Aluminum Buyers Forced to Pay Up After Underestimating Recovery

(Bloomberg) -- Aluminum companies that turned too pessimistic last year during the height of pandemic lockdowns are paying the price as demand returns more quickly than anticipated.

The spot price premium for billet -- a key form of metal needed in the automotive, building and construction industries -- surged close to a record last week and may set new highs within days, according to researcher Harbor Intelligence.

Prices are surging amid a U.S. aluminum shortage few companies anticipated, which is forcing them into bidding wars with their own customers. Harbor’s price assessment represents what “traditional suppliers,” like Alcoa Corp., Rio Tinto Group, Century Aluminum Co. and Norsk Hydro ASA, charge for delivery, indicating the shortage is widespread.

“At the end of the day, you have producers and consumers competing and looking for billet at the same time when there’s not enough supply around,” Harbor’s managing director Jorge Vazquez said in a phone interview.

Raw-material producers have mounting concerns that their customers, the so-called extruders who make parts that go into refrigerators, recreational vehicles and window frames, won’t have enough metal to meet surging demand.

The price for immediate delivery reached 15 cents to 16 cents a pound on Thursday, up from 11.5 cents to 12.5 cents a day earlier, Vazquez said, adding that prices could surpass the record 20 cents in “a matter of days.”

Typically, suppliers and consumers agree to annual supply contracts, with flexibility to deliver more or less of the agreed-upon volume, depending on market trends. Vazquez said many agreed to buy 80% of what they believed demand was going to be for this year.

“Not only was demand way stronger than their internal projections showed, but it was way stronger than what they had agreed with producers,” Vazquez said.

Europe is also seeing signs of a bump in billet premiums, with Friday’s spot price gaining to $355 per metric ton, up about 6% from the prior week.

Shutdowns during the Covid-19 pandemic left industries devastated for months during a historic drop in demand. Producers, assuming consumption would be lower, weren’t churning out as much billet.

This became one of the biggest topics for aluminum investors in 2020, when metal makers like Alcoa, the top U.S. producer, said they cut back on making value-added products. Instead, producers boosted raw aluminum output, which allowed companies to avoid shutdowns and to ship the unpurchased metal to warehouses. Billet is usually a made-to-order product that isn’t stored.

While 2020 saw aluminum prices post their worst first half since 2013, the metal recovered to have its best second-half gain in a decade thanks to an unprecedented surge in demand as economies reopened from pandemic-induced shutdowns. Outlooks shifted on the quicker-than-expected recovery, which drove up consumption and fueled a surge in aluminum prices.

Now, not only do buyers need the maximum of what their original contracts allow, they require even more.