Weak construction output hampers European aluminium, steel markets

Slower demand for construction materials continues to weigh on Europe’s aluminium and steel markets, pushing premiums and price levels downward while high interest rates and increasing material costs compress project investment across the continent.“The outlook for 2023 is more pessimistic, with investment in construction in Europe expected to fall by 2.5% [year on year], with all sectors expected to contract except for civil engineering,” European construction association FIEC said in its statistical report 2023, published on June 27.

“Sweden is expected to be the country that is hit the hardest, with investment in construction expected to fall by 13.7%, while Portugal should be the best performer with expected growth of 3.4%. In terms of employment, the sector employed 11.1 million workers in 2022, a decrease of 4.0% compared with 2021,” the FIEC report added.

Weaker building and construction demand has weighed heavily on the European aluminium billet market over recent months, with several producers taking extended summer maintenance breaks due to a lack of inquiries, market participants told Fastmarkets.

“I would estimate that physical [building and construction] demand has reduced by around 30-45% in Europe this year,” one aluminium trader said.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region), at $525-565 per tonne on June 30, compared with $530-580 per tonne two weeks earlier, and its lowest mid-point since February 2021.

The premium was down by 61% from $1,350-1,500 per tonne at the corresponding time last year, when premiums spiked across the continent amid soaring energy costs and heightened supply concerns.

“Inflation and interest rates are still high and likely to increase,” one European billet producer told Fastmarkets. “There’s no government stimulus to make further investment attractive, and over the next six-to-nine months I don’t see any reason why [building and construction] demand would get any better, unless something changes in terms of support schemes.”

Premiums in Italy have also been declining, with the construction sector weakening after the end of government stimulus to boost the sector in the wake of the Covid-19 pandemic.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp Italy (Brescia region), at $520-570 per tonne on June 30, falling from $530-580 per tonne the week before, and down from $650-700 per tonne at the beginning of the year.

“Global construction activity remains restrained in a post-Covid world. With the higher cost of living, interest rates and sticky inflation, the outlook for a fast recovery is rather unlikely for now,” Fastmarkets analyst Andy Farida said.

“Some raw material costs are coming down, and supply chains have eased to an extent,” he added, “but a speedy recovery is unlikely because China is still not keen to overstimulate its real estate [sector] and Europe faces a difficult winter.”

P1020 premiums lower as supply story gives way to weak demand
The weakening demand outlook has also been weighing on Rotterdam ingot premiums, market participants said, with previous strength from supply-side concerns providing only limited support against the recent decline.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam, at $290-320 per tonne on July 4, compared with $300-320 per tonne on June 23 and down by 6% from $310-340 per tonne at the beginning of June.

The premium had found support from low global inventories, after rising from $255-270 per tonne at the beginning of the year on estimates that more than 1 million tonnes of European primary aluminium capacity has temporarily come offline.

But weakening demand and some requests to postpone deliveries have been damping the market and prompting lower offers, market participants said.

“I’m not too worried, but you also can’t kid yourself for too long. The supply story is still there, but there are more and more demand questions emerging,” one trader in the region said.

“If demand does return, there could be a sharp premium increase due to the low inventory levels, but for now there’s definitely a growing number of people in the market who are spooked by fewer inquiries,” he added.

Fastmarkets assessed the aluminium P1020A premium, in-whs dup Rotterdam, at $220-240 per tonne on July 4, compared with $220-245 per tonne the previous week and down from $240-250 per tonne at the beginning of June.

“It feels like summer came early this year, and it’s dead across most markets. Demand is sluggish and producers have material to sell,” a second trader said.

But others said that while weak demand is prompting a number of lower offers in the market, London Metal Exchange spreads in wide contango were halting the decline to some extent, with reduced pressure to let go of units.

“The third quarter doesn’t seem to be performing as we were expecting, but spreads are super-soft and I’m not in a huge rush to liquidate,” a third trader said.

The LME aluminium cash/three-month spread was most recently in a $46.76 per tonne contango, widening from $37.31 per tonne contango one week earlier and flipping from a $36.50 per tonne backwardation at the beginning of June.

Weak construction demand putting pressure on European steel markets
Chronically weak demand from the construction industry, the major consumer of steel rebar, has been one of the major factors behind the downtrend in the European long steel market in recent months.

“The construction industry is facing pressure from rising interest rates. There is a lack of new projects,” a trading source in Europe said.

