Aluminum inventories on the London Metal Exchange have dropped to levels unseen since 1990, driving the spot premium over three-month futures to $151 a ton on Wednesday. Just two market participants held 60% to 80% of available warehouse stocks earlier in the week, pushing the daily Tom/next deferral spread to its steepest premium since 2021 before it eased. The exchange possesses authority to cap lending rates for dominant position holders, but prolonged backwardation through 2028 suggests structural tightness will endure. Meanwhile, growing Indonesian production cannot yet relieve pressure because that output remains unregistered for LME delivery.
Key points
Severe backwardation across contracts through 2028 is creating sustained financial risks…: Severe backwardation across contracts through 2028 is creating sustained financial risks for market participants holding short positions.
Regulatory powers allow the exchange to enforce rules requiring dominant warehouse stock…: Regulatory powers allow the exchange to enforce rules requiring dominant warehouse stock holders to lend at capped rates.
Emerging Indonesian aluminum output cannot immediately resolve warehouse shortages becaus…: Emerging Indonesian aluminum output cannot immediately resolve warehouse shortages because the metal is not yet registered for exchange delivery.
Sources checked by our analysis pipeline: 1
Aluminum buyers on the London Metal Exchange are facing the most severe squeeze in decades as inventories backing contracts plunge and much of the remaining stock comes under the control of just two traders.
Spot prices for the crucial industrial metal spiked to trade $151 a ton above benchmark three-month futures on the exchange on Wednesday, hitting the highest level on record in data spanning more than 30 years. The spread was trading at a discount as recently as mid-October, but it has corkscrewed higher as stockpiles in LME warehouses have plunged to the lowest level since 1990.
The premiums for spot contracts, known as backwardation, are the steepest in the LME aluminum contract since the late 1980s, when Marc Rich Co squeezed the market, pushing the cash-three-month spread above $1,000 a ton. Since then, the LME has introduced rules that force traders with large positions to lend them out, effectively putting a cap on the scale of backwardations.
Backwardations can cause major commercial challenges for holders of short positions, who must either buy back their contracts or deliver metal…
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