2014 downstream aluminium contracts

While primary aluminium supply contracts have been warped by high premiums over the past two years, downstream aluminium product contracts are still more tied to their market’s fundamentals.

Primary buyers have had to contend with new types of contract as premiums are now a much larger part of the cost of buying aluminium.

Producers pushed for floating-rate premiums in their 2013 contracts last year after spot premiums had climbed to record highs, while uncertainty over next year’s premium levels has lead them to offer both fixed and floating premiums for 2014.

But in the downstream space, the structure of supply contracts can still reveal more fundamental trends within the individual markets.

Extrusion billet – quarterly, fixed premium

As in the primary ingot market, billet consumers do not want the uncertainty that comes with a floating-rate contract, but nor do the producers want to lock in a premium for a whole year that could be $20-30 per tonne below market levels in the space of a few weeks.

The answer has been to shorten the length of the contracts, chiefly to three months, leading to a quasi-floating premium that is renegotiated every quarter.

“Billet is a more standard product, like ingot, and floating premiums never really took off,” a downstream producer said. “There are different customers and some can’t pass the premium on [to their own customers] so it never really got off the ground.”

With fixed-premium quarterly deals, consumers get the security of a known premium level, albeit for a shorter period of time, while producers are happy because they see premiums strengthening next year on strong demand.

“We have had five successive months of growth, and that reflects its sustainability,” a second downstream producer said. “We usually have free capacity to get rid of at the end of the year, but this year there is a name behind every tonne.”

Rolling slab – yearly, floating premium

Rolling slab has fewer producers and consumers than the ingot and billet markets, and the consumers tend to be larger, too. Negotiations become less complex as a result.

Consumers want to secure supply for the full year, and are willing to take on a floating premium to convince the producers to do so.

“There aren’t many producers of rolling slab, so there’s no sense in arguing every month,” the first producer said. “Floating premiums have become common.”

Full-year deals are also attractive to producers because demand for rolling slab is likely to dip next year. This is due to many producers building casthouse capacity of their own, using remelt ingot and aluminium scrap to cast their own slabs and thus requiring less from the market.

Novelis, Elval and Bridgnorth Aluminium are examples of rolling slab consumers that have recently invested in their own casting capacity.

“All three are investing in their internal capacities,” the second producer said. “Premiums are being maintained [in our 2014 supply contracts] but we’re fighting to keep up the volumes.”

Foundry alloys – quarterly and half-yearly, fixed premium

Foundry alloys contain varying amounts of alloying elements such as silicon and magnesium, so their pricing is a slightly different proposition to the more pure aluminium products.

The alloying elements are not quoted on any exchange and so would add a large unknown element to any floating-rate deal.

“Foundry alloys are a different ball game,” the first producer said. “Nobody floats because of the unknown element that is not exchange-quoted.”

Wire rod – mixed bag

Producers reported both floating and fixed premiums in 2014 wire rod contracts. Floating premiums are unviable for some of the consumers’ customers that have little experience with them.

“A floating premium is a relatively new phenomenon to many people in Europe,” the first producer said. “People don’t want to use it because they don’t know it.”

Other consumers are more willing to take on floating premiums to secure supply in 2014 – and the challenge of passing them to customers.