European aluminium scrap prices fell sharply in the second quarter as inflationary pressures affected economies around the world and export demand all but vanished as Chinese consumers went into lockdown due to the country's zero-Covid policy. And buyers are happy to wait for further falls, despite a small price recovery in the second half of May, as long as that policy continues to suppress industrial activity.
European aluminium scrap prices fell by almost 20pc from April 1-12 May. The Argus weekly assessment for tense 2pc scrap dropped from €1,850-1,950/t delivered to European consumers to €1,500-1,600/t over that period. Aluminium wheels scrap fell from €2,850-2,950/t to €2,350-2,400/t.
A combination of falling automotive demand, lower London Metal Exchange (LME) prices and lower export demand has seen prices come off since the second quarter began. Automotive companies have been limited in their output to varying degrees throughout the pandemic by a shortage of semiconductors for vehicles, while European carmakers have also had to deal with a shortage of wire system parts from Ukraine since Russia's invasion in February.
LME aluminium prices initially surged following the start of the war as Russian metal supply came under the threat of sanctions, but subsequently fell back as lower demand and high inflation impacted markets across the continent. The three-month LME aluminium contract dropped by 22.61pc from April 1-12 May.
At the same time, the export market for aluminium scrap going to Asian buyers dried up. In a typical trading environment, scrap suppliers in Europe and the UK could depend on strong demand from Asian markets, particularly India, as those regions seek to supply downstream products into China. But with China's zero-Covid policy keeping workers and consumers locked up across the country that demand fell away, and few scrap units have been sold out of Europe in recent weeks.
"India is completely out of the market," one UK-based scrap merchant said. "They were sending a lot of [secondary aluminium ingot] to China but they can't get in there now. We won't see it recover until the pandemic lockdowns end in China."
Scrap prices have partially recovered over the past two weeks as LME prices have been volatile, first rising then falling as investors consider the efficacy of Chinese economic stimulus measures, given that the country has stated it intends to maintain its zero-Covid target in the long term. LME prices rose and then fell by almost 10pc on 12 May-1 June.
Additionally, some automotive consumers have given some better demand signals for the third quarter, with volumes tendered surprising alloy producers in some cases. German carmaker Volkswagen issued tenders for just 5pc less aluminium metal in the third quarter than in the same period last year, after many market participants had predicted a greater cut. Prices for tendered metal also surprised on the upside, producers said, settling within current price ranges rather than at their foot or even lower as many had feared.
But other carmakers are more affected by the various shortages of parts that are hitting markets, and are expected to show a larger negative effect on output levels through the rest of the year. The automotive market is the main arbiter of the health of aluminium alloy demand in Europe.
Scrap markets have always relied on export sales as more scrap is produced than used in many European countries, such as the UK. Export demand has traditionally accounted for sales beyond the capacity of local consumer markets.
Without better international demand for scrap units, aluminium scrap prices will likely fall further based on ample supply against insufficient demand, even if LME aluminium prices recover further. Many scrap buyers are consequently holding off from further spot purchases in the near term after having bought in sufficient supplies ahead of the price falls earlier in the second quarter.
