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 contracts of LME aluminum have shifted from a contango structure with futures premiums of $28 to a slight backwardation structure with spot premiums, intensifying market concerns about the rise in near-month contract prices of LME aluminum. Many investors are beginning to wonder if LME aluminum will replicate the previous strong backwardation trend of LME copper, which was triggered by changes in global trade flows due to tariff policy risks.
SMM believes that despite the uncertainty surrounding the 232 aluminum tariffs, which has introduced volatility into the global aluminum trading landscape and led to repeated shifts in short-term trading expectations amidst ongoing inventory drawdowns, the LME backwardation structure does not have the conditions to be sustained for an extended period from the perspective of overseas aluminum fundamentals.
From the perspective 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 backwardation structure.
At the level 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 market arbitrage, rather than a simple bet on a unilateral rise in aluminum prices.
Regarding tariff policies, even if breakthroughs are achieved in negotiations between China and the US on the 232 steel and aluminum tariff issues, leading to changes in the global aluminum trade flow pattern, it will still be difficult to support a strong backwardation structure. The reason is that the US still holds 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 termination of Western sanctions on Russian metals. There is a high degree of uncertainty regarding the lifting of sanctions on Russia, which brings with it higher capital cost pressures and risks. Currently, trade frictions triggered by global tariffs still persist, and the low inventory situation has further strengthened the resilience of aluminum prices. However, the subsequent off-season pressure on the demand side will limit its upside potential. If China and the US make substantive progress in the 232 steel and aluminum tariff negotiations, the global aluminum trade flow will be reshaped, the supply pressure in markets outside the US is expected to be alleviated, and market sentiment will also be boosted. However, fundamentally speaking, with the continuous increase in production from newly commissioned aluminum smelters overseas, it will still be difficult to substantially reverse the overseas aluminum market fundamentals. Market participants need to closely monitor relevant developments and cautiously respond to 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 cautious decisions and should not rely on this as a substitute for independent judgment. Any decisions made by clients are unrelated to SMM.]
