European aluminium consumers are facing a markedly different market heading into the latter part of this year than they were 12 months ago, as a convergence of high production costs has dragged prices to levels that appear unsustainable, given faltering demand in end-user markets.
Raw material prices, power costs and freight rates have all raced to high levels this year, but the strong buying levels seen as markets reopened after the lifting of Covid-19 lockdown restrictions have not persisted beyond the summer period in a number of markets.
Aluminium prices are unrecognisable compared to a year ago. The three-month aluminium contract on the London Metal Exchange is trading above $2,900/t this month, with today's settlement price of $2,911/t some 64.2pc higher than a year ago.
Ingot delivery premiums have also risen strongly from last year. The Argus weekly assessment for European duty-paid aluminium premiums was $350-380/t on 29 September, up by almost 150pc from a year ago.
The rise in aluminium billet premiums has dwarfed that of ingots. European aluminium billet premiums have skyrocketed to record highs over the past year, combining with high LME aluminium prices to raise buying prices to unprecedented levels.
Billet supply has yet to catch back up with demand as significant capacity was idled during the initial lockdown restrictions last year. Billets are not deliverable into LME warehouses, so supply levels fell more sharply as demand vanished in 2020, and have been trailing the recovery in demand ever since.
The Argus assessment for aluminium billet premiums delivered in southern Europe was $1,300-1,400/t on 29 September, up more than fourfold from $280-300/t a year earlier.
But such high price levels, while initially demand-led against a struggling nearby supply picture, have become detached from demand dynamics, shifting focus to the high cost picture. Power costs are an example. Benchmark European natural gas prices have risen sixfold this year alone, as global demand has rebounded against constrained supply levels.
Freight rates are also high, while alumina raw material prices have jumped in recent weeks following a military coup in Guinea, a major producer.
But as end-user markets settle back into some kind of normality, regular demand levels do not justify such high overall prices even if costs necessitate them for now.
"I don't see how the world has changed in demand terms so much since the pandemic, so these prices are not sustainable," one analyst said. "The market could be in for a ride next year. People cannot just spend money forever."
Some markets could sustain higher demand levels. Aluminium packaging with its connection to more environmentally conscious packing solutions and construction markets filled with pent-up demand are looking strong into 2022.
But broader demand levels have already started to fall. Given the nature of purchasing strategies earlier in 2021, which built long lead times through the fourth quarter and into next year, it will take some time for markets to feel the impact of this lower appetite.
"If you talk to the big distributors in Europe, the lead times are massive but customers have stopped buying," a second analyst said. "It's the first sign that people are not prepared to buy at any price, but it will take time for that to trickle down into the market."
The automotive market in particular looks to be under severe pressure going into 2022. Automotive sales have been falling in Europe since an initial surge following the first easing of lockdown restrictions, while production levels remain hampered by a shortage of semiconductor parts for vehicles. Sales in Germany fell to their lowest level since 1992 in August, while UK sales are also at their lowest since last century.
"There isn't massive demand even with the production cuts. The automotive market is not like it used to be," the first analyst said.
With consumers well-bought for the time being, many will be happy to wait ahead of resuming buying at a later date. High prices are surely unsustainable against such a picture, but with energy markets approaching crisis levels in some geographies — most notably China, where coal supplies have dropped sharply owing to heavy flooding in producing regions — it is very uncertain how the market will react in the coming months.
"Downstream lead times are about five to six months, so in about two to three months people are going to start getting uneasy," the second analyst said.
