As rising inflation and hiked interest rates have discouraged spending and slowed wider markets around the world, the aluminium sector in the global west has been thrown into uncertainty by a sharp downturn in the construction sector and destocking trends in packaging markets. But low stock levels and the looming energy transition tell a more positive story.
The events of London Metal Exchange (LME) Week took place under a looming economic shadow last week, with demand weak among almost all of the major aluminium consuming industries. The construction and packaging segments are showing very little appetite for fresh units, with high interest rates paralysing western construction markets, and huge inventories slowing demand among aluminium packaging producers.
"Construction is very bad, and it's all on interest rates," one metals analyst said. "Construction markets desperately need interest rates to come down."
Packaging producers are working through large inventories that were built as prices bottomed out late last year. One European producer of aluminium bottle closures said demand is as bad now as it has ever been in their space.
"Packaging markets had a growth spurt but have levelled off now, and are going into a destocking phase for a year or two," a second analyst said.
Prices have little upside amid such conditions, while strained producer margins will resist further falls. Premiums, meanwhile, are likely to fall further through the rest of the year and into 2024.
Against this outlook, buying behaviour has altered to make forward planning much more difficult for producers. Buyers are calling for greater flexibility in their contracts, with more tolerance for shifting volumes and floating premium levels to allow for lower premiums ahead.
"Volume tolerance used to be plus or minus 5pc for a good customer, and maybe 3pc for everyone else," the second analyst said. "But now everybody is asking for 10-15pc, and they all want floating premiums. It makes it impossible for smelters to plan what spot availability they will have, and amounts to moving the working capital cost from the consumer to the smelter."
The situation may have been worse but for surprisingly good demand for aluminium from China. Strong demand from the photovoltaic sector as well as for air conditioning units and vehicles has offset any fall in demand from the troubled construction sector, where government stimulus measures have supported deposits and thus ensured high levels of property completions for now.
"Chinese demand is great," the first analyst said. "We expect Chinese demand to grow by 4-5pc this year, which no one would have expected [earlier in the year]."
Continuing strong demand in China will help absorb stocks at a time of slow demand elsewhere, tiding over markets until conditions improve.
And there is some confidence that conditions will improve next year. People may be waiting for a better time to buy big ticket items like houses and cars due to high interest rates, but that underlying demand remains.
And the energy transition story is not going away, nor its need for new infrastructure. Among the gloom of the LME Week discussions, one thing that was clear was that sustainability has advanced to the forefront of markets' attention.
Aluminium stock levels remain at historic lows, having recovered only slightly from record lows last year. China has absorbed a lot of units, while production levels in western markets are still constrained following energy price-related cutbacks over the last two years.
"This is the healthiest aluminium market since 2006 in terms of inventories, and there are no big projects coming online in the next two to three years," the first analyst said. "Demand is coming back from its inflation hangover."
