Aluminium stocks jump as traders eye shift from shortage to glut

Warehouse stockpiles tracked by the LME jumped by 11% on Tuesday, the biggest increase since February, and rebounding from a three-decade low struck in August

A jump in London Metal Exchange aluminium inventories is adding to mounting evidence of weakening demand for one of the world’s most important industrial metals, while some key buyers are trying to shun Russian supplies.

Warehouse stockpiles tracked by the LME jumped by 11 per cent on Tuesday, the biggest increase since February, and rebounding from a three-decade low struck in August. Like several other metals, aluminium has been caught for months in a push-pull between tight physical supplies and worries about a deteriorating economic outlook.

There are growing signs that consumption is suffering, which could lead to even bigger inflows onto the LME -- typically the market of last resort. Some buyers are already asking to roll forward purchase volumes under contracts for this year into 2023, according to two senior aluminium traders, asking not to be identified identified discussing private information.

A shift to oversupply would represent a reversal for the global aluminium market, which has faced acute shortages as a construction boom boosted demand while Europe’s energy crisis hobbled production. The challenges for producers look set to get worse over winter, but the surge in power and gas prices is threatening to create an even greater slump in factory output, hurting demand. 

“In Germany, so far we’ve seen more supply losses than demand destruction but things are looking trickier going forwards,” Bank of America Corp. strategist Michael Widmer said by phone. Futures prices on the LME have already reacted to the growing demand risk, with aluminium trading more than 40 per cent below a peak in March.

There’s also a growing question mark over the role of Russian metal in the global market following the invasion of Ukraine, particularly as negotiations get underway this month for annual supply contracts across the industry. Aluminium hasn’t been targeted with sanctions by the US or Europe, but some major buyers including Novelis Inc. are seeking to avoid Russian metal in new deals. 

Russian aluminium giant United Co. Rusal saw a rise in metal inventories and raw materials over the first half of the year as production outpaced sales. The risk for the market is that large amounts of unwanted Russian metal begin to flow into LME warehouses, creating distortions, said two senior aluminium traders. Rusal declined to comment.

Aluminium prices on the LME declined 0.9 per cent to $2,264 a ton on Tuesday. Aluminium inventories rose by 31,325 tons to 308,375 tons.