Recently, news has been circulating widely in the market that an energy giant has established aluminum positions exceeding 1 million mt on the London Metal Exchange (LME). The scale of this position is staggering—as of May 15, LME aluminum inventory stood at only 397,300 mt (with Rusal accounting for approximately 90% of it), and the giant's position is 2.5 times larger than the existing inventory. Affected by this, the near-month LME aluminum contract has shifted from a futures contango structure of $28 to a slight spot premium (back) structure, intensifying market concerns about a rise in the near-month LME aluminum contract price. Many investors are beginning to wonder if LME aluminum will replicate the previous strong back rally in LME copper, which was triggered by tariff policy risks that led to changes in global trade flows.
SMM believes that despite the uncertainty surrounding the 232 aluminum tariffs, which has introduced volatility into the global aluminum trading landscape and, coupled with the continuous drawdown of inventory, has led to repeated shifts in short-term trading expectations, from the perspective of overseas aluminum fundamentals, the LME back structure does not have the conditions to be sustained for an extended period.
In terms of spot market performance, spot premiums for aluminum ingots globally are mostly on a downward trend, particularly in Asia. Influenced by expectations of the off-season, there is no shortage of aluminum ingots in the market, which poses an obstacle to the continuation of the back structure.
From the perspective of open interest logic, market participants holding large spot positions typically maintain a certain amount of short hedging positions in the futures market. It can thus be inferred that the primary purpose of the operation on the LME this time may be for futures/futures market arbitrage, rather than a simple bet on a unilateral rise in aluminum prices.
Regarding tariff policies, even if there is a breakthrough in negotiations between China and the US on the 232 steel and aluminum tariff issues, leading to changes in global aluminum trade flows, it will still be difficult to support a strong back structure. The reason is that the US currently still has a portion of hidden aluminum ingot inventory and has not yet faced a situation of supply depletion.
On the international front, the end of the Russia-Ukraine war does not mean the end of Western sanctions on Russian metals. There is a high degree of uncertainty regarding the lifting of sanctions on Russia, which brings higher capital cost pressures and risks.
Currently, trade frictions triggered by global tariffs still exist, and the low inventory situation has further strengthened the resilience of aluminum prices. However, the subsequent off-season pressure on the demand side limits its upside potential. If China and the US make substantive progress in the 232 steel and aluminum tariff negotiations, global aluminum trade flows will be reshaped, supply pressures in markets outside the US are expected to be alleviated, and market sentiment will also be boosted. However, fundamentally, this will still be difficult to bring about a substantive reversal in overseas aluminum fundamentals. Market participants need to closely monitor relevant developments and cautiously respond to the complex changes in the LME aluminum market.
[The information provided is for reference only. This article does not constitute direct advice for investment research and decision-making. Clients should make decisions cautiously and should not replace their own independent judgment with this information. Any decisions made by clients are not related to SMM.]
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