Al producers see strong 1Q after recovery

European aluminium suppliers are looking forward to a strong first quarter of 2021 as volume indications during the traditional season for agreeing term supply contracts in the new year have been very positive, with consumers forecasting 80-90pc of 2019's pre-Covid activity levels across all markets next year.

Earlier scepticism over such mooted numbers in the initial discussion stages for 2021 contracts grew from rising Covid-19 infection rates across Europe in October-November that led to the re-imposition of curfews and other lockdown restrictions in many European jurisdictions. But several major developments over the past few weeks in the search for an effective vaccine have sparked confidence that the projected strong aluminium trading volumes for the first quarter are achievable.

In some markets, almost all the first-quarter business has already been done. Aluminium billet producers have reported very good uptake of term contracts for the first quarter, in some cases exhausting all their projected output and leaving little availability for the spot market early next year.

"Almost all of our volumes have been fixed for the first quarter. Buyers are not waiting," one European billet producer said. "When there was low demand earlier this year, we were going into the third quarter with quantities not yet fixed with more being made available to the spot market. Now all our available first-quarter volumes have been fixed, and we've no extra volumes to sell."

First-quarter ingot deals are lagging the billet market, as often occurs when London Metal Exchange warehouses have large inventories of aluminium ingot that indicate a well-supplied market. There is also some nearby tightness in the billet market that has encouraged buyers to prioritise securing volumes for the new year. The source of this tightness is that producers switched billet production to LME deliverable products when demand sank amid the initial lockdown stages of the Covid-19 pandemic in the second quarter of this year.

But ingot suppliers have received strong enquiries for the first quarter and expect the larger part of their first-quarter business to be agreed in December as discussions with customers are under way.

Sectors such as the automotive market, industrial machinery and packaging have either recovered strongly from earlier falls driven by the pandemic or generally maintained strong activity throughout the year, and are likely to see healthy volumes consumed in the first quarter. Other sectors have been slower to recover, such as aerospace, where purchasing activity is still severely depressed.

Overall, aluminium consumers in Europe expect operational levels to run at 80-90pc in the first quarter compared to activity in the first quarter of 2019, when markets were untouched by coronavirus.

"We're not at 100pc recovery, but it will be better than in the fourth quarter of 2020, and the fourth quarter was better than the third," one European consumer said. "Demand will be above pre-Covid levels, with some auto customers and the industrial side hardly seeing any slowdown at all. The first quarter of 2021 will see about 80-90pc of the levels we saw in the first quarter of 2019, and that is very good."

An overall recovery of 80-90pc of 2019 aluminium consumption levels in the first quarter will be very positive considering the damage the pandemic did to end-user markets earlier in 2020, and it may be that buyers are risking higher costs by waiting to book first-quarter volumes until very late in the year.

Aluminium prices are already well above the level they were going into 2020, despite the pandemic. The three-month aluminium contract traded at around $1,980/t this week, from around $1,735/t a year ago. Premiums are at similar levels to last year, with the Argus assessment for duty-paid metal in Europe reaching $130-140/t this week. A year ago it stood at $135-145/t.

It is the premiums that are the most susceptible to nearby supply issues. High inventories in LME warehouses will not be made available to the market if forward spreads remain strong enough to encourage their holding, and while strong nearby demand traditionally does pressure those forward spreads, the reaction in premiums is always sharper and could override the positive net cost effects of more material seeping out of LME storage deals if spreads relax in the new year.

The cash to three months spread on the aluminium contract on the LME is now trading at a contango of around $17/t — too narrow to prompt significantly more take-up of cash-and-carry deals but too wide to yet encourage a loosening of stocks from current storage deals.

By Jethro Wookey