Weak demand hits European scrap prices

Prices for most European grades declined in August

The European scrap market has been impacted by weak demand. All of our contacts who buy scrap to feed their production have reported being less active on the spot market. Some even took the decision to stop buying scrap until further notice, and instead use their existing inventories. This is motivated by the fact that demand has been weak, with a lot of maintenance closures observed in July and August; but also due to the gloomy outlook for later this year.

In this context, no one wants to be long metal and buyers are confident they will be able to source whatever material they need, even at the last minute. This gives the promise of some sterile business discussions at the various incoming business gatherings that will take place in September and October. Nevertheless, these will be useful to gauge market sentiment as uncertainty has rarely been so high.

Industrial scrap more exposed due to the weak underlying demand

As a result, prices for most grades have been declining since our latest update in mid-July. The prices for the 3XXX and 5XXX series alloy scrap have dropped to 99% and 102% of the LME price – a couple of percentage points down from the start of July.

Overall, these industrial alloys have been exposed to the weaker demand from the construction sector as inflation has caused the cancellation and postponement of many projects. In particular, renovation works which were a big boost for aluminium demand during the post-pandemic recovery have been put on hold and the sector has been suffering from a shortage of raw materials too. As for transportation, demand has improved as the shortage of semiconductor is easing but it is mainly visible for the premium segment, with sales of medium-range cars still in contraction.

The weak demand from building and construction is also impacting the extrusions sector – a field that was booming last year but that has turned around since. This is well illustrated by the sharp fall in European billet premiums, with deliveries to Germany last trading at just above $1,000 /t, down from a peak of $1,500+ /t only four months ago. As a result, extrusions scrap, which was trading at a premium of over 10% of the LME price at the start of 2022 is now nearly flat.

The prospect of even higher energy prices in Q4 impacts procurement

Another reason why buyers are less active on the market is the risk of closures due to high gas prices. Recycling is a very energy-intensive process, and the price of gas reached a peak of €346 per MWh in late August as per the Dutch TTF spot contract on the ICE exchange. The price has since eased back to €210 per MWh but many expect it will rise again as we approach the winter months. If governments fail to intervene effectively to cap gas prices, many fear they would be forced to shut their furnaces, making the process of buying additional scrap not the best strategy at the moment. The market is therefore adopting a “wait and see attitude”, which is made possible by the weak demand environment, but is depressing scrap prices across the board.

Lower prices for packaging scrap mainly due to seasonal factors

There is another category of scrap that has seen its prices dropping sharply lately – and it is packaging scrap. Here, however, the drop is not so much due to demand weakness but because of seasonal factors. Indeed, we continue to hear that demand from the packaging sector is strong and consumption trends favour the use of aluminium. However, due to the unusually warm weather this summer, consumption of cans has been strong, which resulted in a lot of UBC coming back to the market. This is also taking place in a context where collection rates have improved noticeably across the continent. Now buyers are receiving regular calls for offers on UBC and the grade has slipped to around 63% of the LME price, down 7 percentage points from July. The same trend has been seen for Class scrap, with the three categories down around 5 percentage points each as well.

In contrast the secondary market remains resilient

The DIN 226 price recovers losses made in August

In comparison, the secondary market has been much more resilient, with the DIN 226 price last assessed at €2,475 /t. As is quite usual for this market, the price has been rather volatile since July, dropping to a low of €2,300 /t in August before bouncing back where we are today. Unlike the LME, secondary producers seem to have more control over their benchmark price and have been offering at higher levels to offset the higher gas price, we were told. Also as mentioned above, demand from automotive has improved alongside the bettered supply of chips and parts from Ukraine. This is mainly driven by the premium and EV segments as overall car sales remain weak. Nevertheless, this is sufficient to support prices.

Tight availability of lower grade scrap also supports prices

As for the underlying scrap of castings, sheet and turnings, here prices have also been resilient. The price for old aluminium sheet was last assessed at €1,575 /t, with a similar level for clean castings at €1,550 /t, and mixed turnings were last priced at €1,235 /t. Besides the level of demand, one reason for the stable prices was the fact that this particular category of scrap remained tight in Europe, we were told. The reason seems to be linked to the maintenance closures in July and August, implying this is only a temporary phenomenon. In addition, we heard it was still relatively easy to sell scrap abroad. Indeed, demand remains strong in countries that have not experienced such increases in energy prices, such as India and other countries in Southeast Asia. This shows that recycling is still a popular trend across the world even if for now it has become an expensive practice in Europe due to the exorbitant cost of energy. Nevertheless, it remains more affordable than the practice of producing primary as seen by the lack of sizeable cuts so far.