Aluminum Market Tightens as Inventories Plunge and Spot Premiums Jump

What happened to supply and prices

Aluminum is in a real pinch as the inventory behind exchange contracts has thinned out. LME inventories have fallen by 56% this year, hitting their lowest since 1990, and that scarcity is lifting the price for immediate delivery. On Monday in London, spot prices were $92 per ton above the three-month contract, approaching the kind of multiyear peak reached earlier this year, a period when the war in the Middle East choked off shipments from the region.

Gulf producers have since found workarounds that eased some strain, but moving metal out now involves pricier, more hazardous, and lengthier routes. A number of plants across the region remain in recovery after suffering direct strikes early in the conflict.

Backwardation, positioning, and the curve

Both London and Shanghai are showing backwardation - near-term prices above those further out due to tight supply. ING Bank NV commodities strategist Ewa Manthey said, "The backwardation is really a reflection of how tight the physical market is right now." "There aren't many obvious sources of metal that can quickly make their way onto the LME."

When the front end trades rich, shorts can get squeezed if they cannot deliver metal, since they may need to roll positions at a loss. Longs benefit by rolling forward. Exchange data show four unidentified long holders collectively control at least 25% of the open interest in November LME aluminum contracts, which mature next week.

The near-term question is how wide the premium must get to coax those longs to roll, easing pressure on shorts who may struggle to source metal. The futures curve suggests tightness could persist, with backwardation showing through 2028.

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In a mixed day for industrial metals, the LME three-month aluminum benchmark inched up 0.1% on Monday, closing at $3,066.50 a ton. Copper, confronting a significant squeeze tied to supply constraints in China, climbed 0.9% to $13,896.50 a ton.

Why restocking is tough and what could change

Usually, steep spot premiums lure surplus metal into exchange warehouses. Not this time. Persistent limits on Middle Eastern supply, China's regulatory cap on aluminum output, and various trade barriers are also keeping the US and Europe tight, leaving scant surplus to rebuild LME stocks.

New supply from Indonesia is already picking up and could tilt the physical market toward surplus in the coming years, but that metal is not registered for LME delivery yet. For now, producers outside the region frequently earn higher returns by delivering straight to customers in Europe and the US, where purchasers are paying hefty premiums to futures despite subdued demand. "That could mean the backwardation needs to widen further to attract metal into LME warehouses," said Manthey at ING. "Further out, though, we see more downside risks for aluminium prices."

What this means for your portfolio

Near-term buyers face tight availability and potentially higher costs until new flows reach exchange stocks. Watch the November maturities and the behavior of those large long holders, which could sway short-term price action. The longer arc matters too: a curve in backwardation through 2028 signals tightness could linger, even as future Indonesian supply builds.

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