No-deal Brexit would cripple domestic UK aluminium scrap market, participants say

With just 35 days remaining until the United Kingdom withdraws from the European Union, the country’s potential departure from the EU single market could see its domestic aluminium scrap market face business-critical trade barriers that, according to market participants, would send the UK’s scrap industry hurtling backwards.

The EU’s import duties range from 3% to 6% for aluminium products from non-EU member states, with UK-based exporters into the region soon to be subject to the duties if British policymakers fail to strike a trade deal with Brussels before January 1, 2021.

Earlier this year, chief EU negotiator Michel Barnier gave the UK government until October 31 to provide a full legal text for a deal, which did not arrive. Still, any proposal from the UK would need approval by both the European Council and European Parliament. The UK’s chancellor said on Thursday that a deal could be struck within time, but that the UK would not stretch for an agreement at any cost.

Market concerns from scrap merchants dealing in secondary aluminium are now mounting at a time when the UK’s precarious trade position has caused a traditionally quieter November-December period animated with trading activity amid stockpiling efforts across the domestic market.

“The recent strength in the [secondary aluminium] market has been mostly to do with Brexit uncertainty,” a UK-based scrap producer told Fastmarkets.

“There are [market participants] stocking up against that uncertainty, and my fear is that a no-deal Brexit would limit how competitive UK producers could be,” the producer added.

Secondary aluminium scrap ingot prices in the UK have continued to rise, as have European prices, driven by the higher London Metal Exchange aluminium cash price, a continued shortage of raw materials and growing stockpiling efforts across the market heading into December.

Fastmarkets assessed the weekly price of aluminium scrap, LM24 pressure diecasting ingot, delivered consumer UK at £1,410-1,460 ($1,884-1,951) per tonne on Wednesday November 25, maintaining its highest level since February 2019.

Many market participants have also suggested that a potential no-deal arrangement could make the country a landing spot for Chinese aluminium units, with Britain’s trade parameters no longer subject to the EU’s anti-dumping duties against China-origin aluminium extrusions of 30-48%.

Balancing these concerns, however, is trade data that indicates China’s aluminium scrap imports and exports declined by some 48% and 20% year on year to 680,000 tonnes and 3.5 million tonnes respectively in the first 10 months of 2020, albeit against a sharp incline in imports of alumina and bauxite.

Undoing decades of trade relations
Under EU membership, the UK has developed decades of trade relations with other EU states, particularly in the automotive sector, which remains the primary end use for aluminium scrap.

The EU’s non-member tariff structure could eventually cripple the UK’s long-established trade alliances in Europe, while also having a ripple-effect across the aluminium supply chain.

This also comes at a time when European smelting capacity continues to dwindle, with producer Alcoa opting to curtail production at its 228,000-tonne-per-year San Ciprian aluminium smelter in Spain last month.

In addition, large-scale consolidation in the sector from the likes of GFG Alliance has been a result of the collective push toward greener, low-emission aluminium production, with similar efforts seen at Rusal’s Krasnoyarsk smelter in Russia.

UK suppliers hoping to send material to EU locations where smelting capacity is falling could be stung with duties under a non-deal scenario.

“If we fail to get a [trade] deal, and have to pay 6% duty on finished goods, that’s hugely detrimental to UK scrap business,” a UK-based aluminium scrap merchant told Fastmarkets. “That, plus additional transport costs would seriously limit our business scope.”

More widely, regional pandemic-related lockdowns across the latter half of 2020 have also prompted container shortages that are becoming more widespread for the shipment of both finished goods and raw materials.

A combination of fewer vessels on the water, an imbalance in trade flows to and from China, and competition between cargoes has kickstarted a rapid increase in shipping costs for container freight out of China over the past two to three weeks, Fastmarkets reported this week.

Costs are spiraling to record highs on major routes out of China, including to Europe, North America, India, the Black Sea, and North and West Africa. These logistical disruptions could present further hurdles to the UK’s aluminium scrap market, at least in the near term.

“I think it will take a lot for a deal to be brokered given the time period, but everything could change next year,” the UK-based scrap producer concluded.

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