Aluminium, one of the world's most important industrial metals, has seen a surge in inventories on the London Metal Exchange (LME), further evidence that demand for the metal is waning, while some major buyers are trying to avoid supplies from Russia.

LME aluminium inventories surged 11% on Tuesday, the biggest gain since February, and rebounded from a 30-year low hit in August. Like several other metals, aluminum has been hit for months by tight spot supplies and concerns about a deteriorating economic outlook. There are growing signs that consumption is being affected, which could lead to more aluminium flowing into the LME. The LME is often seen as the "market of last resort". Some buyers have asked to extend this year's purchase contracts to 2023, two senior aluminum traders said on condition of anonymity.

Aluminium market reverses

A shift to a supply glut would mean a reversal in the global aluminium market. The global aluminium market has been facing severe shortages as a construction boom boosted demand and Europe's energy crisis hampered production. The challenges facing metals producers appear to be getting tougher in the winter, but soaring electricity and natural gas prices could hurt demand by causing other factories to slump output.

"In Germany, we've seen more supply losses than demand destruction so far, but things are looking trickier going forward," Bank of America strategist Michael Widmer said by phone. LME futures prices have already reacted to growing demand risks. In response, aluminium is trading more than 40% below its March peak.

The role of Russian metals in global markets is also facing growing uncertainty in the wake of the Russia-Ukraine conflict, especially as negotiations on annual supply contracts across the industry begin this month. Aluminum has not yet been the target of U.S. or European sanctions, but some major buyers, including Novelis, are seeking to steer clear of the Russian metal in new deals. Rusal giant Rusal (00486) increased its metal inventories and raw materials in the first half as production exceeded sales. The risk to the market is that large volumes of Russian metal start flowing into LME warehouses, causing distortions, two senior aluminum traders said.

On 6th-Sept, LME aluminium prices fell 1.1% to settle at $2,260.50 a tonne. Aluminium inventories rose by 31,325 tonnes to 308,375 tonnes. To some extent, the rise in inventories should be welcomed by the LME, after a sharp drop in the exchange's inventories sparked a series of historic price surges that culminated in a highly controversial short squeeze in the nickel market in March. But if LME aluminium futures prices end up significantly below the prevailing price in the spot market, the massive inflow of Russian aluminium could create new problems for the exchange.