LONDON - London Metal Exchange (LME) stocks of aluminium have slumped to their lowest level since 1990, attesting to the supply-chain dislocation caused by the Iran war.

Gulf production of primary aluminium has collapsed by two-million tons a year since the US and Israel attacked Iran on February 28.

The supply-chain shock has translated into a scramble for available metal from the market of last resort, where registered stocks have fallen by half since the start of 2026 to just 250 000 tons.

What's curious is that neither outright LME price nor time-spreads seem ruffled by the inventory clear-out.

The market has reassured itself that global supply can recover quickly, encouraged by a positive progress report from the war-damaged Al Taweelah smelter in the United Arab ​Emirates, the largest plant in the Middle East, accelerating Indonesian shipments and a Chinese export surge.

Global supply, however, is not the same as LME supply.

What remains in the LME warrant pool is almost all Russian aluminium and almost all of it is owned by one entity.

RUSSIAN RESIDUE

The raid on LME stocks has been confined to Indian brands of aluminium, which together with Russian brands have accounted for most of LME on-warrant inventory over the last few years.

Registered stocks of Indian metal have slumped from 236 000 tons to 12 450 tons in the space of 12 months. Russian brands accounted for 95% of the 245 250 tons of available aluminium in the LME system at the end of July, according to the exchange's latest monthly breakdown.

This is not unprecedented. The Russian share of warranted stocks exceeded 90% in the early months of 2024. The difference then, though, was that there were another 800 000 tons sitting in off-warrant storage, most of it Indian metal being rotated between warehouse deals.

Those off-warrant inventories now stand at just 85 645 tons, of which 26 130 tons are located at Malaysia's Port Klang. This is where all the Indian metal has departed. But it's not helped replenish shadow inventory, which has been falling in tandem with registered stocks.

Either the metal has moved into storage outside the LME warehouse network or, more likely, it's been shipped into the Asian market, where physical premiums for second-quarter delivery were set at an 11-year high of $350 to $353 a ton over the LME cash price.

LOCKED UP

What remains in the LME trading pool is Russian metal produced before April 12, 2024, which is when the US and Britain announced a new sanctions package on Russia over the 2022 invasion of Ukraine.

Most of this aluminium is split between the Korean port of Gwangyang, Malaysia's Port Klang and Kaohsiung in Taiwan. Bar some modest nibbles at Gwangyang, the Russian stock residue has barely been touched for many months.

Physical buyers in the US and Europe are prohibited from using it and many in Asia are choosing not to.

The inactivity may also be down to the metal being locked up in financing-warehousing deals, reducing its ease of flow.

That would explain why most of it is held by one player.

DOMINANT PLAYER

The LME's daily positioning reports show one entity holding 80 to 90% of all warranted stocks as of Tuesday's inventory report. That rises to over 90% when cash-date positioning is included.

That's what the exchange classifies as a dominant holding, which means it is subject to LME lending rules, designed to prevent a large position morphing into a market corner.

Indeed, the position is big enough to require the holder to lend metal to the cash market free of charge until the position falls below the 90% threshold, at which stage the owner can reap up to 0.25% of the cash price per day.

These lending caps were permanently enhanced in March 2025 to cover trading over the full front month, if the position exceeds 150% of available stocks.

Rolling lending restrictions may explain why LME time-spreads look so relaxed. The benchmark cash-to-three-month period is trading in a highly modest backwardation of $8 a ton despite the near depletion of non-Russian stock liquidity.

But such low exchange inventory promises a few stress tests of the LME's more expansive lending rules.

The LME's Futures Banding Report shows there are four sizeable short positions sitting on the August prime prompt date, which will trade on Monday.

One of them is short to the tune of 20% to 29% relative to exchange open interest, which was just over 31 000 lots at Wednesday's close. That means the position is at least 155 000 tons in size and possibly as big as 225 000 tons.

The short always has the option of delivering physical metal to cover the position. That, however, may be a big ask in the current supply-stressed environment.