Lower European aluminium premiums risk deterring imports, freight rates fall

Lower aluminium premiums in Europe risk deterring imports amid falling freight rates, with some market participants now looking at the availability of material for 2023 in light of the various smelter cuts on the continent

Weaker consumer demand has caused European aluminium premiums to fall sharply from the record highs seen earlier this year - which peaked due to concerns about material availability in Europe amid high freight rates and port congestion.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $230-260 per tonne on Tuesday, November 22, unchanged from November 15. But the premium has fallen by 59% since the start of June having previously reached an all-time high of $600-630 per tonne in May.

With premium levels falling alongside freight rates, some market participants are now considering whether Europe remains an attractive destination for imports or if the arbitration window has closed.

Premium levels in other global locations remain below those in Europe, with Fastmarkets’ assessment of the aluminium P1020A (MJP) spot premium, cif Japan, most recently at $70-80 per tonne.

“Premiums have been falling even though there is still a need for Europe to rely on imports, but [the fact that freight rates have also been falling] means the lower premiums are OK. Both have been dropping in tandem,” a trader said.

Another market participant predicted a further fall of $30-40 per tonne in the duty-paid premium because of the destocking trend and in the expectation that the arbitration window with Asia will close by the end of December.

Falling consumer demand has pushed down freight rates, according to Judah Levine, head of research at global freight booking platform Freightos Group, who said imports to Europe have been gradually falling since the start of the year, linked to inflation and its destructive impact.

Freightos Baltic Index data shows the rate on a 40-foot container on the Asia to Northern Europe has dropped more than 70% since the beginning of the year from more than $14,000 per container to the current price of $4,267, including a 40% decrease since the beginning of October, Levine said, adding however, that these rates remain nearly triple the price of November 2019.

And according to Eurostat, rising inflation has increased financing and credit costs while also reducing purchasing power. The annual inflation rate in the European Union was 11.5% in October 2022.

“Freight rates have come off a lot, which keeps a cap on premiums with financing costs and spreads. [The freight rates] are certainly not incentivizing any units to come over at these levels so there is a natural level for the premiums,” a second trader said.

“There is not a huge arb opportunity and the rates have probably about found a floor now they are competing with breakbulk,” they added.

Breakbulk - the transport of cargo as individual or loose material - is often cheaper than containers.

“The import arb window is still open as it makes sense to ship here on the CME futures but it’s dependent on freight, which continues to move down,” a third trader said. “Shipping lines are cutting capacity to maintain rates, but the major freight movement is breakbulk, not containers.”

CME’s European duty-paid forward contract is currently higher for some months in 2023. It is settled against Fastmarkets duty-paid premium, with the CME settling at $255.44 per tonne for the November 2022 contract on November 22.

It was trading at $250 per tonne midpoint for April to September 2023, higher than Fastmarkets’ current spot midpoint of $245 per tonne.

But because 50% of Europe’s smelter capacity now offline due to high input costs and lower demand, imports will need to fill the supply gap - most of which will come from Asia. But the potential closure of the arb window means that supply could quickly tighten when consumer demand returns - once again pushing up premiums in Europe.

“There is a concern that we could get into the same situation as last year - where one increase in freight rates, or issues at ports, leads to long wait times and nearby premiums rocketing again,” the first trader added.

Levine said freight rates were likely to continue lower if consumer demand continues to fall.

“Lower volumes should eventually enable port congestion to unwind, which will release capacity into the market and put more downward pressure on rates,” he said.

“At the same time, carriers will seek to stabilize rates at a profitable level through capacity management. Ocean carriers have also canceled a significant amount of scheduled sailings to reduce capacity to the current demand levels,” he added.

In recent days, shipping giant Maersk has announced “capacity adjustment changes” on its Far East Asia to Europe services to balance its network, which it said was “a consequence of the forecast reductions in global demand.”

The trend has been seen in other metal markets, where falling container rates have struggled to attract more trade.

Elsewhere, market participants have been watching a recent tick upwards on the US market.

Fastmarkets assessment of aluminium P1020A premium, ddp Midwest US was at 19-21 cents per lb on November 22, unchanged from November 18, but up on the high end from 19.50-21 cents per lb on November 1, having risen to 19-22 cents per lb during the month.

If the US market becomes stronger than Europe, units could be diverted, again reducing supply, resulting in a competition to attract imports from Asia.

In recent days, however, the downward trend on premium levels has slowed, with reports of consumer inquiries increasing - although the uncertain economic outlook for the first quarter continues to dampen purchasing confidence.

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