Why are aluminium, zinc premiums reacting differently to Europe’s energy crisis?

The energy crisis across Europe is leading to capacity being taken offline as producer margins become squeezed, but aluminium and zinc premiums are having opposite reactions

As aluminium premiums in Europe retreat from all-time highs and fell by 13% across August, those for zinc in the same region continue to break through record highs.

“Both metals are so energy intensive and are both struggling; there are cuts and concerns but at the moment that’s only a bullish story for zinc and it’s all about supply,” a trader said.

Both metals have seen production cuts over recent weeks due to high energy and electricity costs.

Aluminium also saw a number of cuts in December 2021 when high energy prices took over. But in August, Hydro announced that its Slovalco aluminium facility would stop all primary aluminium production and Alcoa said it will reduce output by one-third at its Lista smelter in Norway.

While for zinc, the only confirmed production curtailment so far has been for Nyrstar’s 315,000-tonne Budel smelter in the Netherlands, though other producers such as Glencore have hinted at potential future production cuts and rumors are percolating within the market that further supply cuts could be on the horizon.

But aluminium demand in Europe has weakened and there is supply arriving from other regions – especially Port Klang, Malaysia. Overall, there is far more supply of aluminium around than zinc.

“It is different that the aluminium prices and premiums are ignoring the energy crisis. The question has to be: is demand for aluminium really that bad?” a second trader said.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam, at $450-500 per tonne on Tuesday, August 30, down significantly from the all-time high of $600-630 per tonne reached in May.

Duty-unpaid premiums also remain under pressure, with Fastmarkets assessing the aluminium P1020A premium, in-whs dup Rotterdam, at $360-400 per tonne on Thursday, down by $20 per tonne from $380-420 per tonne a day earlier.

“Right now it’s a demand story – the question is all about demand for aluminium and production cut headlines aren’t enough to stop the downside,” an aluminium producer source said.

Zinc markets however have remained fundamentally tight throughout 2022, as reflected by premium volatility in both Europe and the United States. Following production cuts in late 2021, participants turned to the “market of last resort”, pulling significant tonnages of zinc ingots from LME-listed warehouses globally.

Total on-warrant zinc stock in LME warehouses stood at 52,525 tonnes on Friday, down by more than 71% from a year ago, when on-warrant stocks stood at 183,325 tonnes.

“It is undeniable that both supply and demand will suffer with these energy prices,” a third trader told Fastmarkets. “The big question is: what is impacted fastest and hardest?”

“The zinc market is already exceptionally tight [in Europe], if supply is cut further then there will be big issues as we can’t fall back on the LME warehouse stocks again,” a fourth trader said.

The tight supply situation is reflected in Fastmarkets research supply demand forecasts, which show a forecast deficit of 290,000 tonnes in the zinc market for the second half of 2022.

Fastmarkets analyst Andy Farida pointed to recent China export data as another reason the two metals are reacting differently.

“Aluminium is far more vulnerable to the downside compared with zinc due to one simple reason,” Farida said. “Chinese aluminium supply is on the mend and total exports for 2022 have been far greater, which help offsets the supply deficit in the world ex-China. But that is not the case in zinc where total exports from China are far too small to make a dent in the deficit.”

China’s total exports of refined zinc stood at 1,900 tonnes in July, with a net import volume of 1,000 tonnes, according to the latest customs data.

By comparison, the country’s total exports for unwrought aluminium and aluminium products stood at 652,100 tonnes in July, up by 39.1% year on year. Total exports for unwrought aluminium and aluminium products in the first seven months of the year were 4.16 million tonnes, up by 34.9% year on year, customs data shows.

There are some in the zinc market that believe premiums can only push higher as a result of this supply situation, completely bucking the trend in aluminium. However, others believe that while premiums could rise to further record highs, there is a ceiling to increases before the market sees demand destruction.

“In order to meet our costs, we would need to double premiums from their current level,” a zinc producer source told Fastmarkets. “This is obviously not possible.”

“I have never known anything like this,” a market participant said. “While there is enough zinc out there, it is all in the wrong place and bringing it over will prove very difficult.”

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