The global aluminium market is facing a severe supply squeeze, with buyers scrambling to secure physical metal as exchange inventories fall to multi-decade lows.
According to Bloomberg, both the London and Shanghai markets are experiencing backwardation, a pricing structure in which immediately available metal trades at a premium to later-dated futures.
The condition signals tightening physical supplies, particularly as inventories backing exchange contracts continue to decline.
On the London Metal Exchange (LME), aluminium stockpiles have fallen 56% this year to their lowest level since 1990, according to exchange data.
Meanwhile, spot aluminium contracts have surged this month, trading at a premium of as much as US$101.50 ($144.42) per tonne over three-month futures on Monday.
The premium is now approaching a multi-year high reached earlier this year, when the outbreak of war in the Middle East disrupted shipments from the region.
Ewa Manthey, a commodities strategist at ING Bank, part of ING Group (NYSE:ING), tells Bloomberg: “The backwardation is really a reflection of how tight the physical market is right now.”
“There aren’t many obvious sources of metal that can quickly make their way onto the LME.”
Middle East disruptions tighten supply
While aluminium producers in the Persian Gulf have found alternative shipping routes to ease disruptions, exports remain more expensive, riskier, and slower than before the conflict.
Some smelters in the region are also still recovering from direct attacks on their facilities during the early stages of the war.
Typically, high spot premiums encourage traders to deliver surplus metal into exchange warehouses, helping replenish inventories.
However, continued disruptions to Middle Eastern supplies, combined with China’s aluminium production cap and trade barriers affecting the US and Europe, have left little excess metal available.
Although Indonesia is expected to increase aluminium production significantly in the coming years, potentially pushing the global market into surplus, that additional supply has yet to reach LME warehouses.
For now, producers elsewhere can still earn higher returns by selling directly to customers in Europe and the US, where buyers are paying substantial premiums to secure supplies despite relatively weak demand.
“That could mean the backwardation needs to widen further to attract metal into LME warehouses,” Manthey says.
“Further out, though, we see more downside risks for aluminium prices.”
Traders hold large futures positions
The tightening market is also drawing attention to concentrated positions in aluminium futures.
Bloomberg, citing exchange data, counts four unidentified holders of long positions collectively account for at least 25% of outstanding open interest in November aluminium contracts on the LME.
Those contracts are due to mature next week, adding to market attention on the availability of metal for immediate delivery.
Write to Jackson Chen at Mining.com.au
