Viewpoint: Primary aluminium faces grim 2020

The primary aluminium market will begin 2020 the same way that it began this year — with big questions over the health of the automotive industry as government regulations, political disputes, and more fundamental market developments conspire to cast dark clouds across the once-shining beacon of Europe's manufacturing industry.

In 2018, Europe produced fewer cars than the previous year for the first time since 2012, as new emissions regulations bought in by the EU in the wake of the Volkswagen emissions scandal caused bottlenecks around the testing phase for new models and delayed deliveries. Elsewhere, the ongoing US-China trade dispute has hampered those countries' respective automotive industries as well, while many in the market have noted the younger generation's lack of aspiration towards luxury car ownership.

None of these trends have abated, and vehicle production in Europe fell by a further 6.2pc year on year in the first half of 2019, while North American car output decreased by 5.5pc during the first half of this year and Chinese vehicle production fell by 12.7pc over the same period.

Prices and premiums in the aluminium market are reflecting this downtrend among its major customers. Three-month aluminium prices on the London Metal Exchange have drifted downwards throughout 2019, hovering at $1,900/t at the start of the year and falling to $1,816/t today.

Premiums started the year at low levels and ended there too. The European duty-paid aluminium premium stands at $130-140/t, having peaked this year at $155-165/t in August. Duty-unpaid premiums stand at $80-90/t from highs of $105-115/t. None of these levels would trouble the upper regions of aluminium's historical price charts. Argus' highest duty-paid aluminium premium assessment was $520-550/t on 24 October 2014.

Meanwhile, premiums have hit rock bottom in the billet market, where supply has outstripped demand throughout the year.

Billet premiums are at crushing lows, with premiums in Italy having been assessed at $270-300/t delivered (60-day payment) on 18 December, down from $500-540/t at the start of this year, and in Germany at $300-320/t delivered (30-day payment) from $530-550/t. Billet producers struggle to make any margin when premiums approach the $300/t mark.

Companies with capacity to switch production to other products have done so and are preparing to step away from the billet market altogether in 2020 if premiums fail to improve significantly. But there does not appear to be any tightness in Europe's billet supply yet, neither soon nor anticipated for next year, partly because non-European billet producers have been exporting into southern Europe.

Although some suppliers will take a hard line in 2020, simply refusing to supply customers at such low premiums, a recovery in billet is still some way off as buyers are in no rush to return to the market, with much of the fourth-quarter contractual volume having been rolled over into the first quarter of next year as manufacturing levels dipped against poor demand late this year.

There may be no more room on the downside for aluminium billets, but that still does not paint a positive picture for 2020.

"It's the sentiment from falling US premiums, it's destocking before the end of the year, it's potential for Middle Eastern and Russian supply next year, it's traders being long and unable to get out of it, and it's the expectation of a further slowdown in demand," one trading firm said.