RPT-COLUMN-Is battle for LME aluminium stocks noise or signal? Andy Home

By Andy Home

LONDON, June 18 (Reuters) - Where's all the aluminium gone? Two years ago there were over 1.3 million metric tons of the light metal sitting in London Metal Exchange (LME) warehouses. Inventory has since almost halved and is now at levels last seen in 2022.

As traders fight over what's left, the London market has become increasingly turbulent, even if it's not apparent from the deceptively calm surface.

While the outright LME three-month price CMAL has been sedately treading water around the $2,500-per ton level, short-dated spreads have turned tight and volatile.

The LME aluminium market is no stranger to titanic tussles for metal by traders with deep pockets. Indeed, the game's taken on a whole new dimension since the exchange banned deliveries of new Russian aluminium in April last year.

This latest power play echoes previous LME stocks battles but this time around the LME noise may be masking an important market signal.

LARGE MARKET, LARGE POSITIONS

Aluminium is the biggest global base metals market with annual consumption of around 100 million tons and aluminium traders have a history of taking outlandishly large positions in the London market.

The latest manifestation is the mega long position that has being roiling nearby spread structures over the last month.

The benchmark cash-to-three-months period CMAL0-3 has shifted from a comfortable contango of over $42 per ton in April to small backwardation.

The "tom-next" spread, the cost of rolling a position overnight and a reliable indicator of market stress, traded out to a $12.30-per ton backwardation last week.

Someone is clearly looking to scoop up a significant volume of aluminium but there are only 321,800 tons of available metal left in LME warehouses and two-thirds of that is Russian.

Russian metal was banned in the United States and United Kingdom in April last year and is subject to quotas in Europe prior to a full ban at the end of 2026, making it less desirable than other material.

It's not possible to know how much of the 323,000 tons sitting in LME off-warrant storage is also Russian but there has been no sign of this metal moving on to warrant to alleviate the spread tightness.

Similarly, if the purpose of the squeeze was to entice metal out of the deep non-LME storage shadows, it doesn't seem to be working. Arrivals have amounted to a negligible 150 tons so far this month.

The LME's ban on the delivery of Russian metal produced after April 13, 2024 may be hindering the normal working of the LME stocks grab trade, which is to tighten spreads to force holders to release metal.

But that assumes there is a lot of aluminium, whether Russian or anything else, that is available for LME delivery.

CHINA'S IMPORT APPETITE GROWS

That assumption is starting to look a little questionable, given the conspicuous absence of any significant arrivals of any sort of aluminium in the LME warehouse system since March.

Even Russian metal appears to be in hot demand, judging by China's imports so far this year.

The country has been soaking up Russian aluminium shunned by Western buyers since the start of the war in Ukraine in 2022.

Chinese imports of Russian primary aluminium surged from 291,000 tons in 2021 to 1.13 million tons in 2024. The pace has accelerated again in 2025. Imports jumped by another 48% year-on-year to 741,000 tons in January-April.

China's appetite for imported metal results from one of the big structural shifts playing out on aluminium's supply side.

The country's smelters are running close to the government's annual capacity cap of 45 million tons. The national annualised run-rate has held steady around the 44-million ton level since the start of the year.

Against a backdrop of robust demand, particularly from the solar energy sector, the domestic market for primary metal looks tight.

Shanghai Futures Exchange stocks have fallen to a 16-month low of 110,000 tons and the forward curve is in backwardation.

SCRAP WARS

China's stated policy is to ramp up secondary production from recyclable sources to compensate for the cap on primary metal production.

However, that may prove increasingly challenging as recyclable material flows to the United States because it is exempt from the 50% tariffs imposed by the Donald Trump administration.

This second big structural shift risks tightening the global supply of scrap, which in turn means processors outside of the United States have to use more primary metal.

Scrap flows to China, the world's largest buyer, are in danger of being further disrupted if the European Union decides to impose export tariffs to stem what it terms "scrap leakage". The threat was originally China but now it's the United States.

TESTING AVAILABILITY

This squeeze on the LME aluminium contract is the latest in a long history of mega trades intended to grab a slice of available stocks.

But it doesn't appear to be drawing metal into the system.

There may be a Russian kink in this story but this is a test of broader market availability and so far supply has been found wanting.

The longer the LME inventory downtrend continues, the more it will look like a market signal rather than the usual LME stocks churn noise.

The opinions expressed here are those of the author, a columnist for Reuters