assessed the aluminium P1020A (MJP) spot premium, cif Japan, at $85-95 per tonne on September 23, unchanged from the previous week but falling by 31% from $120-140 per tonne three months earlier, and down by 51% year-on-year.
Market participants noted that Japanese demand remains weak, because of subdued automotive production and Covid-19-related lockdowns.
In July, carmaker Toyota reported an 11th consecutive month of year-on-year decreases in sales inside Japan, while domestic monthly production statistics were down by 28.2% year-on-year to 221,817 units.
In Europe, other sectors such as packaging remain robust, with steady material requirements.
“The cable and rod sector is extremely bright and tight, and packaging and can production is still very strong,” a second trader said.
Weaker European demand, narrow forward spreads and higher financing costs could now act as disincentives for the importing of large quantities of aluminium into the region.
London Metal Exchange forward spreads for aluminium have most recently been trading in contango, after flipping from backwardation on August 19, with the cash-to-three-month spread most recently at a $19 per tonne contango.
But some market participants said that the spreads remain too narrow to be an incentive for large shipments to be brought from Malaysia’s Port Klang into Europe, despite large tonnages being available in Asian ports.
LME warehouse stocks were most recently at 338,850 tonnes, with more than 56% available in Port Klang and just 4% (14,400 tonnes) available across all European ports.
Market participants in Europe, however, were now running leaner books amid the weakening market and were seeking to offload expensive metal, leaving little buffer stock available.
Additionally, with a variety of brands to choose from in Europe, at lower premium levels, some buyers were opting to stick with their traditional suppliers, rather than gamble on overseas tonnages.
“Many are focusing on historical suppliers, and not willing to start any adventures with new suppliers,” a third trader said. “But when you look at [the costs of aluminium from] MJP, plus containers and logistics from Asia to the west, it still works,”
Some market participants, however, saw a situation in which Europe would need to compete against the US market to attract material.
“If the situation in the US remains strong, or not as soft as in Europe, some units will travel from Asia to the US market or the Middle East,” they said.
“Freight rates are dropping, production costs have not greatly gone up in Southeast Asia and the Middle East, so Europe is still attractive,” a fourth trader said. “The LME aluminium price has dropped, so the 4% duty is less [of a burden].”
For those who can wait for their material, or have no brand preference, then imports remain an attractive option, but there continues to be a risk of delays to shipping and other modes of transport, as well as the potential for workforce strikes and shortages.
“We are now at a [premium level] which is disincentivizing the flow of metal from Asia,” Nicholas Snowdon, metals strategist at Goldman Sachs, said at Fastmarkets’ International Aluminium Conference in Barcelona earlier this month.
“You can argue that the downward move in premiums is now achieving what it should in the demand environment,” he added. “There may be some slight further downside to premiums… but, given the disincentive for import volumes that will feed into moderating flows over the next few months, I think that’s a self-correcting adjustment in the market.”
Material continues to flow into Europe, even while European producers mull further output cuts and high costs show no sign of coming back down.
“European main continent smelting [excluding Norway and Iceland] is effectively over,” a market source said. “It’s either in palliative care or it’s already gone, hence the reliance on imports.”
The EU is trying to tackle the problem of soaring energy prices and to secure supply, with proposed measures welcomed as a first step by industry associations, which say that as much as 1 million tonnes of aluminium capacity has been shut down on the continent so far.
“We have stopped signing new contracts and [if energy costs continue to rise] we will soon have to shut down our plant because it is not worth it any more,” one European consumer said.
One billet producer said that its production cost, which included energy, transport and P1020 purchases, was more than $1,000 per tonne, and with European aluminium billet premiums now around $1,000 per tonne, producers were evaluating their output levels.
Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp Italy (Brescia region), at $970-1,030 per tonne on September 23, down from a high of $1,500-1,570 per tonne on February 4.
European aluminium billet premiums have been pushed down from record highs after a high volume of overseas material caused an oversupply at a time of weakened automotive demand.
“In Europe, natural gas costs $550-600 per tonne, [and then there is the cost of aluminium] P1020. In other regions, it is much cheaper,” a billet seller in the region said. “Before the energy crisis, [gas was priced at] $150-200 per tonne. Freight costs are getting low, and even though the [aluminium] premium has dropped, if you consider everything, [imports are] still attractive.”
Fastmarkets analyst Andy Farida said that the easing of the logistics issues had helped to drive imports, which were offsetting the tightness in Europe.
“That could well change in the coming months, when the production cuts in Europe start to bite, and as supply of aluminium from the East starts to decline due to the unfavorable Rotterdam [premium],” he said.
“What appear to be the unknown factors are the effect from the production cuts, and whether European market participants have enough buffer stocks should demand improve in [October-December this year] and [in the first quarter] of 2023. Will there be enough vessels to send metals from China to the West?” he added.
Industry associations have voiced concerns about aluminium units made overseas, with higher carbon emissions, replacing the European output lost to smelter cuts.
“Everyone wants aluminium with a super-clean [carbon] footprint,” one European consumer said. “The problem is that the majority of imports don’t fall into that category.”
Industry association European Aluminium recently said that the shuttered production could be replaced by increased production in China, but with a carbon footprint almost three times higher than if it had been produced in Europe.
Data from ANZ Research shows that increasing supply from other countries could generate emissions as high as 16 tonnes of CO2 per tonne of aluminium metal, for those using coal-fired power generation.
Fastmarkets’ low-carbon aluminium differentials allow a maximum of 4 tonnes of CO2 equivalent (4tCO2e) per tonne of aluminium produced.
Demand for low-carbon aluminium continues to grow, with Fastmarkets’ assessment of the aluminium low-carbon differential P1020A, Europe, widening upward by $10 per tonne to $10-30 per tonne in the most recent calculation on September 2.
Concerns over low-carbon unit supply have resulted in some offers of supply in 2023 at levels as high as $50 per tonne to secure tonnages.
“As a result of the self-sanctioning against [Russia-origin aluminium] that we’ve seen across the continent, there has been a pulling-apart between offers for units,” one European trader said. “A lot of the imported material is high-carbon and [this is] reflected in the offer [price]. If you have cleaner units, I don’t think you’ll struggle to place them, even in this environment.”