EU alloy producers could cut secondary output in 1Q

Many European die-cast alloy producers could face closure because of heavy financial losses in the first quarter of next year, if aluminium alloy prices remain low amid rising energy costs.

The first quarter will be a "crunch time", according to these producers, depending on price movements in secondary aluminium alloy, raw materials and energy costs. Secondary aluminium alloy prices in Europe have crashed to a decade-low as a result of low demand.

The Argus price for European alloy DIN 226 was assessed at €1,350-1,400/t ($1,520-1,580/t) on 22 November, down by 26pc from a high for this year of €1,860/t on 29 January-5 February.

Aluminium die-cast alloy is used for automotive engines and components, and typically 90-95pc of die-cast alloy demand comes from the automotive industry.

Prices for alloy DIN 226 — the bellwether alloy for European secondary grades — started to drop sharply in July when the impending introduction of the worldwide harmonised light vehicle (WLTP) emissions testing procedure began to impact car production. WLTP came into force in September.

European carmakers have experienced production delays as a result of this more in-depth and thorough testing regime, particularly Germany's Volkswagen Group. The group delayed its fourth-quarter alloy deliveries as a result.

Alloy demand in Europe has fallen significantly in the fourth quarter because of the production bottlenecks in car manufacturing. And some producers have been selling at lower prices to generate cash flow for the end of the year, further pressurising alloy 226 prices in Europe.

Higher raw material costs

Falling prices for old scrap — the key raw material for secondary die-cast alloy producers — initially offset some of the current pressures on profit margins.

The price of old cast scrap Tense 2pc delivered European smelter has fallen by 27pc over the year and stood at €950-1,000/t on 23 November, down from a peak of €1,340/t in January. The price of Taint/Tabor 2pc delivered smelter has also fallen by 27pc over the same period to €950-1,000/t.

Other popular grades used to produce DIN 226, including twitch and turnings, have fallen at this rate. The sharp drops were driven by increased scrap supply in Europe as a result of lower exports to China.

But old scrap prices have not dropped since mid-October. Collection rates by smaller scrap suppliers are likely to have decreased because of low prices.

Secondary alloy producers have been paying €20-30/t more for scrap in the past month to secure materials. Eastern European smelters are building stocks ahead of winter to avoid delivery delays related to unfavourable weather conditions.

And the price of natural gas, the other key input cost, has increased sharply this year. Wholesale prices for natural gas in Germany, Italy and Spain increased by around 40pc on the year in April-September. European consumers are generally supplied by retail gas providers, and retail prices are higher than wholesale prices traded in European gas hubs.

The average front-month Argus price at Germany's NCG hub increased by 43pc on the year in April-September, to €22.80/MWh from €16/MWh.

The equivalent price at Italy's PSV hub rose by 38pc, to €24.70/MWh from €17.80/MWh. And the price at Spain's PVB hub rose by 42pc, to €24.80/MWh from €17.40/MWh.

Producers adapt in hope of 1Q demand recovery

One European producer told Argus it has decided to switch a furnace from 226 to higher-value alloys for the first quarter of 2019, and reassess whether to switch back to 226 depending on prices.

Some producers had previously secured long-term contracts for delivery until November, and higher prices for sales to Japan and Turkey have protected their profit margin.

There are hints of demand recovery in the first quarter, with producers receiving enquiries in late November for increased contractual volumes next year.

A large European carmaker was heard to have requested an around 40,000t of alloy for delivery to three plants in the first quarter. Around 20,000t of this was reported to be secondary alloy.

This 40,000t figure is higher than the 38,500t the carmaker requested in the first quarter of 2018 and up from the 32,000t it booked for the fourth quarter before postponing deliveries for the period.

Some producers were sceptical about whether the carmaker would need these quantities. Producers suggested that it could be stocking up while alloy prices are low. Others saw the higher volume as a sign that demand is recovering and that the production bottleneck caused by the introduction of the WLTP emissions testing regime is starting to ease.