LONDON: London Metal Exchange (LME) stocks of aluminium have been draining away steadily since August and headline inventory of 443,000 metric tons is now the lowest since February.

More than half of that tonnage is in the form of cancelled warrants, meaning freely available stocks stand at only 198,025 tons. Low visible inventory should be a bullish price signal, but not in the case of aluminium. LME three-month metal has been sliding in tandem with exchange stocks and at a current $2,142 a ton is within sight of August’s year-to-date low of $2,115.

A better indicator of the true state of play in the aluminium market is the slump in physical premiums. Japanese buyers are locked in talks with major producers over what premium they will pay for deliveries in the first quarter of next year. The country is a major aluminium importer and its quarterly premium is a benchmark for the whole Asian region.

An initial producer offer of $95 a ton over the LME cash price would be the lowest since the first quarter of this year, but buyers still think it is too high. Japan’s shipments of aluminium products have been falling for 20 straight months and the spot premium last month fell below $80 a ton. Moreover, Japanese buyers will have noted that physical premiums have fallen even harder in both Europe and the United States.

The CME’s spot European duty-unpaid premium is trading at $128 over the LME cash price, which is the lowest since the first quarter of 2021. The US Midwest premium was trading close to $650 a ton over the LME cash price in the first quarter of this year as the market worried about the impact of penal import duties on Russian metal. It has since slumped to $413, also the lowest since the first quarter of 2021. The Western surplus would be higher still was it not for China, the one positive spot in an otherwise gloomy global picture.

China’s imports of unwrought primary aluminium hit a two-year high of 217,000 tons in October and year-to-date imports of 1.17 million tons have already far surpassed last year’s tally of 668,000 tons.

The country’s demand has held up surprisingly well while domestic production is being hampered by another round of weather-related smelter curtailments in Yunnan province.

That said, most of what is currently entering China is Russian-brand metal, which has been locked out of the US market and is subject to self-sanctioning by many European consumers. Russian aluminium has accounted for 80% of China’s total imports so far this year and the metal appears to be priced at a significant discount to Western brands. The average value of Russian metal imported in September was $2,384 a ton, compared with $2,672 for Australian-brand imports. However, the past two months have also brought rising imports of Middle Eastern, Malaysian and South African aluminium.

Malaysian imports of 11,700 tons in October were the highest monthly total since September 2020. The last time South African metal showed up in China’s import mix was October 2021.

These additional import flows suggest that it’s not only Russia’s Rusal that is finding it difficult to place its production in Western markets. Another sign of growing surplus is the rise in LME shadow stocks, inventory sitting off-market but with a contractual option of delivery into the LME system. What the LME terms “off-exchange stocks” have grown from 207,056 tons in May to 329,075 tons in September, the LME’s most recent monthly report shows.

That suggests there is scope for more aluminium to be warranted in the coming weeks, though much will depend on what brand it is. Russian metal already accounts for about 80% of open stocks in the LME system and anyone holding non-Russian metal may be reluctant to warrant it for fear of losing it in the exchange’s stocks churn. Factor in the usual smoke-and-mirror storage dynamics of the LME warehouse system and it’s clear that what you see on the LME is not reflective of what you can get in the physical marketplace. That’s why aluminium is experiencing the unusual combination of sliding inventory and sliding price.