Viewpoint: European aluminium alloys now a China story

One year ago, most European aluminium casting alloy producers had no relationships in China and had not once received a bid from a China-based buyer. But many will go into 2020 focused on serving Chinese customers after a seismic shift in trade flows in the fourth quarter of this year.

Historically, China has imported very little in the way of casting alloys, as it has traditionally been a big scrap buyer, sourcing all forms of metal scrap from across the globe and feeding a domestic casting alloy industry that required little outside assistance.

But that is no longer the case following changes to China's scrap metal import policy. In January this year, the Chinese government said it would require import licenses for eight categories of scrap metal, including aluminium. Initially, a lack of information on the mandatory online registration and new licences for scrap metal importers sparked increased buying of non-ferrous scrap ahead of the 1 July deadline. A quota system for licenced importers was subsequently introduced — one that has been tightening every quarter.

In the third quarter, China developed plans to overhaul the categorisation of high-purity scrap metal as raw material as part of its strategy to accelerate the development of its domestic recycling industry. Under an unpublished proposal seen by Argus, the specifications in terms of metal content and allowable impurities will be tightened considerably, meaning that much of the scrap metal that China has imported in the past will simply not meet those specifications.

These import restrictions have created a shortage of scrap metal in China, and in response, its alloy industry is doing something it has never really done — source aluminium casting alloy units from international markets.

Europe has been the biggest beneficiary of Chinese demand, mostly because its suppliers' cost position better allows them to sell profitably into Asia, but also because the standard DIN 226 casting alloy in Europe is similar to the standard ADC12 casting alloy used in Asia, particularly in terms of zinc content. The ADC12 specifications allow for up to 1pc zinc content, while the DIN 226 specifications allow for 1.2pc zinc. By contrast, the US standard grade A380 alloy allows for up to 2.9pc zinc and the LM24 alloy in the UK allows for up to 3pc zinc.

Prices have responded. Argus' assessment for the DIN 226 alloy was at €1,320-1,380/t on 19 December, up from €1,180-1,230/t in the first week of November, when suppliers first reported interest from Chinese buyers.

Although initially seen as little more than temporary relief for a European alloy market struggling against low demand through much of this year, China's alloy demand has swiftly become the driving force in the market and is expected to last well into the new year. China is now expected to postpone the rollout of its scrap metal reclassification policy until March next year, as private consultations within the industry continue.

While European producers were contemplating a slow first quarter for casting alloys just a few weeks ago, they are now gearing up for a far busier time, and for some, China is their sole focus.

Such is the level of demand in China that it is affecting many other markets. Japan, a traditional customer of European alloy producers, is now competing with Chinese buyers for units.

"There's such strong demand in China that we've even seen Japanese traders looking for metal to sell into China," a producer said. "It's unbelievable. In 20 years, I've never seen that."

In the UK, where prices for alloys and scrap have barely moved amid the uncertainty surrounding the UK's planned withdrawal from the EU, sellers have started to notice higher bids coming from Europe as a result of China's demand for alloy.

"We're seeing LM24 just starting to creep up and get a little more support," a UK producer said. "Trading firms are offering higher prices."

And in the US, despite the higher zinc content of the standard casting alloy and the inability of many producers to meet China's requirements, producers have also started to make sales into China. Argus confirmed sales by three domestic US producers into China early this month.

It is a very welcome development in a market that was listing from otherwise low demand. It has become a rising tide that has lifted many ships. And alloy producers across the world will be hoping the trend continues for as long as possible next year.

By Jethro Wookey