European Al alloy supply under threat

European aluminium alloy suppliers are in negotiations for fourth-quarter deals, but fears of a looming recession will not depress prices while the cost of power is so high — and elevated power prices could undermine alloy supply by constraining the operations of higher-cost producers.

Europe's economies are struggling with the impacts of Covid-19, the war in Ukraine and now a drought that is affecting waterways across the continent. The IMF has downgraded its growth forecasts for Germany, Spain, Italy and France, while in the UK inflation has hit a 40-year high and is forecast by the Bank of England to rise further by almost a third.

Energy bills have risen in multiples, eroding consumers' spending power, and analysts are now forecasting a significant recession across Europe. Demand for alloy-intensive products such as automotives will fall as a result.

But the energy crisis will mean alloy producers will continue to face huge costs. Prices are likely to rise in the near term as consumers look to book their fourth-quarter needs quickly ahead of further increases in power costs.

"There have been a lot of enquiries from customers this week," one alloy producer said. "They had hoped to be able to buy at lower levels, but they now understand that won't be the case. There is definitely a lot of pressure from energy prices."

That pressure has been augmented by deteriorating logistics, as the drought lowers river levels and further hampers the movement of goods — already made difficult by labour shortages resulting from Covid.

Alloy producers are also contending with higher scrap costs. Scrap suppliers reported rising demand from Asia this week, with buyers in China and India increasing offers. Scrap supply in Europe has been sapped by lower car scrappage rates resulting from automotive supply problems, and the transport difficulties that are exacerbating that tightness.

"It's so difficult to find scrap at lower prices now. In most fourth-quarter negotiations we've been too low," a second alloy producer and scrap buyer said. "We have to raise prices. We've seen the bottom now."

High costs are likely to threaten alloy supply in Europe in the coming months. Some producers are more exposed than others, depending on the nature of their power contracts and raw material supply deals, and a large spread of prices in recent offers show that the cost situation varies significantly between firms.

"Some competitors are now being forced to buy energy in the short term. All energy suppliers will raise prices as gas supply falls, and costs could double again or triple," the second producer said. "Those without existing power contracts will have to pay more."

Last year, silicon prices spiked on severe supply cuts in China, peaking at record highs almost a year ago before falling back piecemeal, although they remain well above pre-2021 levels. Silicon is an important alloying element for secondary aluminium alloy producers, and the prices being paid for silicon by alloy manufacturers will depend on when they last secured long-term supply.

So despite a worsening economic picture and the prospect of falling demand, alloy prices will remain high and even then might to be enough to allow some producers to maintain operations. The outlook for the weeks ahead is unclear.

"Some producers were offering lower alloy prices in July, hoping that the energy situation would relax, but the situation is just so dramatic now," a third producer said. "We will see shutdowns from some, while others with better hedging of energy will last longer. But energy will keep the cost of production higher than ever."

By Jethro Wookey