Europe’s Aluminum Extrusion Market Is Under Price Stress

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Europe’s aluminum extrusion market is under strain, the stresses are coming from two dynamics.

First, physical delivery premiums on primary metal are pushing up billet prices. Even though many billet producers rely largely or even totally on scrap, raw material supply scrap prices have benefited from the premiums being demanded for primary metal, resulting in higher scrap prices relative to the LME than 12-18 months ago.

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This puts extrusion mills, along with all processors of course, under pressure to pass these costs on to consumers by way of higher conversion premiums. Naturally, consumers have resisted price increases, as they always do, but due to capacity constraints the bar market has become polarized depending on the size of press needed to produce the finished product.

There has always been a higher premium for larger diameter sections and solid bars, due to the capital and operating costs of larger presses, the more limited supply sources for larger billets and the fact that larger sections are often produced in harder alloys than standard 6063. This all means the premiums for larger sections are considerably more than for standard sections. However, with European big presses running at capacity, mills have been able to raise prices proportionally higher this year than in the recent past and the trend is expected to get worse in the months ahead.

In spite of France being near stagnation – GDP announced today was flat, some southern states like Italy are in outright contraction and others are in varying degrees of slow recovery and finally European GDP, as a whole, looking like it is faltering after a false dawn last year – the large bar market is almost inexplicably strong. European extrusion mills, at least at the top end of the market producing sections over 10” or 250mm in diameter, are so busy some have put clients on allocation and others are furiously training up extra shifts to meet demand.

Comments from producers such as UC Rusal, reported in Bloomberg, that physical delivery premiums are set to top US$ 500/ton this summer cannot be dismissed as an interested party talking up the market. Smelter cutbacks are beginning to bite and the primary market surplus will certainly shrink dramatically next year if it is not already in technical deficit. The uncertainty is the amount taken up by the stock and finance trade, this is what is currently causing the metal tightness and pushing up premiums.

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Although the Contango on the LME has shrunk since earlier this year it still remains strong enough for the trade to be profitable. As such, physical delivery premiums and scrap prices are unlikely to fall and more likely to rise further this year adding pressure for further rises in mill conversion premiums even if the LME price remains moribund in its current $1750-1850/ton range.

 

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