European aluminum scrap prices fell sharply in the second quarter as inflationary pressures hit economies around the world and export demand almost vanished as Chinese consumers quarantined over the country's zero-Covid policy. And buyers are still expecting further declines as this policy continues to suppress industrial activity, despite a minor price recovery in the second half of May.
European aluminum scrap prices fell almost 20% from 1 to 12 May. Argus' weekly valuation has dropped to €1,500-1,600/tonne from €1,850-1,950/ton delivered to European consumers during this period. Aluminum wheel scrap decreased from €2,850-2,950/ton to €2,350-2,400/ton.
Lower automotive demand, lower London Metal Exchange (LME) prices and lower export demand have seen prices fall since the start of the second quarter. While automotive companies have limited their production to varying degrees throughout the pandemic due to the shortage of semiconductors for vehicles, European automakers have also had to deal with a shortage of wire system parts from Ukraine since the Russian invasion in February.
LME aluminum prices initially rose after the start of the war as Russian metal supplies came under threat of sanctions, but then fell back as low demand and high inflation hit markets across the continent. The quarterly LME aluminum contract fell 22.61 percent from May 1-12.
At the same time, the export market for aluminum scrap to Asian buyers has dried up. In a typical trading environment, scrap suppliers in Europe and the UK may depend on strong demand from Asian markets, particularly India, as these regions seek to supply downstream products to China. But with China's zero Covid policy keeping workers and consumers locked up across the country, demand has waned and very few scrap units have been sold from Europe in recent weeks.
"India is completely out of the market," said a UK-based scrap dealer. "They were sending a lot of [secondary aluminum ingots] to China, but now they can't get in there. We won't see it recover until the pandemic lockdowns in China are over." Said.
Scrap prices have partially recovered over the past two weeks as LME prices are volatile, rising first and then falling as investors consider the effectiveness of China's economic stimulus measures, given that the country has indicated its intention to maintain its long-term zero-Kovid target. From May 12 to June 1, LME prices rose and then fell almost 10 percent.
Additionally, some automotive consumers signaled better demand for the third quarter, with offers that in some cases surprised alloy manufacturers. German automaker Volkswagen awarded only 5 percent fewer aluminum metal tenders in the third quarter than in the same period last year, after many market participants predicted a larger discount. Producers said that the tendered metal prices were also surprised to the upside, placing them in lower price ranges rather than under their feet as many feared.
But other automakers are more affected by the various parts shortages hitting the markets and are expected to have a greater negative impact on production levels for the remainder of the year. The automotive market is the main determinant of the health of aluminum alloy demand in Europe.
Scrap markets have always relied on export sales as more scrap is produced than is used in many European countries such as the UK. Export demand has traditionally taken into account sales beyond the capacity of local consumer markets.
Without better international demand for scrap units, even if LME aluminum prices rebound further, aluminum scrap prices will likely fall further due to ample supply against insufficient demand. As a result, many scrap buyers are avoiding further spot purchases in the near term after purchasing enough material before the price drops in the early second quarter.
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