Aluminum ended the week of July 6-10 at $3,139.50 per metric tonne on the LME, recording its first weekly gain in six weeks with a 1.6% advance. The metal had touched $3,085 on July 7 — a four-month low — before recovering as softer US employment data weakened the dollar and the physical supply picture reasserted itself. The cash-to-three-month spread is a negligible $2 contango, indicating a market so tight that the cost of carry has effectively disappeared.
LME primary aluminum inventories fell another 11,050 tonnes last week to 287,725 tonnes, the lowest since 2022. Cancelled warrants declined 10,850 tonnes to 41,325 tonnes, suggesting material is being drawn for physical delivery rather than financial plays. Total LME stocks are down 43% from their 2026 peak, a depletion rate that is not sustainable. At current draw rates, LME warehouses would be effectively empty within six months.
The supply story has multiple reinforcing layers. GCC producers — which supply approximately 9% of global aluminum consumption — face direct operational risk from the Strait of Hormuz conflict. While US Central Command dismissed Iran's claim of closing the strait, commercial shipping insurance premiums have spiked, and vessel traffic through the chokepoint has slowed. Emirates Global Aluminium confirmed the restart of its Al Taweelah refinery last week, which tempered some near-term supply panic, but the restart timeline is measured in months, not weeks.
China's 45-million-tonne annual aluminum capacity cap, implemented in 2017 and long treated as a soft ceiling, is becoming a hard constraint. Domestic production is running at approximately 43.5 million tonnes annualized, and the remaining 1.5 million tonnes of headroom is concentrated in Yunnan province, where hydropower availability is seasonal and unreliable. When Chinese smelters cannot expand, the global market loses its traditional supply shock absorber — the mechanism that flooded the market with excess metal every time prices spiked in previous cycles.
European smelters face a different but equally constraining problem: energy costs. The surge in natural gas prices driven by Middle East supply disruption has raised the operating cost floor for European aluminum production. Roughly 600,000 tonnes of European capacity that restarted in 2024-2025 after the 2022 energy crisis remains vulnerable. At $3,140 aluminum, most European smelters are profitable; at $2,800 they are not. The energy cost floor is structurally higher today than at any point in the last five years.
On the demand side, Chinese factory activity returned to expansion in June for the first time in three months, according to the official manufacturing PMI. This is significant for aluminum because China consumes roughly 60% of global production, and roughly 30% of that goes into construction and infrastructure. The property sector remains weak, but manufacturing — autos, packaging, solar panel frames — is compensating. Global aluminum demand grew an estimated 2.1% in H1 2026, in line with the long-term trend.
Analyst views are split. Macquarie sees the market in a 930,000-tonne deficit this year and expects prices to average above $3,200/mt in H2 2026. Goldman Sachs is notably more bearish, forecasting a surplus in 2026/27 and targeting LME prices as low as $2,350/mt by Q4 2026. The Goldman call rests on two assumptions: a US-Iran peace deal that restores full GCC exports, and rising Indonesian smelter output displacing Chinese metal. Both assumptions look questionable after last week's military escalation.
Aluminum procurement teams should treat the current $3,140/mt price as a floor, not a ceiling, for Q3 2026. The combination of critically low LME inventories, a binding China capacity cap, and elevated energy costs in Europe creates a market where any further supply disruption — a Hormuz closure, a winter energy spike in Europe, a Yunnan drought — could push prices back above $3,500/mt within weeks. If you have not yet covered Q4 2026 requirements, buy forward now at current levels rather than waiting for a pullback that physical market conditions do not support. For 2027 planning, contract structures should include energy-cost pass-through clauses for European-origin metal and force majeure provisions covering Hormuz transit risk. Split your 2027 book: 50% fixed-price contracts locked by September, 30% on LME quarterly average plus regional premium, and 20% floating for tactical buying. The most important action this quarter is accelerating deliveries of already-contracted metal — with LME stocks at 287,000 tonnes, warehouse queues and delivery delays are becoming more common, and metal that exists on paper may not be available for physical collection when you need it. Monitor the EGA restart timeline closely; a faster-than-expected return of Al Taweelah output is the single most important near-term catalyst for lower premiums in the Middle East and Asian markets.