Silicon Scarcity to Impose a Shift in the Supply Contract Structure in 2022

Aluminum companies are increasingly investigating new contract structures for value-added goods containing alloying components like silicon to reduce the risk of higher production costs. In recent weeks, the companies together with dealers and consumers have seen that long-term supply contracts for items like 7 percent silicon primary foundry alloy (PFA) would incorporate various methods to safeguard producers and traders selling the product from rising silicon costs.
 
The price assessment for silicon export by Fast markets is 98.5 percent Si min, fob China to USD 9,000-10,000 per tonne on October 1 was pushed up by an energy deficit in China. This is a 150 percent increase from the beginning of September.

On September 10, Fast markets estimated the aluminum primary foundry alloy, silicon seven ingot premium, DDP Germany at USD 550-620 per tonne, up by USD 40-70 per tonne from USD 510-550 per tonne on August 13. The most recent evaluation is a new high.

Magnesium, which is also used as an alloying ingredient in other products, is witnessing a rise. On October 1, prices for magnesium 99.9 percent Mg min, FOB China main ports, were estimated at USD 10,000-11,000 per tonne, increased by USD 5,280-6,000 per tonne from USD 4,720-5,000 per tonne on September 3.

According to market participants, premiums for primary foundry alloys with silicon content are expected to continue to rise in the Friday, October 8 assessment. Fast markets’ PFA premium in Europe includes a P1020 premium, a fixed upcharge to cover conversion charges, payment conditions, and duty and shipping costs, as per its current approach. This is also how market participants generally sign PFA supply contracts.

However, owing to raw material prices, such as silicon, being incredibly variable, makers are concerned that premiums will not cover production expenses in the coming months, especially if the scarcity continues and worsens.

As a result, producers have begun to provide an index-linked contract, which means that the silicon content previously included in the fixed conversion upcharge has been separated and connected to a reference silicon price instead. This permits the merchant to pass the costs on to the customers if they buy it.

according to one aluminum producer who is also proposing silicon index-linked contracts for supply in 2022, it is excellent that people are thinking about silicon correction, otherwise, producing PFA is pointless. Producers say they are hesitant to sign contracts for next year without that component because they risk losing money due to rising raw material prices. The price of silicon has skyrocketed, a European merchant said. Producers have stopped offering and are requesting an index based on the silicon price.

Others argue that a fixed contract with substantially greater costs incorporated into the premium is an option for signing index-linked contracts. A second trader in Europe stated that they operate in a formula that assists in the price increase or asks for more. Market participants are also unsure about the long-term ramifications of a silicon shortage into 2022 and what this means for the supply and demand for aluminum value-added products. Market players believe that if resources like silicon and magnesium become more difficult and expensive to get, firms may shift their product mix away from value-added products and toward P1020.

In 2022, this would be bullish for value-added products but bearish for commodity-grade P1020. If smelters do not have enough magnesium, they would not be able to manufacture alloys, so they would have to resort back to it, a third European merchant added. On weaker fundamentals than in prior months, premiums for P1020 in Europe have started to drop this week.

A fourth European merchant acknowledged that one cannot make a car without chips, a car without magnesium, and cannot deliver aluminum wheels without silicon. With additional P1020, one can paint a setup with more P1020. On Thursday, Fast markets estimated the aluminum P1020A premium, in-whs dup Rotterdam, to be USD 295-305 per tonne, steady for the second day.

The news concerning silicon, according to the initial trader, makes the foundry extremely strong. If silicon maintains at USD 10,000 per tonne, a producer with 1.0-1.5 million tonnes of production may face production challenges. It has an effect, which is why the news we're hearing is encouraging.