The aluminum market experienced the worst supply squeeze in decades, and inventory fell to the lowest level since 1990, and spot premiums set a record

The Zhitong Finance App learned that the London Metal Exchange (LME) aluminum market is facing the worst supply squeeze in decades. As deliverable inventory on exchanges continues to decline, and most of the remaining inventory is concentrated in the hands of a small number of traders, the premium of aluminum spot prices compared to futures prices has risen sharply, reaching the highest level in more than 30 years of records. Although the rapid increase in Indonesian aluminum production is expected to drive the global market to oversupply in the next few years, the tight spot supply situation is likely to worsen further in the short term.

On Wednesday, the spot price of LME aluminum was once $147 per ton higher than the three-month futures price, setting a data record that can be traced back more than 30 years. As early as mid-October, the spot price was still at a premium compared to three-month futures, but as LME warehouse inventory fell to its lowest level since 1990, the supply and demand relationship in the market quickly reversed, and the spot premium rose sharply.

This market structure, where the spot price is higher than the forward price, is called “spot rise” or “backwardation” (backwardation), and usually reflects a tight supply of short-term deliverable metals. Currently, the degree of negative price spread in the LME aluminum market has reached the worst level since the late 1980s.

The last time a similar extreme market occurred was in the late 1980s, when trading companies under Marc Rich squeezed the aluminum market through centralized holdings to push the price difference between spot and three-month futures above $1,000 per ton. Since then, LME has introduced restrictions on large holdings, requiring traders with a large number of long positions to lend their positions to the market under specific circumstances to prevent a repetition of extreme crowding.

For traders with short positions, a sharp increase in spot appreciation could put significant pressure on them. As the contract nears expiration, bears must either buy back the contract and close the position or deliver physical metal for fulfillment, and both options may face high costs when inventory is insufficient.

The degree of market tension is also reflected in short-term price spreads. On Wednesday, the fees required for traders to delay the delivery of aluminum by one day soared to the highest level since 2021, reflecting extremely tight spot supply in the market, and market participants are fiercely competing for increasingly scarce deliverable aluminum stocks in exchange warehouses.

What worries the market even more is that surplus inventory is highly concentrated in the hands of a small number of traders. According to LME data, as of Monday, the two trading entities had accumulated long positions in warehouse receipts and spot contracts, which is equivalent to 60% to 80% of inventory that can be delivered at any time in the exchange's warehousing network. This means that other buyers who need to obtain physical aluminum are facing increasingly limited supply options, further increasing the risk of market congestion.

It is worth noting that the current extremely tight situation in the LME aluminum market contrasts sharply with the medium- to long-term supply prospects of the global aluminum industry.

With the rapid expansion of aluminum smelting capacity in Indonesia, the market generally anticipates that new production will drive the global aluminum market to oversupply in the next few years. This expectation has continued to depress aluminum prices until now, but for buyers in urgent need of spot metals, future supply growth has not been able to ease the immediate delivery pressure.

Meanwhile, the impact of the Middle East war on the aluminum supply chain continues. Although suppliers in the Persian Gulf region have gradually found alternative transportation options, new export routes are more costly, take longer, and have increased risks. Smelters in some regions are still repairing damage caused by previous attacks, further limiting short-term supply recovery.

Furthermore, although new supplies from Indonesia have begun to drive the global physical aluminum market towards excess, the relevant metals have not yet been registered as LME deliverable brands, so they cannot be directly used to meet the delivery requirements of exchange contracts.

Analysts believe that the key issue in the short-term market is the extent to which the rise in spot prices needs to be extended to induce inventory holders and spot contract bulls to be willing to roll over their positions, thereby relieving pressure on immediate delivery.

If the share of inventory controlled by a few traders rises further, LME may introduce mandatory lending rules for large long positions to limit the influence of relevant traders on market prices.

LME responded that the exchange has established a number of mechanisms to prevent large or dominant positions from unduly affecting the market. The exchange will also periodically request further position management information from market participants and have the right to request them to take appropriate measures to adjust their positions.

However, the trend at the end of trading on Wednesday showed that short-term market pressure had eased somewhat. After rising to $31.73 per ton during the intraday period, the TOM/NEXT price spread finally settled at $1 per ton, indicating a temporary decline in the immediate delivery pressure faced by buyers.

Despite this, the aluminum futures curve still shows a continued tight supply situation. The spot rise structure extends until 2028, which means that the market is still concerned about deliverable metal supply for some time to come. Other basic metals also generally rose on Wednesday, with copper rising 1% to close at $13,817 per tonne.