European aluminium market faces bleak start to year

A malaise has settled across the European aluminium market. After a strong first half of 2022, demand has fallen away against an increasingly bleak outlook for the manufacturing industry in the first part of 2023.

Given their aggressive purchasing strategies earlier this year, most consumers have overbooked themselves and will look to delay deliveries in the new year.

Few in the European aluminium market now expect any concerted trading activity in the first quarter of next year, either on contracted sales or via the spot market, and availability of supply could well look very different when buyers eventually do return later next year.

"In Europe in particular there is a fear that manufacturing activity is about to drop off a cliff," one analyst explained. "Most have not yet felt the impact of huge power cost increases but they will do in the first and second quarters, and no one is offering fixed power contracts anymore."

Although spot energy prices have fallen back in the past month, they remain far above the levels being paid by manufacturers under previous term contracts, many of which will expire in the new year according to market analysts. Manufacturers will face huge price jumps for their power needs, even if spot prices fall further in the near term or if EU governments impose energy price caps.

"Power costs are falling but they're still the big issue," the analyst said, pointing to supply problems in France, where just half of nuclear capacity is on ine while gas supply has been slashed, and the energy regulator recently appealed both residential and industrial users to lower power consumption to avoid winter blackouts.

"There are a lot of difficult things to forecast, but energy prices will remain sky high," the analyst said.

Against high costs, demand has suffered. After a relatively strong first half of the year helped maintain high premiums, things changed markedly in the third quarter.

The Argus assessment midpoint for the duty-paid P1020 ingot premium in-warehouse Rotterdam jumped to $585/t in May this year from just $300/t at the end of last year. But premiums began falling in the third quarter and have now dipped well below $300/t, reaching $265/t earlier this week.

Aluminium billet premiums have likewise fallen back from historically high levels at which they have traded since early last year owing to supply issues caused by the Covid-19 pandemic. The Argus assessment for aluminium 6063 billet premiums delivered to Italy has almost halved since May, dropping to $800/t this week from $1,550/t in the second quarter.

As aluminium orders fell back in the third quarter, many manufacturers were caught off-guard after they had booked heavily against the possibility of further price increases. Nearby demand levels are therefore suffering under the double blow of falling end-user appetite and high consumer stocks, with the result for now being that many buyers are trying to delay deliveries of metal scheduled for the fourth quarter into next year.

"A lot of companies got caught in a fast-moving environment, and now they've no orders, high costs and falling margins," a second analyst said. "Consumers are delaying and postponing deliveries across the market, in Europe, Asia and the US. It's spreading everywhere. The first quarter will be almost dead."

An extended period of very weak demand could lead to huge changes in supply markets, particularly in Europe where high power costs have already decimated output. Between a third and a half of European aluminium smelting capacity was taken off line owing to high energy costs over the past year, and additional cuts have also been implemented on the basis of falling demand, as was the case with Norsk Hydro's Norwegian smelters at the end of September.

If the fears of many market observers are realised with a very quiet first quarter or even first half of 2023, then European production could fall still further, and what goes down is by no means assured to rise again.

"It's possible we won't have any operating smelters in Europe outside of Scandinavia by the end of next year," the first analyst said. "There are some that still have power hedges, but they'll roll off next year."

Jethro Wookey