Tight supply remains Europe Al driver

European aluminium markets have barely stirred following the slow summer months, as demand in the automotive and construction markets continues to disappoint and sales opportunities for traders and distributors remain sparse even after the holiday period definitively ended. But premiums have remained steady throughout September, as tight supply remains the main driver of the European aluminium market, even more so than earlier in the year, when premiums were climbing amid moderate demand.

European aluminium premiums rose by two-thirds over the first five months of the year, with the Argus assessment of the P1020 duty-paid spot in-warehouse Rotterdam premium hitting an 18-month high of $320-350/t in May. Demand, although unimpressive compared with stronger years, increased sufficiently to tip the market balance against tight supply.

Availability in Europe was severely limited by low production following sizeable cuts over the previous two years, the absence of Russian metal owing to self-sanctioning by consumers and official sanctions by governments in the UK and US, and aggressive Chinese importing from most international regions.

Premiums subsequently edged back slightly to $320-340/t and then began an unprecedented run of flatness over the June-August summer period, as demand fell away in Europe but the sustained tight supply environment stopped premiums from falling back. Throughout the slow summer months, there was a sense that premiums were primed to race higher as soon as demand picked up in the autumn, led by automotive markets that were expected to at least show some improvement after slowing from the middle of the year.

But that has not happened, and premiums have continued to flatline at $320-430/t in September, as demand has failed to stir in either the automotive or construction sectors. Europe's largest economy Germany has seen particular weakness in its consumer industries, with the construction sector having been in decline throughout this decade, while major carmaker Volkswagen recently told its employees that it is considering closing some factories. In July, Germany's manufacturing output index hit its lowest since June 2020, according to climate and economy ministry BMWK, with total industrial production down by 2.4pc from June this year and 5.3pc lower than in July 2023.

"There has been no bounce-back from the end of the summer. Stockists and distributors still have empty inboxes, which is very unusual for this time of year," one analyst said. "The automotive market is bad and the construction market is terrible."

But premiums have not budged against such a bleak demand picture, as supply remains very tight even against that stark lack of buying. The factors that reduced availability in Europe over the past few years remain very much in play, while China's appetite for imports has grown even stronger this year. China's primary aluminium imports in the year to August rose by more than 50pc on the year to 2.58mn t, customs data show.

That trend is likely to continue, as domestic Chinese aluminium production is bumping up against the country's output cap of 45mn t/yr. Some had expected earlier this year that China could raise the cap but few are of that view now, especially given the damage done this year to the country's steel industry by excess production. Additionally, most provinces have now mandated efficiency targets. The best way to achieve them is to limit energy use, and aluminium smelters are one of the biggest energy users.

"The Chinese production cap is key, and China is within a few hundred thousand tonnes of it already," a second analyst said. "They don't even need to see better demand to keep increasing imports."

Tightness in the alumina market will feed through to the smelting industry, limiting output further. UK-Australian mining firm Rio Tinto's alumina output fell by 10pc on the quarter and the year to 1.68mn t in the second quarter, following an incident at its third party-operated Queensland gas pipeline in March, while record Chinese aluminium production this year has also drained alumina supplies.

There is little in the way of imports flowing to Europe from other regions. Freight costs remain high, and suppliers in the Middle East and India are showing little inclination to bear the cost of deliveries to Europe without greater price and premium incentives.

Consequently, the European market will remain very tight in the fourth quarter, leaving it susceptible to any stirring of demand that could cause premiums to jump. But there seems little chance of any such demand growth until 2025, with few suppliers even reporting discussions for further activity this year.

By Jethro Wookey