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Europe’s largest aluminium producer Norsk Hydro has warned that the construction sector in some of the region’s largest countries is suffering from a demand slump similar to the one during the Covid-19 crisis.
Pål Kildemo, chief financial officer of the Norwegian company, said this construction crash because of high rates and rising building costs had hit the aluminium sector hard, undermining earnings of Hydro and rivals.
“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,” he said in an interview with the Financial Times.
Aluminium is used in facades and skyscraper frames; construction accounts for 25 per cent of its demand globally, according to Russia’s Rusal, the world’s second-largest producer of the metal.
Graham Kerr, chief executive of South32, a large Perth-based aluminium producer, said demand for the metal in Europe was “anaemic” as investment remained tough throughout the region.
Kildemo ruled out recovery for aluminium demand in the first half of the year while noting there was a risk that a rebound would not materialise in the second half of the year if interest rates stayed high.
“There’s not a lot of positive signs in the very short-term . . . we expect both Europe and North America to be year-over-year down 10 per cent or so [in the first quarter],” he added.
As a result of lower aluminium prices and higher costs, Hydro’s adjusted earnings before interest, tax, debt and amortisation almost halved in the fourth quarter to Nkr3.7bn ($354mn) on revenues of Nkr46.7bn ($4.4bn).
Kildemo singled out Germany, the world’s worst-performing major economy last year, according to the IMF, as the country where construction had been hurt by high energy costs after losing Russian gas following the invasion of Ukraine.
Germany’s export-oriented economy has been hammered by the loss of this cheap pipeline gas and a slowdown in Chinese demand, raising broader concerns about deindustrialisation in the country.
S&P Global and Hamburg Commercial Bank’s Germany construction purchasing managers’ index for December showed a sector deep in contraction at the end of 2023 with a “bleak outlook” for 2024.
The aluminium market was also at risk of a period of volatility, Kildemo warned.
This is because London Metal Exchange warehouses have filled up with Russian aluminium that potentially cannot be offloaded because of sanctions. It makes up 90 per cent of inventories.
Should demand for the metal rise, there could be a shortage as some consumers refuse to buy Russian aluminium. This would cause a spike in the price and the potential for a volatile and unstable market.
“It’s a large risk of higher volatility in the LME price when the market becomes short again and people need to pull metal out of the LME,” Kildemo said. “It’s only Russian metal there, they can’t receive it — then you risk having real volatility in your prices.”
