Auto dip adds to European Al demand woes

The European aluminium market is facing an increasingly bleak demand outlook as automotive markets, a bright spot up to now thanks to a strong performance so far this year, are showing indications of falling activity in the coming months.

But premiums have remained robust as European supply has been cut so drastically over the past two years, leading to a greater dependence on international markets for pricing direction.

Europe's automotive market performed strongly in the first quarter of the year, with new car registrations rising 17.9pc on the year to about 2.7mn units. Spain saw the largest growth among the EU's major economies, with new registrations up 44.5pc in the quarter. Registrations grew by 26.2pc in Italy, by 15.2pc in France and by 6.5pc in Germany.

And that activity remained strong in April. German passenger car sales climbed 13pc on the year last month as delivery bottlenecks eased and demand for electric vehicles (EVs) rose further. German EV sales rose 34pc in April.

But this month has seen primary aluminium and aluminium alloy suppliers reporting worrying signs from their automotive customers that things could be slowing down in this sector. Producers have received disappointing forecasts for third-quarter demand from their automotive customers, with some major automotive manufacturing firms looking to cut up to half of their alloy requirements from a year ago in the third quarter.

"For the first time we're seeing the big carmakers becoming concerned about sales, so maybe things are starting to turn — it certainly feels like it," one alloy producer said.

Reports of falling demand, particularly among corporate buyers, have followed high inflation and rising interest rates. The European Central Bank (ECB) raised its main policy rate by 25 basis points to 3.25pc earlier this month, as inflation in the eurozone stands more than three times above the ECB's target. The Bank of England also further raised interest rates by a quarter of a percentage point today to 4.5pc at a time of growing inflationary concerns.

"Interest rates are just killing business, especially for corporate-subsidised car purchasing, which is a big factor in Europe and especially in Germany," a trader said. "So far, customers have taken what they've ordered but the second half of the year needs to be looked at very closely."

There is a growing concern that sales numbers from earlier in the year were boosted by large backlogs of pent-up demand that built owing to a shortage of semiconductor chips for vehicles and Covid-19 lockdown restrictions. Those backlogs may now be all but depleted, and there appears to be only lacklustre demand without them.

"Those active in the automotive sector are coming for lower volumes for the rest of the year. They are showing a very cautious approach in purchasing," a second trader said.

EVs remain a strong growth area in Europe, but that is a long-term trend that is not seen as driving wider demand in the near future. A significant fall in more traditional car buying combined with a weak construction space, where demolition activity is quiet and many new projects have been delayed, is making for a poor demand picture in the near term.

But premiums have so far remained robust in Europe, rising through the first quarter and stabilising since mid-April. Aluminium smelting in Europe remains far below capacity after cutbacks over the past two years on high power prices, and demand elsewhere is sound.

The Argus duty-paid P1020 ingot in-warehouse Rotterdam premium assessment has stayed at $300-320/t since 19 April, having started the year at $250-270/t.

"The fundamentals have not changed much," a second trader said. "European smelting capacity is down, and Asian markets are relatively strong compared with a few months ago. When clients need material, they're still facing high premiums."

With supply levels now more weighted towards international markets after supply cuts in Europe, consumers are having to compete for units with other markets, which has helped premiums remain strong against falling domestic demand levels.

The outlook for aluminium hinges now more than ever on Chinese activity, which has disappointed in 2023 after a slower-than-expected recovery from its zero-Covid lockdown restrictions that were lifted earlier this year. But trading group Sucden Financial was cautiously optimistic during its latest quarterly metals report, saying that it struggled to see a sustained demand push from China in the near term, but it does expect construction activity to rise there later this year.

European premiums could, under the influence of decent Chinese activity, remain elevated despite demand levels showing every sign of falling back through the rest of the year.

By Jethro Wookey