European Al billet market faces competing pressures

The European aluminium billet market is facing falling demand that will undoubtedly see current elevated premiums fall significantly in the coming months, but high input costs will limit falls and market activity is subdued as participants seek to navigate a middle ground between these competing pressures.

The start of the Covid-19 pandemic saw aluminium billet premiums in Europe at relatively low levels, and this continued through the initial lockdown phase as billet demand disappeared. Simultaneously, supply levels dropped significantly as producers focused on products serving sectors that maintained strong activity, such as packaging.

When demand started to recover as construction and manufacturing industries resumed activity, premiums rose strongly throughout 2021, to reach record highs as renewed demand swiftly outpaced limited supply.

Through 2021, the Argus assessment for the aluminium 6063 extrusion billet premium delivered in Italy quadrupled, ending the year at $1,450-1,500/t after starting it at $330-340/t. Premiums in Germany followed the same path. In comparison, European aluminium P1020 ingot premiums rose by about 150pc in 2021.

Billet premiums reached a high of $1,525-1,575/t in January, but have started to decline slightly in recent weeks. Italian billet premiums have dropped by 8.1pc in the past two months, reaching $1,400-1,450/t last week.

But spot market activity has been very subdued over that time, and premiums have drifted down more in relation to quarterly deals, generally settled well in advance of delivery. At the same time, global economic sentiment soured on inflationary pressures and the effects of the war in Ukraine, while end-user markets are now seeing demand slip as construction projects fall victim to cost pressures, including daunting energy prices and high aluminium billet premiums.

"The construction sector is not in a great place," one analyst said. "High costs lead to delays, then costs rise again leading to abandonments."

There is still significant uncertainty over where premiums should be because supply is still tight in Europe, despite falling demand. Supply levels have improved this year as international sellers have sought to benefit from high European premiums through increased exports into the continent, notably from India where producers have been prepared to ship billet to Europe while maintaining a domestic focus for primary ingot sales. But there is not yet any glut of overseas billet supply.

Additionally, several domestic European producers are heard to have the potential to follow others in curtailing capacity owing to high energy prices, while significant logistical problems caused by staffing shortages at European ports continue to persist.

"We're seeing billet demand chip away, but it's still tight in Europe," the analyst said. "Rotterdam still has logistical issues around labour, and premiums are still supported. We will see billet premiums come off, but costs are still high."

In such times, when supply is tight but spot demand is minimal, the spot market becomes a form of distressed purchase for the occasional buyer, elevating offered premiums and further clouding views of where premiums will settle.

Aluminium remelters, who cast billets from a mix of primary and scrap raw material, are also facing high cost pressures. With a number of manufacturing industries having suffered through periods of low activity over the past two years, the supply of scrap metal has dwindled.

This has been exacerbated owing to the supply of scrap appropriate for billet manufacture being sapped by competing demand from rolling mills, which are able to process many different types of scrap. The supply of 6000 series scrap units for billet production has steadily lowered as more is absorbed into the rolling industry, which commonly operates closed loop recycling systems within its own facilities.

Although billet premiums will almost definitely fall significantly further from current prices, it will be impossible for them to drop back anywhere near pre-pandemic levels. A second analyst estimated current billet production costs for remelters to be about $400/t above primary aluminium ingot levels. For billet premiums that would indicate a floor of about $900-1,000/t when adjusted for delivered basis.

By Jethro Wookey