European aluminium market sentiment has improved starkly over the past six weeks and traders will go into the year-end period with high expectations for the first half of next year, with forecasts for strong demand among manufacturers and tight supply so far unaffected by the spread of the Covid-19 Omicron variant.
At the start of November, traders were far more pessimistic over the light metal's prospects for 2022, as demand faltered and prices sank on the London Metal Exchange, and traders were left holding volumes that had become difficult to shift ahead of the end of the year.
Between 18 October and 27 October the three-month aluminium contract fell by 14.82pc from a 13-year high of $3,199/t to $2,724.75/t. European delivery premiums fell by a similar amount during that period. Billet premiums held firm at record highs as a wider shortage of units combined with pressure from high silicon prices to freeze premiums, but traders expected falls to come in that market.
However, while prices and premiums settled at lower levels last month, premiums have actually improved this month as demand levels have picked up, and traders have reported strong enquiries for 2022 business that have alleviated those earlier negative expectations.
"Premiums have stopped retreating and rebounded slightly," a trader said. "Customers are asking for good volumes in 2022."
The Argus weekly assessment for the duty-paid P1020 in-warehouse Rotterdam premium edged up to $290-310/t last week, from $280-310/t previously, as deals below $300/t became difficult for buyers with few sellers offering volumes. Duty-unpaid premiums rose to $240-260/t from $230-250/t. The weekly assessments for aluminium 6063 billet premiums delivered to Germany and Italy increased the previous week, rising to $1,450-1,500/t from $1,400-1550/t.
While the market is expected to be more balanced next year with supply backlogs easing, demand is expected to remain strong. In particular, the automotive market is expected to perform better in 2022 due to a greater availability of semiconductors for vehicles. After struggling against this shortage for the better part of two years, their availability is expected to improve next year, although not entirely to pre-pandemic levels.
"It will still be a good year, but we will be closer to a balance across the supply chain," an analyst said. "The long-term trends will hold. There will still be backlogs in the supply chain, but it won't be as bad as this year."
Additionally, production curbs in China will limit the rise in output from that region, with Chinese import demand likely to remain high as a result. China's status as a net importer of aluminium has been a major driver of the aluminium market through the pandemic.
The emergence of the Omicron variant has done little to dampen this new enthusiasm, despite ominous warnings from health authorities across Europe that infections could rise rapidly in the coming weeks.
"Markets have really shrugged off the Omicron variant," a second trader noted.
But with a newfound optimism for the first half of 2022 have come warnings over the later period of next year, with some expecting price and premiums to correct sharply downwards as supply issues move further toward resolution and energy prices hopefully ease after sharp increases this year, while Chinese demand levels may not be able to sustain high import demand through the whole of 2022.
"Production is uncertain in China but Chinese demand is also cooling, and high imports are likely to end at some point," the analyst said. "The second half of the year could be an eye-opener."
