European aluminium billet premiums have become detached from the rest of the market this year as tight availability has caused their rally to outpace even impressive rises in London Metal Exchange (LME) aluminium prices and European ingot delivery premiums, and there appears to be no immediate prospect of relief to the tightness.
This year has seen strong price rises across ferrous and non-ferrous metals markets as economies around the world have partially recovered from last year's Covid-19 downturn. China has been the main buyer in many cases, as its own recovery has been swift and aligned with a new government five-year plan that focuses on infrastructure investment and environmental goals.
In the aluminium market, billets have seen the strongest rise, with infrastructure markets a major part of various governments' focus when reopening economies, as other industries, such as travel and retail, remain heavily disrupted by the pandemic.
Billet premiums have now started to grow well beyond the concurrent rise in LME aluminium prices and in ingot delivery premiums, reflecting a stark shortage in available units that is outmatching any tightness in other areas of the aluminium market.
LME three-month aluminium prices peaked at $2,344/t on 15 April, up by 19.44pc from their 2021 low at the start of February, and their highest in three years.
Ingot premiums have risen strongly this year, with Argus' assessment of European duty-unpaid P1020 premiums in-warehouse Rotterdam standing at $185-195/t this week, up by 56.5pc from the start of the year, and duty-paid premiums rising to $225-240/t, up by 53.3pc this year.
But those increases have been dwarfed by the rises in aluminium billet premiums. Argus assessed the delivered Italy 6063 aluminium billet premium at $780-850/t last week, up by 139.7pc from the start of the year and by far the highest since Argus began assessing that market in 2018 (see graph).
Not only have billet premiums been rising at a greater rate this year, but that differential has only grown in recent weeks. European aluminium ingot premiums have been flat since 24 March, during which time billet premiums have grown by a further 19pc.
"The bottom line is that billet is incredibly bullish. The demand shows no sign of stopping," a trader said.
Billet supply levels remain restricted. The initial stages of the pandemic saw many industries come to a standstill, and production facilities swiftly repurposed to serve essential industries in the pandemic, such as packaging for medical supplies and food. When demand recovered in other industries, billet supply took time to react and available stocks dwindled.
The logistical issues that were born of so much one-way traffic to Asia when China's activity began to recover last year have hit imports into Europe as well, robbing the market of much of its traditional supply. Even now that China's arbitrage has fallen away there are still other regions more attractive than Europe to international billet suppliers.
Since the start of the year, delivered US 6063 aluminium billet premiums have risen by 185.7pc to $0.24-0.26/lb.
"With the China arb gone a lot of companies will just start delivering to the US," a trader said, adding that talk of another, larger economic stimulus package following US president Joe Biden's signing of a $1.9 trillion stimulus package last month was adding to the bullishness in that market.
And there appears to be little relief in sight for European billet consumers. With shipping space expensive and in many cases unavailable, and high premiums in other regions, market participants do not anticipate significant imports of aluminium billet into the continent until much later in the year. Demand remains strong in the interim.
No better indication of that can be found than the fact that billet producers themselves have been making plenty of enquiries in the market in the last month to make up supply shortfalls. Even as aluminium prices and ingot delivery premiums have plateaued in recent weeks, aluminium billet premiums have maintained their sharply upward trajectory.
"The market is still going up; the dynamics are all still there. Customers have already started looking for fourth-quarter volumes, and security of supply is the only concern," a billet producer said. "This situation will continue at least until the third quarter. No one can foresee any sudden changes to supply or demand."
