Confidence in European auto Al demand slips

Strong demand from carmakers and original equipment manufacturers (OEMs) has been a huge boost for European aluminium and aluminium alloy producers in 2021, but some market participants fear that cracks are appearing in this support as auto sales continue to run below pre-pandemic levels, and they now forecast a significant fall in aluminium premiums later this year.

When markets began recovering from Covid-19-related lockdown restrictions in the latter part of last year, automotive companies were among the main drivers of stronger demand for aluminium and aluminium alloys and have remained so in 2021 as aluminium prices and premiums have consistently risen.

London Metal Exchange's three-month aluminium prices have traded at above $2,400/t through the early part of June so far, having ended 2020 at below $2,000/t. In-warehouse Rotterdam duty-paid aluminium premiums have reached $240-260/t this month, from just $140-150/t at the end of last year.

To sustain such high price and premium levels throughout the rest of this year would require consistently robust demand, and suppliers are starting to question how this is possible when auto sales this year — though a considerable improvement on 2020's pandemic-hit returns — are still significantly below those seen in 2019 before the viral outbreak.

New passenger car registrations in Europe rose in April by 218.6pc on the year to 862,226 units, but this total was still about 300,000 units below April 2019 levels. Passenger car registrations in January-April reached 3.4mn units, up by a quarter from 2020 but still well below 2019's levels.

In the UK, total new car registrations jumped to 141,483 units in April from just 4,321 units a year earlier, but remain about 12.9pc below the month's 10-year average.

Despite this, demand for aluminium and aluminium alloy among carmakers and the OEMs supplying them has remained strong so far this year. Some analysts suspect this strength has buoyed the market's belief in high long-term demand that in reality is not likely to materialise without far better auto sales numbers.

This belief has been bolstered by a number of factors. Pent-up demand from last year's lockdown restrictions initially boosted car sales as markets reopened, while lower overall production of cars and the alloys used in their production since the restart of world economies has fostered an impression of tight, rampant markets.

But much of the production of new vehicles has been for stocking purposes, market participants have said. New emissions regulations at the start of this year incentivised increased production late last year. And the need to continue using automotive sheet, lest its producers seek other avenues, has helped maintain production levels this year but will not last beyond the maturation of current supply deals.

"Once a facility starts producing automotive sheet, it cannot really produce anything else," one analyst said. "There are long supply contracts that need to be used, so carmakers are producing for stock."

A shortage of electrical semi-conductors — another consequence of the pandemic — has hit a number of markets and forced some automotive companies to pare back production in recent months, further adding to the impression that supply is struggling to keep up with demand. And the hype surrounding the growth of electric vehicles (EVs) is leading to forecasts of huge growth in demand for aluminium car parts in the coming years.

But the EV story will not be one that comes to fruition quickly. While there are areas conducive to the quick take-up of EV substitution of conventional vehicles, owing to the availability of the required infrastructure and will, it will likely be many years before EV substitution becomes the norm across most of Europe.

"There is massive hype around EVs, but it could be 30 years before we see the widespread replacement of old vehicles with EVs," an alloy producer said.

Flagging auto sales will inevitably lead to lower demand for aluminium units. Last week saw third-quarter tenders for aluminium alloy units from European carmakers such as Volkswagen, and suppliers reported requested volumes falling by up to a third from pre-pandemic levels.

"Orders will fall and premiums will fall," the analyst said. "There is an environment of belief in lasting strong demand among the automotive manufacturers, but it could be the second half of 2022 before we see things get back to 2019 levels."

By Jethro Wookey