In the Northern European rebar market, prices have fallen to lows of €610 ($665) per tonne ex-works in late June 2023 from highs of around €1,030 ($1,122) per tonne ex-works in September 2022.

“We see persistent weakness in the construction sector. With multiple factors contributing to instability and weakness, we cannot forecast when it will improve,” a trader source in Germany said.

“There is a direct relationship between the health of the long [steel] market in Europe and consumption levels in the construction sector,” he added.

In the Northern Europe wire rod market, prices have fallen to lows of €605 per tonne ex-works in late June 2023 from highs of around €970 per tonne ex-works in September 2022.

Meanwhile, in some Central European countries, market sources pointed out that a lack of funds was the major obstacle to a rebound in construction demand.

“In Poland, the main problem is that we are still waiting for EU funds. We already know what we want to build, but Poland and Hungary are still waiting for these funds. And it is unlikely that we [will] receive them before the end of the year,” a trading source in Poland said.

Indeed, rebar prices in Poland have been falling almost non-stop since early May, amid weak construction demand.

Late in June, local steelmakers made an attempt to increase prices, but it was not clear yet whether the increase would be sustainable.

Fastmarkets’ most recent weekly price assessment for steel reinforcing bar (rebar), domestic, exw Poland, was 2,650-2,700 zloty ($652-664) per tonne on June 30, up by 50-70 zloty per tonne from 2,600-2,630 zloty per tonne on June 23.

Spikes in energy costs affect construction activity
Because of the Russia-Ukraine war that has been raging since February 2022, energy prices across Europe have rocketed, reaching historical peaks in the summer of last year.

As a result of unworkable energy costs, government subsidies were created to support companies in the heavy industries that had been affected.

Coupled with depressed demand, rising input costs made it difficult for producers to remain above the cost line, sources said. Producers across Europe cut production during the second, third and fourth quarters of 2022.

“A lack of demand from private and public projects in Europe has affected demand for long steel products. With energy costs high we cannot reduce prices. Dropping prices will not stimulate buying anyway, it will only freeze the market while customers wait for further price drops,” a producer source in Italy said.

Meanwhile, in the Italian rebar market, prices have fallen to lows of €677 per tonne ex-works in late June 2023 from highs of around €1,000 per tonne ex-works in September 2022.

In the Southern European wire rod market, prices have fallen to lows of €585 per tonne ex-works in late June 2023 from highs of around €975 per tonne ex-works in September 2022.

“The private sector has been less affected in Italy than elsewhere in Europe, meaning we have experienced stronger demand than in Northern Europe,” another source from Italy said.

“Italians have the highest private savings of any demographic in Europe. This means Italians are less likely to need to borrow to do private construction projects. Higher private savings create a buffer to a country feeling the recession as strongly,” he added.

Bearish outlook prevails for European steel market
With government subsidies removed, and energy costs expected to rise over summer 2023 in Southern Europe, market participants remained bearish regarding input costs.

Coupled with this, it was still uncertain when and how the construction sector would rebound.

“In July 2023, Italian mills face two main challenges,” a producer source in Italy said. “The first is energy and gas costs. Between the beginning and end of June, electricity prices rose by €40 per MWh. Furthermore, government aid has stopped from July. With demand remaining weak from the construction sector, mills are likely to cut production rather than to reduce prices further.”

Bearish sentiment also prevailed in Northern Europe.

“I do not know when demand will rebound or when [long steel] prices will pick-up,” a buyer source from the Netherlands said. “[Long steel] prices cannot continue to fall, and mills would rather cut production.”

European steel producers’ association Eurofer expected the construction industry to decline by 1.6% in 2023, after recording 4.8% growth in 2022. The sector was expected to recover modestly (+1.3%) in 2024.

The reasons behind this drop were the long-lasting effects of rising construction material prices, increasing scarcity of construction materials, and a shortage of construction workers in many EU countries, coupled with the overall economic slowdown due to the war in Ukraine, Eurofer said in its most recent economic outlook report, published in May 2023.

Overall construction activity should continue to benefit from government-funded schemes, with the civil engineering sub-sector expected to provide the strongest contribution to the construction sector’s performance.

But, Eurofer added, the effect of government housing support schemes was expected to ease substantially over the course of 2023.

Published by: Julia BolotovaImogen DudmanIndia-Inés Levy