Deep contango in LME base metals signals weak nearby buying interest

The discount, known as a contango, for copper on the London Metal Exchange (LME) is hovering near the highest on record, while the discount for aluminum hit the largest in 17 years.

“Usually when demand is weak we see a big contango as consumers are not worried about the shortage of nearby supply. And on the other side, a deep contango encourages people to do the cash-and-carry trade,” said Dan Smith, head of research at Amalgamated Metal Trading.

The cash-and-carry trade involves financiers earning the difference between spot and forward prices on the LME curve.

“However, there is still a large share of Russian metals in LME stocks, and people don’t want to do cash-and-carry with that origin,” Smith said. “The cost of storage is also currently quite high for aluminum, zinc and lead compared to other metals whose price per tonne is higher.”

The LME banned from its system all Russian aluminum, copper and nickel produced from April 13 to comply with US and UK sanctions imposed over Russia’s 2022 invasion of Ukraine.

This decision and the subsequent inflows of Indian metal to the LME-registered warehouses for lucrative financial deals in May boosted the total aluminum stocks and reduced the share of Russian material in available LME stocks.

However, the share of Russian origin still remains relatively high in the stocks: as of the end of May, it was at 42% for aluminum, 40% for copper and 31% for nickel, the LME monthly data showed on Monday.

The LME cash copper contract closed at a $133-a-ton discount to the three-month contract on Monday, the biggest contango since May 8 when it reached a record high of $136.7. It was last at $129 on Tuesday.

For aluminum spot vs the three-month contract, the discount was at $61 on Tuesday vs $62 a ton on Monday, its biggest since 2007.