Key talking points ahead of Fastmarkets’ International Aluminium Conference

Seven key talking points across the aluminium supply chain ahead of Fastmarkets’ annual Aluminium Conference, taking place in Barcelona, Spain, on September 13-15

1. What will be the fallout of high energy costs?

The European aluminium industry has faced a number of smelter cuts since December 2021, and market participants continue to worry about further fallout from increasingly high energy costs.

Output cuts have already taken place at several key European smelters, including Alcoa’s San Ciprian smelter and Hydro’s Slovalco plant in Slovakia, and the situation has been exacerbated by Russia’s invasion of Ukraine.

The original smelter cuts in Europe at the end of 2021 pushed aluminium premiums in the region to all-time highs.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at a record high of $600-630 per tonne in May, up from $410-440 per tonne in early January and rising by 161.70% from $230-240 per tonne in early May 2021. The premium was most recently assessed at $450-500 per tonne on August 26.

“Smelter shutdowns and energy risk theoretically could lend support, but it is still neutral to bearish while there is still a pull for tonnes from Asia,” a trader said.

Participants told Fastmarkets that they remain “on edge” about the supply and demand balance in the market, and demand remains uncertain for the rest of the year, with participants awaiting discussions at the conference to test consumer appetites.

“The market is well-balanced for now, with imports making up for the loss of domestic production, but for how long will this last?” a second trader said. “The situation is very fragile and the demand/supply balance is just in line.”

2. Will demand pick up post-summer?

Market participants remain split on what the supply/demand picture looks like for the rest of 2022.

However, recent inflows from Asia combined with seasonal summer slowdowns in Europe pushed premiums down from their record highs.

Fastmarkets’ daily aluminium P1020A premium, in-whs dup Rotterdam reached a record high of $500-510 per tonne in May. The premium has since fallen by 20.79% and was last assessed at $380-420 per tonne on August 26. In comparison, the premium stood at just $295-305 per tonne in late August 2021.

“Demand is murky; consumers say their order books are full, but they are not buying against them,” a broker said.

Many are optimistic that consumer demand for aluminium value-added products (VAP) will return in September when many market participants resume working after the summer period. But others note that some consumers have stockpiles.

“There is huge uncertainty; we don’t know what to expect in future months. The electricity price has a big share in production cuts; if prices go below $1,200 per tonne [for billet], we are thinking about the possibility of cuts,” a producer said, adding: “Perhaps an earlier limit for production cuts will create a new balance.”

With European billet premiums falling, producer margins have been narrowing, and any cuts to VAP production will have a major impact on primary aluminium demand.

Fastmarkets’ assessment of the aluminium 6063 extrusion billet premium, ddp Italy (Brescia region) was $1,100-1,150 per tonne on August 26, down from $1,250-1,300 per tonne one month previous and down from a high of $1,500-1,570 per tonne on February 4.

3. Will low-carbon supply meet demand?

Low-carbon aluminium premiums have been rising in recent months, and participants are concerned over whether low-carbon supply for 2023 will be able to keep up with increased consumer demand.

“Supply and demand fundamentals are so insane it’s worrying. Something has to break – it’ll either be consumption that gets hit or it’ll be a monster premium,” a third trader said.

Fastmarkets assessed the aluminium low-carbon differential P1020, Europe at $10-20 per tonne on August 5, rising from $5-15 per tonne one month earlier and up from $0 per tonne when the differential was launched in March 2021.

Participants in Europe have noted increased offers for low-carbon P1020A units as high as $100 per tonne for 2023.

Some have described it as the only “seller’s market” in the current short-term bearish environment. Despite falling European premiums, participants have noted increased concern over green aluminium availability in the year ahead, and contract negotiations for specific brands will be on the conference discussion agenda.

4. How much stock is sitting in Europe?

Stock levels will remain a key talking point for the rest of the year, with London Metal Exchange stocks at historically low levels for nearly all base metals.

