Aluminum Cash Premium Hits Record $151 as LME Stocks Fall to 1990 Low

SEATTLE (Scrap Monster): Aluminum buyers on the London Metal Exchange are confronting the tightest supply squeeze in decades, with spot metal commanding a record premium over futures as warehouse inventories sink to levels last seen in 1990.

The cash-to-three-month spread for the industrial metal reached $151 a metric ton on Wednesday, the widest backwardation in data going back more than three decades, according to exchange figures. The spread was still trading at a discount as recently as mid-October before reversing sharply as LME-registered stockpiles dwindled.

The squeeze has been compounded by concentration of what metal remains. Exchange data showed two entities held long positions in warrants and cash contracts equivalent to between 60% and 80% of readily available stocks in the LME warehousing network as of Monday.

The one-day Tom/next spread, which reflects the cost of pushing back delivery obligations by a single day, traded as high as $31.73 a ton before closing Wednesday at $1, the largest premium since 2021. The move signals intensifying competition for a shrinking pool of deliverable metal.

Backwardations punish holders of short positions, who must either buy back contracts at elevated prices or deliver metal against them at expiry. For long holders, the structure is lucrative, allowing them to roll positions forward at a profit.

"The backwardation is really a reflection of how tight the physical market is right now," said Ewa Manthey, commodities strategist at ING Bank NV. "There aren't many obvious sources of metal that can quickly make their way onto the LME."

Several forces are keeping metal out of exchange sheds. War in the Middle East disrupted shipments from the region, and while Persian Gulf suppliers have since established logistical workarounds, export routes are now longer, costlier and riskier. Some regional smelters are still repairing damage from attacks on their plants.

A regulatory cap on Chinese aluminum output and trade barriers tightening supplies in the United States and Europe leave the physical market with few alternatives. Producers elsewhere can still earn more selling directly to end users in Europe and the US, who pay substantial premiums on top of futures, so there is little incentive to deliver into LME warehouses.

Indonesian production is already beginning to rise and is expected to push the global market into surplus in the coming years, a prospect that has weighed on prices for months. But that metal is not yet registered for delivery against LME contracts, leaving buyers of spot material facing the possibility that conditions worsen before new shipments arrive.

The pressure is not confined to London. Aluminum markets in Shanghai are also displaying backwardation, with spot metal trading above later-dated contracts in both centers, according to the same report.

"That could mean the backwardation needs to widen further to attract metal into LME warehouses," Manthey said. "Further out, though, we see more downside risks for aluminium prices."

The LME said it maintains safeguards against excessive concentration. "The LME has a number of arrangements in place to guard against any undue influence of large or dominant positions," the exchange said in response to questions, adding that it routinely requests position management information and can require positions to be managed as appropriate. Rules introduced after Marc Rich Co's late-1980s squeeze, which drove the cash-three-month spread above $1,000 a ton, compel holders of dominant long positions to lend metal back at capped rates.

The immediate question for the market is how much wider the backwardation must become before inventory holders and holders of cash contracts are persuaded to roll positions forward. With so much of the remaining stock concentrated in few hands, those lending rules could be triggered if positions grow further as a share of available metal.

For manufacturers and traders who need metal now, the futures curve offers little comfort: contracts remain in backwardation out to 2028, indicating that near-term tightness is expected to persist even as longer-dated supply prospects improve.

Courtesy: www.finance.biggo.com