Aluminum buyers on the London Metal Exchange are experiencing the most severe supply squeeze in decades, with the premium on the near-term aluminium contract over the three-month benchmark hitting its highest in five months at $94 ($136.79) a tonne on Tuesday, as reported by Reuters. This represents the highest level on record in data spanning more than 30 years, with the spread trading at a discount as recently as mid-October but corkscrewing higher as LME warehouse stockpiles have plunged to their lowest level since March 2025. The premiums for spot contracts, known as backwardation, are the steepest in the LME aluminum contract since the late 1980s. The tightness in physical supplies has pushed spot aluminium premiums over three-month futures to as much as $92 per tonne, reflecting backwardation in both London and Shanghai markets.
The supply crisis has intensified significantly with available aluminium stocks in LME-registered warehouses declining 51% since the US-Israeli war on Iran began in late February, as reported by Reuters. Current inventories stand at 207,525 tonnes, their lowest level since March 2025. The disruption has been particularly severe as Middle East shipments, which account for about 9% of global aluminium production, have been disrupted. The crisis has created unprecedented market conditions where two entities held accumulated long positions equivalent to between 60% and 80% of readily available stocks in the LME's warehousing network. A one-day spread known as Tom/next, which represents the cost of deferring delivery obligations, traded at the biggest premium since 2021, signaling an intensifying struggle over the dwindling volume of metal remaining in exchange warehouses.
The inventory crisis has been compounded by the overwhelming concentration of available stocks in Russian origin aluminium, creating supply chain vulnerabilities for Western traders. According to Reuters data, Russian aluminium accounted for 216,900 tonnes, or 99.98%, of available LME inventories at the end of October, leaving only 50 tonnes of Indian material as an alternative. This concentration has left many Western traders avoiding Russian supplies, creating additional supply tightness. Meanwhile, aluminium inventories in warehouses monitored by the Shanghai Futures Exchange fell 31% last week to 132,605 tonnes, their lowest since December, further constraining global supply availability.
Despite current supply tightness, the aluminium market is expected to swing into surplus next year from a deficit in 2026, providing some relief to the current crisis. According to the latest Reuters poll, analysts forecast a global aluminium surplus of 410,000 tonnes next year, compared with a deficit of 720,000 tonnes in 2026. The recovery is expected to be driven by recovery in Middle Eastern production and additional supply from Indonesia, which is rising and expected to create a global surplus in coming years. However, benchmark aluminium prices have fallen about 20% since hitting a four-year high in June as concerns over supply disruptions eased, creating a contrast between the near-term supply tightness and the more bearish longer-term outlook for market balance.
