London 24/08/2015 - Primary foundry alloy premiums have dropped below the $500 mark in Europe due to a weak ingot market and plentiful supply, while automotive demand in China is declining.
Spot premiums for wheel alloy silicon 7 were last quoted at $445-485 per tonne duty paid over LME cash prices basis delivery in North and Eastern Europe with 30-day payment terms, down from $650-690 at the end of March and as high as $850 at the start of the year.
A few isolated trades were reported as low as $420 per tonne amid destocking while some suppliers quoted as high as $520. The spot market has been illiquid in recent weeks due to summer holidays in Western Europe.
"Volatility has increased and premium ranges are wider," one supplier noted.
"Traders and some producers with stocks have discounted premiums but there is good demand in Europe for foundry," another supplier said.
Current rates are much lower than premiums for 2015 annual contracts, which were reportedly booked at $850-900 per tonne.
The lower premiums are following the trend of primary ingot premiums. Premiums for P1020 have halved in five months to $140-160 per tonne over LME cash prices on a duty-paid in-warehouse basis in Rotterdam.
A few producers have switched to floating pricing this year, with customers buying foundry alloys on a formula based on the monthly average of ingot premiums - published by a pricing agency - plus a product upcharge, which currently stands in a range of $300-340 per tonne.
For wheel alloy silicon 11, the upcharge on premiums has remained stable at $20-25 per tonne on top of the silicon 7 premium.
The outlook for the near term looks skewed to the downside, however, due to a combination of high stocks, ample supply including metal from exotic origins such as Malaysia and India and weakening demand in China.
"The upside potential is limited," the first supplier said. "Demand is good but it's not a big upside story like in 2014 - buyers certainly have more choice."
Much will depend on the health of China's auto sector, a few market participants pointed out. If demand there keeps falling, carmakers such as BMW and Audi could be forced to cut output and therefore reduce their wheel orders.
Chinese consumers bought the fewest passenger vehicles in 17 months in July, extending a slump in the world's largest auto market after deeper discounts failed to revive demand. Retail deliveries fell 2.5 percent to 1.3 million units, the lowest level since February 2014, according to the China Passenger Car Association.
Car sales in Europe and the US have continued to increase in July but for aluminium demand growth is especially notable for the body of the car rather than for wheels.
Negotiations for 2016 premiums are about start - one small deal has already been reported at $500 per tonne for the first quarter but the first volume transactions will probably take place during the annual Metal Bulletin conference in Vancouver in a month's time.
Wheel alloys account for 50 percent of the foundry alloy market; silicon 7 represents 85 percent of the wheel alloy market.
(Editing by Mark Shaw)