Russia’s LME aluminium inventory share close to 95%: Now the market tightens with falling production outside China

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Aluminium’s return to backwardation on the London Metal Exchange (LME) is pointing to tighter near-term physical supply, as stocks continue to fall and production outside China declines. The market is increasingly focused on the availability of aluminium for immediate delivery rather than headline inventory levels.

According to Natalie Scott-Gray, senior metals analyst at StoneX in London, LME aluminium stocks outside China are 95 per cent Russian-origin material. This means the headline stock figure does not necessarily reflect the amount of metal that Western buyers can readily access. This is because physical buyers in the US and Europe are prohibited from using this Russian aluminium, while many buyers in Asia are also choosing not to purchase it. 

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The supply situation has also been affected by production cuts. Aluminium Bahrain's second-quarter production fell 61 per cent year-on-year. In comparison, Norsk Hydro's Alunorte alumina refinery in Brazil had earlier reduced production by 50 per cent because of natural gas supply disruptions. These factors contribute to declining refined aluminium production outside China for a second consecutive quarter.

Against this backdrop, LME stocks have continued to draw down, and backwardation has returned to the market. In simple terms, backwardation means aluminium available for near-term delivery is trading at a premium to metal for later delivery. It is generally seen as a sign that buyers are placing greater value on immediate supply.

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According to Scott-Gray, "The market is currently focused on immediate physical tightness rather than future supply growth, but eventually inventory rebuilding will become the more important pricing driver." Middle Eastern production is recovering, while aluminium capacity in Indonesia is expanding and Chinese production remains high. The focus now is on how long the current tightness will persist before inventory rebuilding begins to weigh on the market.