Over the past few months, substantial capital has flooded into the London Metal Exchange (LME) aluminum contracts as investors bet that the era of prolonged oversupply in this market is nearing its end.

Investors have amassed record-long positions, driving aluminum prices to six consecutive gains. This week, the LME three-month aluminum price surpassed $2,900 per ton for the first time since May 2022.

This speculative inflow marks a shift in the aluminum market’s narrative. As the world’s largest aluminum producer, China’s output has now hit a policy ceiling, fueling growing concerns that the market could face its first structural supply shortage in decades.

Although LME inventories surged by 102,275 tons in a single day last week, such fluctuations are often misleading in the aluminum market, making this development less surprising.

**Funds Turn Bullish** In just six months, investment funds’ net positioning in LME aluminum contracts has shifted from neutral to overwhelmingly bullish.

The collective net-long position has exceeded 130,000 contracts for the first time since early 2022—when aluminum prices soared to a record high of $4,073.50 per ton following Russia’s invasion of Ukraine.

Open long positions (equivalent to nearly 5 million tons of aluminum) reached 198,744 contracts, the largest bullish bet since the LME first published positioning data in February 2018. Meanwhile, short positions have dropped from over 100,000 in April to 68,233, further amplifying the net positioning shift.

**Inventory Shifts** Last Thursday, over 100,000 tons of aluminum were registered as LME warrants. Some might assume this would dampen bullish enthusiasm about an impending aluminum shortage.

However, the impact on absolute prices and spreads has been minimal. While the benchmark cash-to-three-month spread is no longer in backwardation, the shift into contango remains negligible.

The reason? This delivery did not involve new aluminum ingots but rather a transfer from off-warrant to on-warrant stocks. While registered inventories surged at Malaysia’s Port Klang, off-warrant stocks there saw an equivalent decline.

Historically, Port Klang’s inventories have rotated like a "merry-go-round"—traders and banks competing for warrants to lock in lucrative storage fees. But compared to past shifts, the scale of this movement has significantly diminished.

Crucially, total LME aluminum stocks (registered + off-warrant) actually fell by 14,225 tons in October, maintaining overall inventories just above 700,000 tons for five consecutive months.

Notably, a significant portion of LME aluminum originates from Russia. While the U.S. has banned Russian aluminum imports outright, the EU will implement a full ban next year, with sanctions gradually tightening.

**Premium Dynamics** The recent inventory shift primarily involved Indian-branded aluminum, which holds far greater market acceptance among Western buyers compared to Russian metal.

The U.S. market exemplifies this trend: since February, when the Trump administration raised aluminum import tariffs to 25%, and June’s subsequent hike to 50%, U.S. aluminum premiums have climbed steadily.

The CME Group Inc Midwest premium—the extra cost U.S. consumers pay atop LME benchmark prices—has now hit a record $0.89 per pound ($1,938 per ton).

With U.S. delivery costs now at 67% of LME prices, it’s clear that pre-tariff stockpiles have been depleted, leaving the market facing a shortage.

This premium pull is redirecting Port Klang’s LME aluminum westward to the U.S. Reports indicate that commodity trader Mercuria, which holds a dominant long position in LME aluminum contracts, is shipping over 30,000 tons to the U.S.

Even LME warehouses can’t compete with current U.S. delivery premiums—explaining why months of rolling squeezes in London have yielded little new aluminum entering the LME system.

Unless fresh metal arrives, funds have little reason to challenge aluminum’s newly established bullish narrative.