Heated Al alloy and scrap markets start to cool

The European aluminium alloy and scrap markets are reverting to typical trading patterns after alloy producers were forced to secure scrap raw material ahead of making first-quarter alloy offers late last year.

Aluminium scrap and secondary alloy prices generally decline in the fourth quarter as manufacturers run their raw material stocks down, then see a small lift between mid November and early December on first-quarter buying activity before flattening out ahead of the Christmas and new year holiday period. This trend was evident in 2018 and 2019.

But there was no price decline in the first part of the fourth quarter of 2020. Scrap supply dried up in May as manufacturing operations were put on hold in the initial lockdown phase of the Covid-19 pandemic. Prices continued to lift through the year-end period, supported by a rise in domestic demand for the first quarter of 2021 combined with the emergence from the second half of last year of strong Asian demand to feed China's swift manufacturing recovery.

DIN 226 diecasting alloy prices have not dipped since early July, while aluminium scrap prices have not fallen since May. Prices for both have climbed sharply in that time, particularly in the final quarter of 2020.

Automaker Volkswagen tendered for its first-quarter DIN 226 alloy supply in mid-November, reportedly at what was then a reasonable market rate of €1,550/t delivered. By the end of the year, spot prices had spiked to €1,800/t and have since reached highs of €1,950/t. Offers for second-quarter volumes have even run above €2,000/t in recent weeks.

Alloy prices are driven by the scrap market, which is why they commonly relax in the fourth quarter and over the year-end and why they did not do so this time around.

The Argus assessment for tense 2pc scrap delivered to European smelters sat at €1,000/t in mid November, rising to €1,150/t by the end of the year and reaching €1,200/t earlier this month.

As a result, European alloy producers were forced to find scrap units in a tight market in advance of selling the alloy they would produce with that scrap, which is an inversion of normal year-end practice when a relaxing scrap market allows producers to source scrap units in the new year for deals struck in the previous quarter.

But alloy producers are now reverting to the sales-first strategy for the second quarter as scrap markets have loosened in the past few weeks. Asian demand has fallen as Chinese activity dips ahead of the lunar new year holiday in February, and as China has recorded a rise in Covid-19 infection rates that has seen some lockdown restrictions reapplied.

Alloy prices have fallen for the first time in six months. The weekly Argus assessment for DIN 226 alloy delivered to consumer works in Europe dipped to €1,820-1,900/t today, from €1,850-1,950/t previously. Scrap prices have also been reported lower this week.

"The market has changed, although India is still a strong market," one scrap merchant said. "We've seen some buyers lowering their bids while others are still hesitating. Some have cut prices by €100 since last week."

Additionally, automakers in Europe are seeing a worrying shortage of semiconductors that could hit vehicle production rates and many alloy producers expect their offtake agreements with automotive customers to be affected in the coming months.

"We've come to the realisation that our ingot supply contracts with our automotive customers may start to suffer soon, so we've decided to cool down a bit," one alloy producer said.

Forecast weaker demand from automotive customers and a further loosening of scrap supply has led market participants to expect prices of aluminium scrap and alloy to fall further in the coming weeks.

"Chinese demand is not there now, so we expect European prices to come under pressure," a second alloy producer said. "Material that went to China will now have to be sold in Europe. Prices that were overheated will normalise."

By Jethro Wookey