Struggling German economy weighs on base metals markets

European industrial production is struggling due to high interest rates, rising energy costs and inflation, but with the German economy hit particularly hard, market participants in the base metals sector are worried that the EU powerhouse might fall into a recession.

Germany is the largest economy in the EU, accounting for 25% of the trading bloc’s gross domestic product (GDP), and the fourth largest economy in the world by GDP – but in 2023 its economy has begun to contract.

“Germany’s most prominent [business] indicator, the Ifo index, dropped for the fifth month in a row [in September because] the August number was revised upwards. The Ifo index came in at 85.7, from 85.8 in August – one of the weakest Ifo index readings of the past five years,” ING global’s head of macro Carsten Brzeski told Fastmarkets.

Germany’s manufacturing purchasing managers index (PMI) was 39.1 in August, its second lowest reading since May 2020, with factory orders down the most, falling 11.7% from June to July, exceeding market expectations of a 4% drop.

Industrial production in July was down by 2.1% year on year and more than 7% below the pre-pandemic level.

“Germany is looking like the sick man of Europe,” a German trader said.

And because of its dominance in the trading bloc, a contracting German economy also threatens to affect other EU economies.

“The Italian zinc, lead and aluminium market is not good,” a trader based in Italy said. “We’re doing better than Germany or Poland, but a struggling Germany will drag us down too.”

One key problem is that high energy costs in Germany are stifling manufacturing activity.

“Ever since [Russia’s invasion of] Ukraine, we’ve been hit hard by high energy costs and I don’t see that situation being resolved soon,” a third trader said.

The situation has been exacerbated by the closure of Germany’s last operational nuclear plant. with the remaining reactors, Isar II, Emsland and Neckarwestheim II all shut down in 2023.

“We’re now having to buy nuclear energy from France, which makes no sense to me,” the third trader added.

Spot electricity prices in Germany have begun to rise now summer has ended, with the day-ahead auction price reaching a high of €379.59 per megawatt hour (MWh) on September 25 up from €127.89 per MWh on August 25.

Contracting construction, manufacturing demand
The European zinc premium has been in steady decline throughout 2023, falling by almost 40% amid contractions in the European steel galvanizing and zinc-alloy sectors, with Germany leading the way.

Galvanized steel, which accounts for up to 40% of total zinc consumption, has performed poorly across Europe, and particularly in Germany and Poland, due to the weakness in the construction sector.

“In Germany, our galvanizing sector has declined by 25-30% since the start of the year,” the German trader said.

Fastmarkets assessed the zinc special high grade minimum 99.995% ingot premium, duty paid fca Rotterdam at $280-320 per tonne on October 3, down from $500-530 per tonne since January 3.

The zinc alloys market, which had shown signs of resilience earlier in the year, is now also in decline.

“The alloys sector is not doing well right now. From my perspective, things have gotten worse now summer is over – nobody’s buying,” a zinc alloys producer source told Fastmarkets.

And the London Metal Exchange three-month zinc price closed at $2,493 per tonne at the end of trading on October 4, down 20% since the start of the year.

A zinc price of $2,500 per tonne has become a psychological price point, with zinc miners warning of further cuts to production if the three-month price remains at this level.

Germany’s largest zinc smelter, the Glencore facility at Nordenham, has been on care and maintenance since November 1, 2022 and while there was talk in June that production would resume this summer, market participants told Fastmarkets the smelter is currently only producing continuous galvanizing zinc alloys and is running at a reduced capacity.

At the time of the suspension, Glencore said operations at Nordenham would remain on care and maintenance “until the macro-economic environment improves.” Referring to the smelter, the a second German trader said: “I just can’t see it coming back online this year; it would only put downward pressure on the market.”

The poor performance of the construction sector and the weaker macroeconomic environment have also weighed on aluminium billet premiums in the region.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region) at $420-460 per tonne on September 29, down 34% since the start of the year and down 55% compared with the end of September in 2022.

The HCOB Germany Construction PMI index reported its sharpest drop since early 2020 in September, crushing hopes of a recovery after a slight uptick in July.

Automotive industry hit
Demand for aluminium has also been affected by a major contraction of Germany’s automotive industry, which is a key consumer of the light metal.

According to the German Association of the Automotive Industry (VDA), automotive production in Germany dropped by 30.6% to 266,800 vehicles in August 2023 from 384,738 vehicles in June, after showing strength at the beginning of the year. with more than 438,500 vehicles produced in March.

On September 26, local media outlets in Germany reported that car manufacturer Volkswagen would be reducing the production of electric vehicles (EVs) at two German facilities until mid-October due to declining European demand and waning EV subsidies from the central government.

“Once a poster child and envy of its peers, [Germany] now faces the prospect that its economy may not be able to catch up with other European countries,” Fastmarkets analyst Andy Farida said.

“The lack of structural capital expenditure and investment means that Germany [may have] become complacent,” he added.

Weaker manufacturing output in Germany and across Europe has also weighed on the tin market.

Fastmarkets assessed the tin 99.9% ingot premium, in-whs Rotterdam at $750-850 per tonne on October 3, down from $900-1,1000 per tonne since January 10.

The market is stagnating due to an abundance of material on the exchange and weak demand, with the wide contango in the nearby spreads disincentivizing trade.

The LME cash/three-month tin spread was recently in a $305-per-tonne contango.

Some market participants said they were unwilling to sell tin at a premium below $900 per tonne.

“With the contango so wide, most traders are content to wait and hold any material they’ve got until premiums rise again,” a tin trader said.

But other market participants doubted that this would happen anytime soon.

“I don’t know what the [other traders think they] are waiting for,” a second tin trader said, “because there’s no demand for tin.”

European low-lead tin losing competitive edge
The low-lead tin market has been experiencing the same conditions seen in the tin ingot market. Producers of tin-plated steel, which is the main consumer of low-lead tin, have struggled throughout the year, due to poor demand and competition from overseas.

Fastmarkets assessed the tin 99.9% low lead ingot premium, in-whs Rotterdam at $750-850 per tonne on October 3, down from $1,200-1,300 per tonne on January 10.

All market participants now regard low-lead tin and tin ingot premiums to be at parity, whereas, historically, low-lead tin would normally attract a higher premium.

“There’s no market for low-lead tin at the moment,” a third tin trader said.

And a producer of tin-plated steel said: “We can’t compete with Asia and we’re losing business [because] our production costs are now much higher than our Asian competitors.”

Rising inflation rates across Europe have recently slowed down, with Germany’s consumer price inflation dropping to 4.5% year on year in September 2023, from the previous month’s 6.1% and slightly below market expectation of a 4.6% inflation rate.

“This the lowest level of inflation since the start of the war in Ukraine,” Brzeski said. “But market confidence continues to weaken and inflation is still nowhere near the level that would bring relief or comfort to the central bank.”

Published by: Carrie BoneJosh FultonLaura Roberts