LME aluminium backwardation hits 36-year high as stocks shrink
The cash aluminium contract on the London Metal Exchange traded at its biggest premium over the three-month forward in 36 years on Thursday, with the backwardation pointing to acute near-term tightness in the market. The cash-to-three spread -3 last traded at a $176.80 per metric ton backwardation - a market structure where prices for prompt delivery are higher than those for future delivery - to…
The London Metal Exchange (LME) aluminium contract reached its highest premium over the three-month forward price in 36 years on Thursday, signaling a severe shortage in the market. The backwardation, or the difference between cash and three-month forward prices, stood at $176.80 per metric ton, the steepest since November 1990.
This surge in backwardation can be attributed to dwindling inventories on the LME, which have shrunk by more than half since January to just 226,350 tons. The vast majority of these stocks are Russian aluminium, effectively making the LME aluminium price reflective of the Russian metal's price at present.
Analysts attribute the price spike to the tight market conditions brought about by the low inventories. The concentration of demand is also noteworthy, with one entity reportedly controlling 30-39% of the LME aluminium warrants. This dominance exacerbates the perception of market tightness.
Furthermore, the expiry of short position holders on the November aluminium contract adds to the pressure. These traders will need to either roll over their positions or deliver at settlement next week.
The aluminium curve on the Shanghai Futures Exchange is also experiencing backwardation, with the November contract trading at a 350 yuan ($52.50) premium to the December contract, further highlighting the global aluminium market's tightness.
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