European aluminium scrap prices have risen sharply over the past few weeks on high export demand from India and other parts of Asia, and that pressure could continue in the first quarter. This could make it difficult for alloy producers to maintain margins on domestic sales in a weak economic environment.
A month ago, the aluminium alloy and scrap markets were anticipating a slow end to the year owing to growing recessionary concerns across much of the world. Primary aluminium premiums have fallen by more than 40pc since the end of September, as forecasts for manufacturing and construction activity in the new year drop against a darkening economic outlook.
London Metal Exchange (LME) aluminium prices have mitigated these premium falls to a degree, rising after China dropped some of its Covid-19 lockdown restrictions following widespread protests. The three-month LME aluminium contract has climbed by 13.3pc since the end of September, although forecasts suggest softening prices going into 2023 on weak demand.
But scrap prices have reversed earlier falls in the past few weeks, climbing strongly in stark contrast to primary premiums. The Argus assessment for tense 2pc scrap delivered to European consumers has jumped by 18.2pc since mid-November, while aluminium wheels scrap prices — which are more closely linked to primary aluminium prices — have risen by 14.8pc in that period.
Alloy producers have struggled to pass these higher raw material costs onto their own customers, with the Argus assessment for DIN 226 alloy prices delivered to European consumer climbing by just 6.8pc since mid-November. Margins might have deteriorated further but for surprisingly high volumes in tender enquiries from automotive alloy customers for the first quarter of 2023, which have contrasted with much greater degradation in aluminium demand from other sectors such as construction.
The driver for higher scrap prices has been strong demand from importers in Asia, particularly India. Sentiment in Asia is strengthening after China dropped lockdown restrictions, and the resulting increase in demand for aluminium scrap has put upward pressure on European prices and squeezed alloy producers.
"Asian buyers are the main driver for the scrap price increases. With China reducing its lockdowns, everything has become more positive," one European alloy producer said. "We have to pay higher prices to keep up in Europe. The more they buy, the more we need to pay."
And that pressure looks likely to continue in the new year, with scrap supply in Europe depleted by manufacturing cuts that have led to lower production of factory scrap.
"There's not a lot of scrap about. People are not generating as much of it, and the market seems tight," another European alloy producer said.
The producer warned that scrap prices could rise swiftly in the first quarter if alloy producers were to return to the market in force, but that process appears to have already begun after satisfactory volumes in the first-quarter alloy enquiries from automotive customers pushed alloy producers to raise demand for scrap.
"Asia has imported a lot of scrap in the last month while European buyers were quiet. As soon as we needed to buy, we realised the prices had to go up," the first alloy producer said.
Alloy producers expect scrap demand from India to remain high, despite renewed calls for higher import taxes on aluminium products — including scrap — from representatives of India's primary aluminium producers. Late last month the Federation of Indian Mineral Industries said the government should raise import taxes on aluminium scrap to 10pc from 2.5pc, adding that India has been affected by developments in US-China trade relations.
But such calls are nothing new in the world's third-largest primary aluminium-producing nation. India produces around 4.1mn t/yr of primary aluminium, while demand in the country is at broadly similar levels. Calls for Indian trade action against competing aluminium scrap imports are commonplace, but seldom move the needle among Indian trade authorities.
Neither is the recent decision by a European Parliament committee to adopt new regulations that will place restrictions on exports of scrap metal from the EU to non-OECD countries likely to lead to much limitation on aluminium scrap exports to India, at least in the near term. Non-OECD countries will have to apply for consent and demonstrate their ability to treat waste sustainably through third-party audits, but India's government has already been proactive in its engagement with the EU, and the new regulations are also unlikely to be implemented in the near future.
With high competition for scrap units from Asian buyers likely to continue in the first quarter while European economic conditions are forecast to worsen, profit margins for aluminium alloy producers could come under severe pressure from strong scrap raw material prices.
