Aluminum market faces supply squeeze: LME aluminum inventory hits over 30-year low, spot premium approaches multi-year high

The London aluminum market is undergoing a severe supply squeeze, with inventories continuing to decline and driving spot premiums sharply higher. Buyers see little prospect of relief in the short term.

Aluminum inventories on the London Metal Exchange (LME) have dropped by 56% so far this year, falling to their lowest level since 1990. Driven by this, LME spot aluminum contracts have surged this month, with a premium of $92 per ton over the three-month futures on Monday, approaching the multi-year highs seen earlier this year due to disruptions from the Middle East war.

Although aluminum production in Indonesia is beginning to ramp up significantly and the market expects the global aluminum market to swing into oversupply in the coming years, this prospect offers little help to buyers currently facing tight supply.

Indonesian metal has not yet been registered for delivery on the LME and cannot directly replenish exchange inventories. Ongoing supply restrictions in the Middle East, coupled with U.S. and European trade barriers, have left almost no surplus physical stock to fill the gap in the spot market.

On Monday, the LME three-month benchmark aluminum contract edged up 0.1% to $3,066.50 per ton. Copper prices rose 0.9% to $13,896.50 per ton.

The sharp decline in LME aluminum inventories is the core driver of the current squeeze. Since the beginning of this year, stocks available to support contract delivery have fallen by more than half, hitting a three-decade low, forcing buyers to pay hefty premiums to secure spot supplies.

London is exhibiting a typical spot premium structure, with spot prices higher than deferred futures, reflecting scarcity pressure on immediate deliveries.

Ewa Manthey, ING Bank commodities strategist, stated: "This spot premium genuinely reflects how tight the physical market is right now. There aren't many clear sources of metal that can quickly flow into the LME."

The Middle East was previously a key source of LME aluminum supply, but direct attacks on local smelters at the onset of the war left some facilities still recovering.

Although Gulf suppliers have gradually found alternative logistics routes, somewhat easing supply shocks, export routes have now become more costly, riskier, and longer in duration.

Meanwhile, trade barriers in the U.S. and Europe have exacerbated local supply tightness. Together, these factors have left almost no surplus physical stock to supplement LME warehouse inventories.

Industry insiders and manufacturers are currently awaiting a large-scale release of Indonesian aluminum production. This increase is expected to push the global aluminum market toward oversupply in the coming years, and has already exerted considerable downward pressure on aluminum prices over the past few months.

However, for buyers urgently needing spot metal right now, Indonesian aluminum has not completed LME delivery registration and cannot be injected directly into the exchange warehouses to alleviate the supply pressure.

Meanwhile, end-users in Europe and the U.S. are paying hefty spot premiums on top of futures prices to secure physical metal, allowing producers in other regions to earn higher profits through direct sales, even amid weak demand. This further reduces their incentive to channel metal into the LME.

Manthey said: "This implies spot premiums may need to widen further to attract metal into LME warehouses. But from a medium- to long-term perspective, we think aluminum prices face more downside risk."

LME data show that there are currently four unidentified holders of long positions collectively controlling at least 25% of the open interest in the November aluminum contract, which will expire next week.

Currently, the core issue in the market is how wide spot premiums need to be to prompt these longs to roll over their positions, while providing relief for shorts holding the November contract who may struggle to source physical metal for delivery.

For shorts, the spot premium structure means rollovers will incur losses, posing a substantial squeeze risk. Long holders, meanwhile, can earn considerable returns from the rollover process.

Looking further ahead, the LME aluminum forward curve indicates tight supply conditions could persist for several months, with spot premium structures potentially extending to 2028.