Aluminum Buyers Face Decades-High Supply Squeeze on London Metal Exchange

Aluminum buyers on the London Metal Exchange are facing their most severe supply squeeze in decades as warehouse inventories drop sharply and two traders control much of the remaining stock. Spot prices for the industrial metal spiked on Wednesday to trade $151 a ton above benchmark three-month futures, hitting a record high in data covering over 30 years. This spread traded at a discount as recently as mid-October before jumping as LME warehouse stockpiles fell to their lowest level since 1990. These steep spot premiums, known as backwardation, match levels not seen since the late 1980s when Marc Rich Co squeezed the market. Current rules now force traders with large positions to lend them out, capping extreme backwardations.

Market Pressures

Short position holders face major commercial challenges as they must buy back contracts or deliver metal at expiry. A one-day spread known as Tom/next reached its highest premium since 2021, showing an intense struggle for the dwindling metal. Exchange data from Monday shows two entities held long positions in warrants and spot contracts equal to 60% to 80% of readily available stocks in LME warehouses. The Middle East war has disrupted shipments, making export routes costlier and riskier, while some regional smelters recover from attacks. Chinese production caps and trade barriers in the US and Europe also limit alternative supplies.

Context

While rising output from Indonesia is expected to create a global market surplus in coming years, that metal is not yet registered for delivery on the LME. The London Metal Exchange states it has arrangements to guard against undue influence from dominant positions and can require market participants to manage their holdings as appropriate.