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Europe's largest aluminum producer Norsk Hydro has warned that the construction sector in some of the region's largest countries is suffering from a drop in demand similar to that during the Covid-19 crisis.
Pål Kildemo, the Norwegian company's chief financial officer, said this collapse in construction due to high tariffs and rising construction costs had hit the aluminum sector hard, undermining profits for Hydro and its rivals.
“We have certain countries and areas where we see a drop of up to 50 per cent in building and construction demand year on year, which is something like the impacts of the Covid period,” he said in an interview with the Financial Times.
Aluminum is used in facades and frames of skyscrapers; Construction represents 25 percent of its global demand, according to Russia's Rusal, the world's second largest producer of the metal.
Graham Kerr, chief executive of South32, a large Perth-based aluminum producer, said demand for the metal in Europe was “anemic” as investment remained difficult across the region.
Kildemo ruled out a recovery in aluminum demand in the first half of the year, although he noted there was a risk that a recovery would not materialize in the second half of the year if interest rates remained high.
“There are not many positive signs in the very short term. . . We expect both Europe and North America to be down year-over-year by approximately 10 percent. [in the first quarter]”he added.
As a result of lower aluminum prices and higher costs, Hydro's adjusted earnings before interest, taxes, debt and amortization nearly halved in the fourth quarter to 3.7 billion Norwegian crowns ($354 million) over revenue of 46.7 billion Norwegian krone ($4.4 billion).
Kildemo singled out Germany, the world's worst-performing major economy last year, according to the IMF, as the country where construction had been hit by high energy costs after losing Russian gas following the invasion of Ukraine.
Germany's export-oriented economy has been hit by the loss of this cheap gas pipeline and a slowdown in Chinese demand, raising broader concerns about the country's deindustrialization.
S&P Global and Hamburg Commercial Bank's German Construction Purchasing Managers' Index for December showed a sector deeply in contraction at the end of 2023 with a “bleak outlook” for 2024.
The aluminum market was also at risk of a period of volatility, Kildemo warned.
This is because the London Metal Exchange's warehouses have been filled with Russian aluminum that potentially cannot be unloaded due to sanctions. It represents 90 percent of inventories.
If demand for the metal increases, there could be shortages as some consumers refuse to buy Russian aluminum. This would cause an increase in price and the possibility of a volatile and unstable market.
“There is a big risk of further volatility in the LME price when the market goes short again and people need to take metal out of the LME,” Kildemo said. “There is only Russian metal there, they can't receive it, so you run the risk of having real volatility in your prices.”
