European duty-paid aluminum premiums slip on unclear supply-demand scenario

The European duty-paid aluminum market's recent softening, despite stability in the duty-unpaid market, points to murky outlooks for the remainder of the year, market sources say, as poor demand dynamics continue to battle tightening supply.

Widespread uncertainty set a cautious tone among traders on the sidelines of an industry gathering in Athens, where few bookings materialized in a sluggish market.

"People don't seem to be motivated to take extra units, but equally no one feels pressure to let go of units they hold," a trader said.

Several sources maintained that European supplies continue to dwindle, citing high freight costs as halting large shipments from Asia until netbacks become more workable.

Referring to reduced liquidity in an environment where London Metal Exchange spreads have recently become less favorable, players found that this may reflect the lack of abundance of stocks in the physical market, where holders of metal are less incentivized to let go amid facing high replacement costs later.

A second trader suggested that current stock drawdowns in Rotterdam stand at above 90,000 mt/month, while a third trader claimed that stock levels now are at 800,000-850,000 mt and will reach record lows within two-three months, if the rate of existing outflows sustain.

Bullish supply-side arguments were quickly countered by those shedding light on overwhelmingly poor demand, that may soften the blow of strained availability.

"There are enough duty paid units available from local production or ongoing natural supply to Europe," a fourth trader said. "This is not necessarily people stocking up, but there are replacement units holding the duty paid premium where it is."

Buyers similarly shared expectations of a stable market in the near-term, describing their supply situation as comfortable, but acknowledging Rotterdam's net outflows.

Seeing declining premiums in Italy, a fourth trader attributed the backwardation in the October-November LME spread as adding pressure, alongside worse than anticipated demand and now the end of year argument slowly beginning to come into play. The source added that there is expectation that Rotterdam premiums will come off for similar reasons, with some discounting having already begun.

"I wouldn't make a bullish story -- the margins for end consumers are getting squeezed, and you can only pass on higher costs to an extent," a fifth trader said.

Higher freight costs

Weak demand was further reiterated by a value-added products producer.

"Packaging is doing better than last year but automotive is lackluster," the producer said. "With the building and construction sector, until there are severe cuts in interest rates, there won't be better outlooks. "But as long as the Red Sea tensions persist, this level of ingot premium makes sense and ocean freight is embedded in the cost," added the producer, referring to attacks by Yemen's Houthi rebels on shipping in the crucial waterway.

Several sources agreed that extremely elevated levels of freight costs due to the alternative, longer route around the Cape of Good Hope are limiting downside risk in premiums; however, gradual softening in these rates may push premiums in the same downwards direction.

"If we're pricing off the marginal ton and container freights are coming off, then premiums will fall," the second trader said.

The daily low-carbon aluminum premium shifted up to now reflect a $20/mt upcharge, for certified metal produced with a maximum emissions level of 4 mt of CO2 per mt of aluminum, based on scopes 1 and 2 at the smelter. Tradable values of up to $40/mt were reported, although the repeatability of this level could not be determined.

In addition, market participants revealed said that there is reasonable interest from customers for certified metal covering scopes 1-3, but bookings have ultimately been limited due to difficulties in passing down costs through the supply chain.

The third trader found that charging for low-carbon is especially challenging, given that the majority of tons in Rotterdam -- consisting of domestic production and duty-free units -- are of "green" origin.

The Platts Daily Aluminum Duty Paid In-Warehouse Rotterdam Premium was assessed Sept. 17 at $330-$350/mt, with a midpoint of $340/mt, down $5 on the week.

The Platts Daily Aluminum Duty Unpaid In-Warehouse Rotterdam Premium was assessed Sept. 17 at $280-$290/mt, stable on the week.

Platts' daily low-carbon aluminum duty paid and duty unpaid premiums in-warehouse Rotterdam were assessed Sept. 17 at $20/mt, up from $15/mt the previous week.

Platts is part of S&P Global Commodity Insights.