Aluminum is one of the world’s most important industrial metals, and a sharp increase in aluminum stocks on the London Metal Exchange (LME) is further evidence that market demand for the metal is weakening, while some major buyers are trying to avoid supply from Russia. LME aluminum inventories soared 11% on Tuesday, the biggest gain since February, and rebounded from a 30-year low touched in August. Like several other metals, aluminum has been suffering for months from tight spot supplies and concerns about a worsening economic outlook.
There are growing signs that consumption is suffering, which could lead to more aluminum flowing into the LME, which is often seen as the “market of last resort”. Two senior aluminum traders, who asked not to be named, said some buyers have asked to extend this year’s purchase contracts to 2023. Aluminum Market Reversal A shift to oversupply would mean a reversal in the global aluminum market. The global aluminum market has been facing severe shortages as a construction boom boosted demand and Europe’s energy crisis hampered production. The challenges facing metal producers look set to get tougher in the winter, but soaring electricity and natural gas prices could lead to a sharp drop in output at other plants, hurting demand. Michael Widmer, a strategist at Bank of America, said by phone, “In Germany, we’ve seen more supply losses than demand destruction so far, but the situation looks trickier going forward.” LME futures prices have reacted to growing demand risks, with aluminum trading more than 40 percent below its peak level in March. The Russian metal also faces growing uncertainty over its role in global markets following the outbreak of the Russia-Ukraine conflict, especially as negotiations begin this month on annual supply contracts for the entire industry. Aluminum hasn’t been targeted by U.S. or European sanctions, but some major buyers, including Novelis, are looking to avoid Russian metal in new deals. Russian aluminum giant Rusal (00486) increased metal stocks and raw materials in the first half of the year as production outpaced sales. Two senior aluminum traders said the risk to the market is that large quantities of Russian metal begin to flow into LME warehouses, causing distortions.
On Tuesday, LME aluminum prices fell 1.1 percent to close at $2,260.50 a ton. Aluminum inventories rose by 31,325 tons to 308,375 tons. To some extent, the rise in inventories should be welcomed by the LME, after a sharp drop in stocks on the exchange triggered a series of historic price spikes that culminated in a highly controversial short squeeze in the nickel market in March. But if LME aluminum futures prices end up significantly lower than those prevailing in the spot market, the massive inflow of Russian aluminum could create new problems for the exchange.
A spokesman for the LME said the exchange currently has no plans to take independent action outside the scope of the sanctions, and has found no evidence that LME warehouses are being used to house the metal for extended periods of time. The LME’s priority is maintaining an orderly market and will continue monitoring the situation.