The global aluminum market is facing an increasingly severe shortage of spot supply. Both the London Metal Exchange (LME) and the Shanghai Futures Exchange have seen a reverse structure where the near-month contracts are higher than the far-month contracts, reflecting the increasing pressure on buyers to compete for metals that can be delivered in the near future.
The LME inventory has decreased by 56% this year, reaching the lowest level since 1990. Due to the shortage of spot supply, buyers not only have to pay higher prices but also face the difficulty of obtaining new supplies in the short term.
On November 9th, the LME spot aluminum was trading at a premium of $92 per ton compared to the three-month futures, approaching the multi-year high set after the outbreak of the US-Iraq war. The war disrupted aluminum exports from the Middle East, which accounts for a significant share of global aluminum production.
Although suppliers in the Gulf region have alleviated some export pressure by adjusting logistics routes, transportation costs, risks, and voyages have all increased. Some smelters are still recovering from the direct attacks suffered in the early stages of the war.
Usually, a significant expansion of the spot premium will stimulate traders to deliver to the exchange warehouses to earn the spread, but currently, the market lacks sufficient liquid inventory.
In addition to the supply constraints in the Middle East, China's aluminum production is constrained by policy ceilings, and trade barriers in the US and Europe also limit regional supply.
At the same time, new aluminum production capacity in Indonesia is being released, and the physical market may shift towards a surplus in the future. However, the aluminum produced in Indonesia has not been registered as an LME deliverable brand, and it is temporarily unable to directly replenish the exchange inventory.
Furthermore, European and American end-users are willing to pay a higher spot premium, and producers prefer to sell directly rather than deliver the metal to the LME warehouse.
ING strategists believe that the current backward market reflects an extremely tight physical supply and the lack of metals that can quickly enter the LME warehouse. The spot premium may need to expand further to attract more supply to be delivered to the warehouse. However, in the long term, the growth in supply from Indonesia will increase the downside risk for aluminum prices.
The position structure has also made the market more sensitive recently. LME data shows that the aluminum contract for November will expire next week, and four unnamed long positions account for at least 25% of the total outstanding contracts.
If the short positions cannot obtain physical delivery, they may be forced to extend the contract at a higher cost; the long positions can gain profits through the extension.
The LME forward curve shows that the tight backward market structure may continue until 2028. On November 9th, the LME three-month aluminum rose by 0.1% and closed at $3066.50 per ton.
