Pending decision over aluminium remelting capacity will hit premiums in 2014

Aluminium remelters that have curtailed capacity due to razor-thin margins are on the brink of bringing that capacity back into operation, and whether they do so will have a strong impact on aluminium supply and premiums next year.

“When we analyse the supply side, we see significant remelting capacity still idle,” a downstream aluminium producer said.

The producer added that there will not be large volumes of aluminium imports into Europe in 2014, and so the decision on the part of the curtailed remelt capacity will have a significant impact on primary aluminium supply, and therefore premiums as well.

“I don’t think the imports will come. The market premiums will be set by the remelters,” the producer said.

In June, primary metal buying costs made up almost 89% of those of aluminium billet, affording only a slim margin to remelt billet producers. But following the announcement of the London Metal Exchange’s proposed changes to warehouse load-out rates, primary metal premiums started to fall and the margin for billet producers widened.

Last month, the cost of buying primary metal fell below 86.5% of the billet buying costs, after primary aluminium premiums fell throughout August but billet premiums edged higher.

While the producer said that the spread would need to improve by another $15 per tonne or so before most remelters with curtailed capacity take the plunge and restart, a second producer said that figure was too low.

“It’s more like another $20-30 [per tonne] needed to restart,” the second producer said. “More remelting means more scrap demand, and there’s a scrap shortage everywhere.”

But the restart decision could be put on hold after the spread tightened over the past few weeks, with primary premiums firming up as discussions begin for 2014 supply. The latest aluminium spread log shows primary metal costs edging back above 87% of the billet costs.

“The P1020 premium is supported again, so it’s very difficult to start remelt capacity at a profitable number,” a trader said.

But a second trader noted that it is not just an adequate margin that will influence remelters considering restarting curtailed capacity, but also the need to retain expertise.

“The spread between ingot and billet has risen, but there’s also the need to retain knowledge,” a trader said. “Some remelters made the decision to restart over the summer [before the favourable premium moves] because they want to keep their workers and their knowledge.”

The second trader noted that one downstream customer in northern Europe that has been closed for two years has decided to reopen in the fourth quarter for this reason, and that the decision will automatically add 18,000 tonnes of aluminium demand to the market next year.

Whether the majority of the idled remelt capacity follows suit will have a huge bearing on primary metal premiums in 2014.