Total aluminium stocks in LME sheds stood at 282,075 tonnes on August 24. The aluminium market is used to LME stock sitting at close to or above 1 million tonnes, but there have not been over 1 million tonnes of aluminium in the system since November 2021. Of the total stocks on the LME, 62% sits in warehouses in Port Klang, Malaysia, and there are just 14,025 tonnes in Rotterdam.

Another key question for the aluminium market is the amount of stock on the ground in Rotterdam. Participants told Fastmarkets they had heard a range of estimates from 300,000 to 1 million tonnes of aluminium in Rotterdam.

“The buffer stocks that were once in Europe are no longer there. For a long time we were used to there being a lot of stock on the ground in various ports, but now that is not the case,” a fourth trader said.

Market participants told Fastmarkets that vessels continuing to arrive in the port of Rotterdam in recent months contained allocated or delayed stocks, meaning those volumes were not hanging around in warehouses or increasing stock levels.

Despite recently announced capacity closures, Fastmarkets research now forecasts that the global aluminium market will record a smaller overall deficit of 400,000 tonnes in 2022, revised from the roughly 2-million-tonne shortfall previously forecast.

5. What impact will inflation and recession fears have?

Rising inflation across the globe has resulted in higher interest rates for credit and financing, which could limit the scope of trading activity, as well as prompting fears of a recession, with some countries already in technical recessions or approaching them.

Recession fears are likely to result in uncertainty, which will dampen buying appetite from consumers, while there are also concerns that rising inflation and record-high prices could result in demand destruction.

With some financial players seeking to reduce risk appetite quickly, the LME aluminium cash/three-month spread being in backwardation is also likely to encourage many to have lean books and hold less stock.

Risk has become a key theme in the metals market following the Russian invasion of Ukraine, and that is even more true now that the macroeconomic picture has weakened.

The rising inflation environment and increasing input costs have also resulted in smelting and refining capacity coming offline at an increased rate, which could result in less supply being available on the market.

6. Will CME remain in backwardation?

Chicago Mercantile Exchange aluminium premium forwards have been in backwardation for a number of months, spurring bearish sentiment earlier in the year and forcing participants to ask the question of how long this will last.

On August 26, the CME duty-paid forwards for aluminium, which are cash-settled against Fastmarkets’ Rotterdam aluminium premiums, were $435 per tonne for September 2022 and $371.20 per tonne for October-December 2022.

In comparison, the current Fastmarkets mid-point stands at $475 per tonne.

Although CME forwards remain in backwardation, forwards for October-December 2022 have already risen from $360 per tonne on August 23.

“The market is betting on a strong EU recession, as you can see with [CME] premium spreads around $350 per tonne for later this year,” a fifth trader said. “But there are so many uncertainties ahead, it really is difficult to predict.”

Heightened macro uncertainty has driven an uplift in trading volumes on the CME in recent months, with 10,107 lots traded in July, compared with 5,883 lots during the same month last year.

7. Eyes on raw material trade flows

European alumina refineries have been acutely affected by the soaring gas prices in Europe, linked to the war in Ukraine.

In response to the invasion, Australia banned exports of alumina to Russia in late March. Since then, alumina prices have fallen by more than 38%.

The war in Ukraine also has resulted in a change to alumina and bauxite trade flows, and this will be another key topic of discussion for the industry at the conference in Barcelona.

Fastmarkets’ daily alumina index, fob Australia was calculated at $327.14 per tonne on August 26, down sharply from $528.81 per tonne on March 21. In comparison, the monthly average in August 2021 was $303.10 per tonne.

Since the ban was implemented, Chinese alumina exports to Russia have soared, with customs data reporting shipments of 153,362 tonnes in May and 183,874 tonnes in June.

Alumina refinery capacity in Europe also shrunk after Alum stopped its alumina production in Romania and Alcoa cut production to 50-60% capacity at its San Ciprián plant in Spain – both linked to gas and power prices.

“In light of the current macro backdrop and existing micro challenges for alumina, we may still see downward pressure in the alumina index. That said, we are mindful to fresh headlines of another major production cuts before year-end, which could put a floor and provide short-term support for the index,” Fastmarkets analyst Andy Farida said.

See the full agenda for the International Aluminium Conference or register to attend today.

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