This week, aluminum prices approached long-term weekly demand zones. These are price levels that typically trigger a strong upswing. Before the most recent short-term declines, prices bounced off these levels, rising back into zones of strong downward movement (supply zones). Should prices continue to break downward, it could indicate a downtrend continuation. Moreover, the longer prices continue to trade within this range, the longer volatility and current uncertainty will persist.
The Aluminum Monthly Metals Index (MMI) continued sideways, with a 1.68% month-over-month decline.
Aluminum Prices Suffer with European Aluminum Smelter Closures
Europe’s energy crisis continues to worsen, leaving its aluminum industry increasingly vulnerable as high energy prices continue to shutter production. Aluminum Dunkerque Industries France, Europe’s largest aluminum smelter, recently announced it would cut its capacity by 22% by Oct. 1. The smelter, which produced 290,000 tons of aluminum last year, sources most of its power supplies through nuclear energy at fixed prices. However, the remaining share leaves the facility exposed to market prices.
In Germany, Speira GmbH plans to halve production at its Neuss plant indefinitely. The latest cuts come in addition to many others dating back to the beginning of 2021. In just under two years, sites from Spain, Slovakia, Slovenia, Romania, and Norway to the Netherlands, Montenegro, and others in Germany suffered the wrath of high energy prices. In fact, European aluminum production now sits at its lowest level since the 1970s.
Currently, all smelter shutdowns and curtailments directly correlate to energy costs. And though Europe’s entire metal sector will see an impact from the ongoing crisis, the aluminum industry is especially exposed. Indeed, aluminum production requires roughly 40% more energy than copper. And when producers face sharp price increases, production quickly becomes unprofitable for any raw material not attached to fixed-price contracts. Should countries ration energy in the coming months without carve-outs and exceptions for the industrial sector, this could lead to further capacity curtailments across Europe.
Aluminum Prices: Demand Outlook Appears Increasingly Grim
As European production slows, LME warehouse inventories remain at record lows. From the beginning of 2022 through the end of August alone, inventories dropped over 70%. This unique combination of circumstances helped support prices enough to halt the macro downtrend through mid-July.
European production constraints remain a bullish factor for prices and premiums, as well as a risk for companies sourcing products and materials from Europe. However, many other factors outweigh the effect of those constraints. For instance, premiums continue to slide from their peaks. Meanwhile, by the end of the first week of September, aluminum prices fell to their lowest level since March of 2021. On top of that, LME inventories reached their highest levels since late July. What could explain this?
For one, other countries continue to compensate for the loss of Europe’s capacity. According to the International Aluminum Institute, global primary aluminum production actually increased 2.06% year over year in July. Moreover, West and Central Europe’s portion of the global monthly total in July narrowed from 4.87% in 2021 to 4.29% in 2022. Additionally, the demand outlook continues to worsen. As energy prices increasingly choke European demand outside of Europe, ongoing rate hikes from the Fed will continue to pressure U.S. consumers. Lastly, China continues to grapple with a property crisis
Long-Term Ramifications on the Aluminum Industry
For now, Europe continues to lose capacity and appears poised to lose more. However, the extent of the damage to the sector caused by the energy crisis remains uncertain. The deciding factors will most likely be the duration of energy shortages on the continent (and the extent to which European countries can insulate their respective industrial sectors from the crisis).
According to Guillaume de Goys, CEO of Aluminum Dunkerque Industries France, the breakeven point for production sits around 250 euros per MWh, and a return to those prices could take years. This could mean at least some of the damage done is irreparable. Contracting demand, both in and outside of Europe, could prevent markets outside the continent from capitalizing on Europe’s present weakness enough to avoid a return of the currently lost capacity. For now, it appears Europe will play an increasingly-narrow role within the global aluminum market.
By AG Metal Miner
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