European metal consumers switch to short-term buying due to uncertainty: 2023 preview

Growing uncertainty about end-user demand and input costs through 2022 has driven a change in consumer habits in Europe’s aluminium and steel markets, with traders foreseeing a continuation of hand-to-mouth buying going into 2023.

Changing consumer habits

The energy crisis in Europe – exacerbated by Russia’s invasion of Ukraine – as well as rising interest rates, material shortages and a negative economic outlook have combined to force production costs higher for all metals producers in the region. These same factors have also put a strain on the key metal consumer sectors – automotive and construction.

Initial overstocking after the war in Ukraine erupted in February, coupled with shrinking end-user demand, pushed prices down for steel and aluminium products in the ensuing months. European mills then had to significantly cut production to balance supply and demand.

The uncertainty over future consumption has made longer term forecasting difficult, traders have said, and this has led to limited, short-term buying.

“Everyone is [trading] on a weekly basis, mostly because things are very unsure,” a steel-beam producer source in Southern Europe told Fastmarkets.

Growth in the construction sector is predicted to drop to 0.2% in 2023 from 3% in 2022. It is expected to flatten later, to 0% in 2024, with no recovery anticipated until 2025, according to construction market forecasting network Euroconstruct.

Independent global economic forecaster Oxford Economics forecasts a 0.3% quarterly drop in eurozone construction output in the first quarter of next year.

And automotive output is expected to have dropped by 1.7% overall in 2022 due to the “severe repercussions of ongoing supply-chain disruptions and the war in Ukraine,” Eurofer said in its 2022-2023 fourth quarter economic report, in which it also said that these downside factors are expected to persist “at least until the second quarter of 2023.”

In the first nine months of 2022, car registrations in the European Union fell by 9.9% to 6.8 million units, according to the European Automobile Manufacturers’ Association (ACEA).

“The last [several] years have been marked by major events like Brexit, the coronavirus pandemic, semiconductor supply bottlenecks, and the war in Ukraine with its impact on prices and availability of energy,” ACEA president and CEO of BMW Oliver Zipse said in October.

“All of these things underline how quickly, how profoundly, and how unpredictably our world is changing,” Zipse said. “This applies not least in the geopolitical context – where there are direct consequences for our globally interconnected industry and its close-knit value chains.”

The hand-to-mouth purchasing trend will likely carry on into 2023, until rising costs are eased, and end-user demand and confidence are strengthened, trader sources told Fastmarkets.

Several distributors intend to keep their level of stock low in January-February 2023, they said, due to high levels of volatility in the market.

“We currently book only what’s strictly necessary,” a distributor source in Northern Europe said. “There is no clarity on whether the uptrend that has recently begun in the flat-steel markets will actually last in early 2023.”

Higher production costs and sluggish steel demand had also led to several European producers either stopping steelmaking capacities or trimming output to balance supply and demand, during the third and fourth quarter of 2022.

Loss of consumer confidence in construction sector

A gloomy outlook for the construction sector in 2023 has for several months put downward pressure on long-steel product markets including rebar, wire rod, beams and hollow sections.

“As long as the energy cost problem is not solved, I don’t think a lot of construction companies will make investments for the near future,” a sections trader source in Germany said.

In Italy, the price of electricity rose to above €420 per mwh in the week to December 14, more than four times the average one-month cost in November of €87.84 per mwh, according to Italy’s exchange for electricity and natural gas spot trading, Gestore Mercati Energetici.

In Germany, traders pegged energy costs at around €440 per mwh in the same week.

Long-steel prices have now flattened in major markets in the region, with traders expecting long-steel demand to pick up by early next year due to companies needing to restock.

Mills pushed for higher prices in December, but market participant’s opinions were mixed on whether those higher prices would be tradeable in 2023 given the anticipated weak construction consumption – even if the high price of energy and scrap raw material costs support upward price movements.

“At this moment there are so many concerns about uncertainty in the economy that demand is disappearing, and construction projects are being postponed because nobody knows what is going to happen,” a distributor source in Northern Europe said.

“If Europe finds a solution for the energy issue and energy prices drop to more normal, pre-war levels, then the situation is solved,” the distributor source added. “It can’t happen overnight, but it can happen in a quarter of a year.”

But while uncertainty looms over construction-sector prospects in early 2023, some aluminium market participants were optimistic about activity picking up in spring when the weather is milder and energy costs ease.

“I’m expecting the construction business to get stronger in spring,” an aluminium seller said.” It’s very seasonal work, and while the automotive sector looks fine, you can’t rely on that sector; they are pretty fast at cancelling orders.”

Other factors affecting construction-sector activity include rising construction material prices, a growing scarcity of materials, and a construction-worker shortage, according to the European Steel Association Eurofer.

Automotive industry

A move away from forward-looking trading has also been observed in flat-steel and aluminium products due to uncertainty about future end-user demand in the automotive sector.

Automotive industry buyers, meanwhile, have been reportedly seeking shorter-term contracts – preferring quarterly versus half-year contracts – due to the high degree of volatility in the market, several sources said.

