It is the time of year when aluminium markets are normally at their most active. As Europe warms in the spring, but before the traditionally slow summer period, automotive and construction activity often reaches its annual zenith in the second quarter.
But this year, markets are very quiet as demand has weakened throughout the year. But aluminium stock levels are not rising at nearly the rate that such low appetite would normally drive, revealing a thin supply outlook that could see prices and premiums rise swiftly in the event of any improvement in this demand. Domestic supply levels in Europe remain restricted after heavy cuts induced by high power prices.
On-warrant aluminium stocks started 2023 at relatively low levels following drawdowns late last year, but they more than doubled to 453,700t in the space of a week from 7 February and saw another significant delivery on 18 April, rising by 10.43pc to 500,300t. But levels have fallen since then, aided by a 130,000t cancellation on 11 May, although the drawdown of stocks between deliveries has slowed as end-user markets have weakened this quarter.
Additionally, a large portion of this warehouse stock is Russian metal, which western consumers are not willing to use. Russian metal has made up more than half of London Metal Exchange aluminium stocks at times this year, and further deliveries are likely from trading firms that have contracts to take Russian metal but no longer have willing buyers of the material.
"Demand is poor but aluminium is still more of a supply story," an analyst said. "The market is broadly balanced because any surplus is mostly Russian metal, which people do not want."
Construction markets in Europe are heavily depressed so far this year, while some packaging markets have also slowed significantly. Automotive markets have been stronger this year, but trading companies have noted a marked slowdown in recent weeks, with volumes for third-quarter deliveries under discussion falling significantly below the previous quarter.
But primary aluminium premiums have remained robust. The Argus weekly duty-paid P1020 ingot in-warehouse Rotterdam premium only fell for the first time on 10 May, to $280-300/t from $300-320/t previously, but still up from $250-270/t at the start of this year. Premiums remain well below 2022 peaks touching $600/t, but are still about double pre-pandemic levels and are not yet showing signs of decreasing further despite such low demand.
Western commodities markets in general are suffering from rising interest rates against high inflation, while China is also seeing low demand amid a slow recovery after lifting its zero-Covid-19 lockdown measures in the first quarter.
And the global supply issue persists. Chinese aluminium output fell on the month in April as power curbs in southwestern Yunnan province continued to hamper production. Energy-intensive industries in Yunnan have been instructed to cap production over the coming months, as lower-than-expected rainfall levels will continue to hit hydropower production.
In Europe, trading companies now do not expect any improvement in activity until September at the earliest, and yet suppliers are behaving as though the next significant shift in pricing and premium levels will be positive. There are no lowball offers in the market, and no significant stock-building. Indeed, much of the recent jockeying in stock levels has been attributed by some to large trading firms positioning for an industrial demand rebound.
"Traders still want to secure units for the European market," a European merchant said. "There are others with the opposite story, but some are very bullish."
If the Chinese arbitrage opens, allowing a margin for buying European units to sell into China, the tight supply picture in Europe would be squeezed further. And the likelihood of Chinese prices rising against the Yunnan supply restrictions and demand levels slowly improving is one that trading houses view with some confidence.
"The market is broadly balanced now, but things can get nasty if the Yunnan situation continues and the arbitrage opens," the analyst said. "It is not like there are millions of tonnes of stocks."
The more bullish trading companies are betting that tight supply markets will keep premiums and prices mostly stable even through an extended period of low demand flowing into the summer, while any subsequent improvement in demand will see a positive response in those premiums and prices.
"With Russian metal still sidelined, premiums will not fall much further," a second trading firm said. "We are stuck in a weak environment now, but when demand comes back, we will see what happens."
