Unprecedented cost rise batters Al alloy margins

European aluminium alloy producers are facing huge pressure on profit margins as costs rise swiftly across all raw material markets, and alloy prices will need to rise further to sustain production even as demand from the domestic automotive industry suffers under the semiconductor shortage.

Alloy prices are most influenced by raw material costs, mainly through movements in the price of scrap metal — the primary feedstock for alloy production in Europe. But other costs include silicon and magnesium metal for alloying purposes, as well as gas for smelter furnaces, in addition to general power and logistics costs.

Every one of those costs is currently rising sharply, mostly because of factors external to the European market.

The biggest driver is, unsurprisingly, China. Base metal prices have almost all hit multi-year highs this quarter, mostly owing to strong industrial activity in China since its economy began to recover from Covid-19 lockdowns last year. London Metal Exchange (LME) aluminium prices reached 13-year highs of above $2,900/t this month, up by 16pc from the start of the quarter.

LME aluminium prices affect scrap prices, particularly among the higher grades of scrap such as aluminium wheels, which have a larger aluminium element and fewer impurities than other scrap grades.

Argus' assessment for aluminium wheel scrap delivered to European smelters has risen to €2,000-2,050/t ($2,345-2,400/t) this month, up by 23.9pc from the end of August.

But all scrap prices are rising on strong demand from export markets in Asia-Pacific, predominantly to supply China. Lower-grade scraps have not risen as sharply as the higher grades this month, but have strengthened throughout the year and the consistent driving factor has been high export demand.

European taint/tabor scrap prices have reached €1,400-1,450/t this month, up by 5.9pc from the end of August and by 11.8pc from the start of the quarter.

Meanwhile, prices for the silicon and magnesium units that go into alloy production have rocketed this month on output cuts in China, leading to limited supply held by European traders.

Argus' assessment for 5-5-3 grade silicon is at €4,000-4,200/t ddp, a 15-year high and up by 46.4pc since the beginning of September. This is largely down to China's Yunnan province imposing energy consumption controls for September-December, aimed at reducing its silicon output by 90pc from August levels.

Magnesium prices have reached $5,000-5,150/t delivered Rotterdam, up by 9.7pc from the start of the month.

European gas prices have tripled this year, while the eurozone energy consumer price index has reached its highest level since records began in 1996.

Alloy prices have been rising strongly in response, with DIN 226 alloy reaching €2,100-2,200/t last week, up by 10.5pc from the start of September. Prices are racing higher even as the European automotive market has slowed because of the continuing shortage of semiconductors for vehicles. Strong demand for alloys and scrap, most notably from China but also from European primary aluminium producers looking to boost their environmental credentials, has offset much of the lost nearby demand.

While European alloy producers have sold strong volumes for the fourth quarter to automotive manufacturers, almost all of those contracts include clauses that allow customers to defer delivery, as automotive customers have done repeatedly this year because of slowdowns caused by the shortage of electrical semiconductor parts for vehicles.

No relief in sight

None of the factors driving the market show any sign of going away soon. There has been strong demand for scrap and alloy units from export markets since the start of 2020, and it only took a temporary dip during the initial Covid lockdowns.

The shortage of semiconductors has been an issue throughout 2021 and is expected to last well into next year, which will increase alloy producers' dependence on export markets for alloy sales as they look to offload volumes they will have left to sell after deferments on deliveries to automotive companies.

LME aluminium prices look robust at higher levels, after forward spreads moved into a strong contango in recent weeks and stocks started to fall at LME warehouses. On-warrant aluminium stocks dropped by more than 120,000t in the first two days of this week alone — a fall of almost 15pc.

Silicon and magnesium prices will stay high as long as supply is scarce, and the production outlook depends on China, where a lot of metals manufacturing has been curtailed in recent months because of environmental concerns.

Alloy producers will hope that the semiconductor shortage is alleviated sooner rather than later, or that long-term demand sources can be found elsewhere, because the confluence of high costs that is driving massive pressure on alloy profit margins does not look like it will abate any time soon.

By Jethro Wookey