In a warning echoing the echoes of the COVID-19 crisis, Norsk Hydro, Europe's largest aluminium producer, reveals a significant downturn in the construction sector in some of the continent's major countries. Pål Kildemo, the CFO of Norsk Hydro, points to a 50% decline in building and construction demand year-over-year in specific regions reminiscent of the challenges faced during the pandemic.
In an interview with the Financial Times, he revealed: "We have certain countries and areas where we see up to 50 per cent fall in building and construction demand year-over-year, which is kind of like Covid-period impacts."
The construction crash, driven by high rates and escalating building costs, has dealt a severe blow to the aluminium sector. Aluminium, extensively used in facades and skyscraper frames, sees 25% of its global demand tied to the construction industry, according to Russia's Rusal, the world's second-largest producer of the metal.
Challenges in Europe's aluminium demand
Graham Kerr, CEO of South32, a prominent Perth-based aluminium producer, describes the demand for the metal in Europe as "anaemic," citing challenging investment conditions across the region. Kildemo emphasises that a recovery in aluminium demand is unlikely in the first half of the year, with a looming risk of no rebound in the second half if interest rates remain high.
The prognosis for Europe and North America, expecting a 10% year-over-year decline in the first quarter, raises concerns about the immediate future of the aluminium industry. High-interest rates further cloud the outlook, hinting at potential prolonged challenges.
Germany's struggle exacerbates the situation
Kildemo singles out Germany, the world's worst-performing major economy in the previous year, citing high energy costs as a factor impacting construction. The loss of Russian gas after the Ukraine invasion has added strain to Germany's export-oriented economy, raising concerns about deindustrialisation.
Aluminium market vulnerabilities
Kildemo warns of potential volatility in the aluminium market, with London Metal Exchange warehouses filled with Russian aluminium facing offloading challenges due to sanctions. Russian aluminium comprises 90% of the inventories, posing a risk of market instability if demand rises and consumers hesitate to buy Russian metal.
"It's a large risk of higher volatility in the LME price when the market becomes short again, and people need to pull the metal out of the LME. It's only Russian metal there; they can't receive it — then you risk having real volatility in your prices," Kildemo concluded.
The European aluminium industry finds itself at a crossroads, navigating through challenges arising from a construction slump, economic uncertainties, and geopolitical tensions. Norsk Hydro's cautionary notes reflect the complex interplay of global events in the industry, urging stakeholders to brace for potential headwinds. If you wish to learn more about the international aluminium industry dynamics, go ahead and read AL Circle's specially curated report, Global Aluminium Industry Outlook 2024.
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