The European aluminium market has continued to struggle for direction in April at a time of poor demand as even the most reliable end users have exhibited weak demand, but conditions are ripe for a swift increase in premiums should demand start to stir as buyers are likely to compete with peers in Asia for international units.
Domestic supply levels in Europe have been severely diminished in this decade. Up to half of European aluminium production capacity was cut over the past two years as skyrocketing power prices slashed margins among all but the lowest-cost producers.
And there have been further curtailments even as power prices have begun to relent in Europe. These latest cuts could have less to do with power prices and instead reflect a structural shift of primary production towards Asia.
It is highly unlikely that any significant portion of curtailed European capacity will return, given the high costs of doing so and the fact that global production has continued to rise as a whole, driven by new and recovering production in China.
Aluminium stock levels in London Metal Exchange (LME) warehouses have risen sharply over the past week, but the majority of that growth has been attributed to companies such as Glencore delivering Russian metal.
On-warrant aluminium stocks have grown by 18.69pc over the past week to 500,200t, their highest level since 3 March 2022. But that does not represent an increase in available metal for the wider European industry that has largely self-sanctioned against Russian metal since Moscow's invasion of Ukraine last year.
Sellers such as Glencore with offtake agreements in place for Russian metal are now seeking to deliver those units that now cannot be delivered to end-users.
"Companies can't sell Russian metal so they're delivering it to the LME," one analyst said. "The apparent surplus is mostly Russian material."
All-in prices on offer in Europe are higher than those in other regions even though demand levels are low. Aluminium premiums in Japan are running well below levels in Europe, while the arbitrage window remains closed in China after a disappointing economic performance in the first quarter, defying expectations that the end of China's zero-Covid lockdown policy would lead to a rise in economic activity. The relatively more attractive pricing in Europe is attracting tonnages from overseas.
"Freight costs have fallen and there's no real competition yet from Asia," a trader said. "Aluminium units from the Middle East, India and all over are coming to Europe."
That dynamic is set against a severely diminished demand picture, with market participants pointing to construction in particular as having seen very little activity in the first quarter, while packaging markets are also starting to suffer as orders fall back in response to high inflation levels.
"Automotive demand is picking up a little bit but construction is still so bad," the trader said. "I would have expected rising demand at this point in the year but it really is surprisingly bad."
European premiums have edged higher in 2023 despite this. The Argus duty-paid P1020 ingot in-warehouse Rotterdam premium assessment rose to $300-320/t on Wednesday, edging up from $290-310/t in the past two weeks and from $250-270/t at the start of the year. There are units available to European buyers, but there are not enough to lower premiums against high production costs.
All of which renders the European market as particularly susceptible to a shift in the demand outlook. When construction, packaging and other markets do eventually recover, aluminium premiums in Europe could spike.
"Demand is still poor, but the conditions are there for European premiums to rise strongly," the analyst said. "Demand will improve one way or another, while there are low inventories of rolled products as a technicality of the restocking cycle, and duties on Chinese goods will stop imports. More than 1mn t of European capacity is not coming back, and Europe will need metal from offshore."
The impact will be even greater in the event that demand in China improves and the arbitrage window reopens, attracting metal of many origins away from Europe.