Mill sources, on the other hand, expressed doubts about the effectiveness of such a move.

“It would be difficult to achieve from an administrative point of view: renegotiating prices every three months would be complicated and time-consuming,” one mill source said. “Using floating indices and making [contracts] more instrumental could be a solution.”

Automotive demand is expected to recover in 2023, market participants told Fastmarkets, although it is unlikely to rebound to pre-Covid levels, they said.

After an 18.7% slump in 2020 due to the Covid-19 pandemic, automotive output in 2021 rebounded, but only by 3.3%, Eurofer said in its most recent market outlook on October 26.

Output from the automotive industry was expected to show a 1.7% decline in 2022. This would mean that the automotive industry’s output would remain below pre-pandemic levels.

The association expects output by the automotive sector to rebound by only 1.1% in 2023 – but only if supply-chain issues and global uncertainty ease substantially.

“We should definitely see a better demand scenario for 2023,” one automotive consumer source said, adding that it would “likely not [be] until the end of [the first quarter] and leading into the second half of the year, but it should definitely be better, subject to no further let-downs on the semiconductor side.”

The automotive industry was significantly affected by supply-chain issues over the course of 2022, which caused postponements of material and a significant backlog in orders.

As such, purchasing managers have been more reluctant to conclude long-term deals for large tonnages given the uncertain demand outlook for 2023, market participants said.

“There’s been roughly a 10-11% demand drop from the impact of semiconductor shortages in 2022, but we should see a rebound into next year,” the consumer source said.

Demand in the “recession-proof” aluminium packaging and aerospace sectors has, however, stayed robust.

Impact on prices

Limited hand-to-mouth purchases as a consequence of low consumption could increase price volatility in Europe’s steel and aluminium markets in 2023, with low stocks leaving traders more vulnerable to price swings during periods of tight supply if supply chain logistics issues arise, Fastmarkets understands.

Aluminium premiums have seen extreme volatility over the past twelve months, with many consumers reportedly purchasing additional quantities earlier in the year when premiums were rising to record highs over fears of being able to secure enough supply.

This has since led to high inventories and limited spot demand as Europe continues to face an ongoing energy crisis.

“There’s been a particular interest in destocking and consumers running down expensive inventory rather than entering the spot market,” one European aluminium trader source said.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $255-270 per tonne on Tuesday January 3, rising from $250-270 per tonne on December 30, but remaining 57% lower than the record high of $600-630 per tonne in May.

Participants in the aluminium billet industry also said that typical first quarter contract negotiations had been postponed, with some still waiting to conclude and consumers drawing on existing stocks.

Similarly, negotiation periods had been shortened, with consumers unwilling to lock in a fixed premium for extended periods due to ongoing volatility and recent swings in the premium.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp North Europe (Ruhr region) at $650-700 per tonne on December 30, lower than the $650-750 per tonne on December 16 and falling from record highs of $1,500-1,570 per tonne in February.

“[Consumers] are booking the bare minimum of their needs, perhaps just 20-25% of their needs, and then in case demand picks up, they will get back to us with spot tonne requests,” a second aluminium seller said. “Our production volumes for January are down 60%, as we still have quantities that were postponed.”

It was a similar story for steel market participants.

“European buyers learned their lesson – we all remember what happened in spring 2022 onwards, when everyone ended up having massive stocks of overpriced HRC,” a stockholder in Italy said.

The war in Ukraine flustered the European steel market, causing a wave of a panic buying in February and March, with prices for flat and long steel surging dramatically, breaking the records set in summer 2021.

For example, Fastmarkets’ calculation of its daily steel hot-rolled coil index, domestic, exw Northern Europe averaged at €1,278.50 per tonne in March 2022, up by €326.49 per tonne month on month from €952.01 per tonne in February and up by €489.60 per tonne year on year from €788.90 per tonne.

Market sentiment, however, has soured due to slowing automotive demand and competitive import offers.

Since April 2022, poor demand has led to an oversupply of material, especially in the flat-steel market, leading to older stock material undercutting freshly produced products and supporting lower prices, sources said.

European flat-steel prices have tumbled since April. Only in December did European steel producers start to attempt price increases. They did so gradually, in response to a slight improvement in trading, output cuts announced by several steelmakers, and anticipated end-user demand recovery.

And despite mills pushing for higher prices for coil with delivery in February 2023, traders said that anticipated contractions in Europe’s automotive and construction sectors will make achieving the higher prices difficult – even considering increased input costs and production cuts, sources told Fastmarkets.

“For now European mills are firmly offering a minimum €650 per tonne EXW for HRC,” a German trader source said. “We will see if they manage to fill their order books with these prices. When the market restarts after holidays in mid-January 2023, it will be clearer.”

Production cuts will, however, have a visible effect on the steel market in Europe early in 2023, mill sources said, and coil supply might fall short of demand.

“We do expect end-user demand to pick up. When everyone is back for material early next year, we might see a shortage of [HRC], given all the capacities that have been brought down in the fourth quarter 2022,” one mill source said.

Published by: Julia Bolotova, Carrie Bone, Imogen Dudman, Holly Chant