Trafigura builds large aluminum stake as London inventories hit multi-decade low

Market Squeeze

Trafigura Group has bought large volumes of aluminum on the London Metal Exchange, making it a central player in a historic market squeeze as metal inventories plunge. As one of the largest commodity traders, Trafigura has built a heavy long position in short-dated aluminum contracts ahead of the November contract expiry. These positions are collectively larger than the entire 226,350 tons of exchange stocks, which have fallen to their lowest level since 1990.

Market Impact

The heavy positions and shrinking inventories have driven the market into its steepest backwardation in decades, with prompt contracts trading far above later-dated futures. A similar crunch is playing out in China, where December delivery contracts on the Shanghai Futures Exchange closed 550 yuan a ton above January contracts, the steepest backwardation for a front-month contract since 2002. This dynamic has created an arbitrage opportunity for traders to buy metal on the London exchange and sell it at a profit in China.

Responses And Complications

A spokesperson for Trafigura declined to comment on the trades. The London Metal Exchange stated that it has arrangements in place to guard against undue influence from dominant positions and regularly requests position management information from market participants. Meanwhile, the exchange's entire aluminum inventory consists of Russian metal, which is viewed as less valuable in western markets due to sanctions but remains widely accepted in China. Goldman Sachs noted in a client email that China has helped absorb global deficits by increasing exports and reducing imports, adding that the team struggles to see spreads easing while China and the London exchange compete for metal.

Context

Commodity exchanges like the London Metal Exchange use backwardation to signal tight physical supplies, where buyers pay a premium for immediate delivery compared to future dates. Sanctions and geopolitical shifts have redirected global metal flows, as traders look to profit from price differences between western and Asian markets when local inventories drop.