Europe’s energy crisis battles with demand for base metals taking center stage: LME Week

But aluminum and zinc have continued to react differently to the energy crisis in recent months, with aluminum demand outweighing all other factors.

Energy prices have recently fallen slightly, with the EU Dutch Title Transfer Facility (TTF) natural gas benchmark price standing at €145.15/Megawatt hour on October 14, its lowest since July 1. This compares to a record price of €339.20/MWh on August 26. .

Despite this decline, fears remain within the market over potential further supply disruptions, particularly following the recent explosions at Nord Stream pipelines.

Aluminum

As the most energy-intensive base metal to produce, aluminum has been particularly exposed to the energy situation in Europe, experiencing significant production cuts as well as weakening demand.

“The aluminum situation is really bad,” a trader told Fastmarkets. “If you look at the production [in Europe]almost 50% have now been reduced. »

Over the past year, aluminum production cuts have been seen at Hydro’s Slovalco smelter in Slovakia, Alcoa’s San Ciprian in Spain and at Romanian producer Alro.

The first smelter cuts at the end of 2021 supported aluminum premiums and tightened the spot market, pushing premiums to record highs.

But in recent months, the latest production cuts have done nothing to stem the recent sharp drop in premiums due to falling demand.

Demand is the key factor right now The most recent reduction in production at the aluminum plants of Hydro Karmøy and Hydro Husnes in Norway was not due to the energy crisis, but to demand.

“Even though 50% of primary aluminum production capacity in Europe has been reduced over the past year, the recent drop in demand is causing inventories to build up, forcing us to take firm action,” said a source at an aluminum producer.

Fastmarkets aluminum P1020A benchmark premium, in-whs dp Rotterdam, peaked at $600-630 per ton on April 29, but has since fallen around 50% to the current level of $290-330. per tonne, as valued on Tuesday, October 18.

“Despite all the uncertainty and worries about the high cost of energy, there is no panic,” said a second trader. “There is enough metal, and demand is driving it.”

It is said that consumers are well supplied and that demand from end users is weakening means that the energy crisis is not the determining factor for the European aluminum market.

Zinc

But for zinc, the energy crisis took center stage, with premiums hitting new records amid lingering supply fears.

Zinc markets were already expected to be tight throughout 2022 due to production disruptions at the end of 2021. Following production cuts, some major trading houses were forced to turn to LME warehouse stocks , the so-called “market of last resort” for fulfilling contracts. agreements and support demand in the region.

LME warehouse stocks for galvanizing metal have fallen by 74% during 2022, from 199,325 tonnes worldwide at the start of the year to just 51,925 tonnes as of October 13.

Recent announcements of production cuts by Glencore and Nyrstar have only heightened supply concerns, particularly for Europe.

“The situation is much tighter now,” said a zinc trader, adding that “there are no LME stocks to fall back on now, so the market will feel a shortage.”

Fastmarkets research projects that the global zinc market will register a supply shortfall of 184,000 tons in 2022.

For the European market, sentiment is mixed on the apparent “race to the bottom” between supply and demand cuts, with widely divergent price indications.

At present, supply constraints dominate physical market spot premiums, which currently remain at record highs. Fastmarkets priced premium zinc ingot SHG min 99.995%, dp fca Rotterdam and premium zinc ingot SHG min 99.995%, dp fca Antwerp at $500-550 per tonne on Tuesday, October 18.

A similar picture has emerged in the United States.

Although electricity has not been a problem in the United States, which depends on natural gas and nuclear energy for its industrial energy needs, the premium for high-quality specialty zinc ingots has more than doubled in over the past year, rising from 15-18 cents per lb on October 12, 2021 to 35-39 cents per lb on October 18, 2022.

This premium increase was caused by a continued shortage of material availability. The main culprit for this tension was transportation bottlenecks due to limited availability of containers, shippers, and truck drivers, as well as long wait times at ports and other transportation hubs.

After peaking at 38-50 cents per pound in June, the premium for SHG material has since fallen, reaching relative stability in mid-August. Since then, it has remained within this approximate range.

US market players are concerned that any further production cuts in Europe will make hardware very tight in Europe, which will also have psychological spillover effects in the US and lead to higher premiums, a trade-based source said. in the USA.

“It affects us more psychologically than anything else,” he said, adding that countries in North America do not have the same energy restrictions as in Europe, with the United States using nuclear energy. or natural gas, with Canada using hydroelectricity and Mexico using a mix of nuclear and fossil fuels.

“If production drops in Europe, then [European consumers of zinc] will scramble to find the material elsewhere and will likely look to Asia – and this will then affect [the US supply] sort of,” the US trade source added. “But it won’t affect our entire supply, as most of our production comes from Canada or Mexico.”

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