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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 against them at expiry.
A one-day spread known as Tom/next, which effectively represents the cost of deferring that obligation to deliver metal by a day, traded at the biggest premium since 2021, signaling an intensifying tussle over the dwindling volume of metal that’s left in exchange warehouses.
And increasingly, those who need the metal have few sellers to turn to. Exchange data shows that two entities held accumulated long positions in warrants and spot contracts equivalent to between 60% and 80% of readily available stocks in the LME’s warehousing network as of Monday.
The acute shortages on the LME have whipsawed traders and manufacturers in the broader aluminum industry, as buyers await a surge in output from Indonesia that’s set to push the global market into surplus in the coming years. That prospect has weighed heavily on prices over the past few months, but the reality for buyers in need of spot metal is that supply constraints could yet get worse before the new shipments arrive.
The war in the Middle East has disrupted shipments from the region, and though Persian Gulf suppliers have since found logistical workarounds, export routes are now costlier, riskier and longer. Some smelters in the region are also still recovering from damage from attacks.
Meanwhile, a regulatory cap on Chinese aluminum production and trade barriers that are also fueling tightness in the US and Europe leave the physical market without major alternatives to replenish supplies.
While Indonesian supply is already starting to surge — helping to tilt the physical market towards surplus — its metal isn’t yet registered for delivery on the LME. In the near term, the key question is how much bigger the backwardation will need to get to encourage holders of inventories and spot contracts to roll their positions forward.
With much of the remaining LME stock under tight control, it’s also possible that exchange rules that compel dominant holders of long positions to lend their positions back at capped rates will come into force if their positions grow bigger as a proportion of the remaining stock.
“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. “The LME also routinely requests further position management information from market participants and has the power to require positions to be managed as appropriate.”
After trading as high as $31.73 a ton, the Tom/next spread closed on Wednesday at $1, easing the stress on buyers in the short term. Still, the broader futures price curve signals ongoing pressure, with contracts in backwardation out to 2028.
This article was generated from an automated news agency feed without modifications to text.
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