Inventory signals show the base metals market remains tight

Overview

This report is Bank of America's global metals weekly, with the core theme of assessing the true tightness of base metals through inventories, regional flows, forward curves, and supply-demand balances. The report argues that headline inventory data can be misleading: part of the inventory increase merely reflects greater visibility or regional transfers rather than new surplus; the inventory structures of aluminium, copper, zinc, and nickel all point to markets tighter than the surface numbers suggest.

Core views

The report's core views include: first, although China's aluminium output increased month over month, global output is down year to date on a year-over-year basis, while overseas inventories are low and LME inventories continue to decline, so prices remain supported. Second, the increase in copper inventories mainly reflects roughly 1.2mt of copper flowing into North America and being attracted by CME financing structures; the global market remains tight, and both China inventories and consumer inventories are at low levels. Third, zinc inventory increases are mainly occurring in China, while overseas markets face refined zinc shortage risks due to tight mine supply, low treatment charges, and the expansion of Chinese smelters. Fourth, nickel is significantly affected by Indonesian policy; after Indonesia cut output, the market rebalanced, but if quotas are raised again in 2H26, fundamentals may weaken once more.

Analysis framework

The report uses a combination of inventory decomposition, exchange inventory comparison, regional supply-demand flows, forward curves, and supply-demand balance tables to distinguish visible inventories, invisible inventories, exchange inventories, consumer inventories, and regional shortages, with a focus on judging the true supply-demand implications behind inventory changes.

Methodology notes

• Inventory analysisComparison of visible and invisible inventories

  Interpret exchange inventories, non-exchange inventories, and previously invisible inventories separately to avoid misjudging inventory visibility as new surplus.

  The increase in copper inventories is interpreted as previously invisible inventories entering the US and the CME system, rather than the global copper market turning loose.

• Market structureForward curves and warehouse financing

  Assess inventory flows and financing arbitrage incentives through the shapes of LME and CME forward curves.

  The steep CME contango makes warehouse financing trades highly attractive, which is an important reason copper has flowed into North America.

• Supply-demand balanceRegional supply constraints and inventory mismatch

  Incorporate supply-demand changes across China, the United States, Indonesia, and World ex-China into the same framework.

  The views on aluminium, zinc, and nickel all depend on regional differences: aluminium focuses on the divergence between China and overseas inventories, zinc on the rise in China's smelting share, and nickel on Indonesian policy constraints.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Aluminium

  Low inventories and declining overseas supply support prices

  Strengths

  Global production is down year over year, LME inventories continue to decline, non-Russian inventories are being depleted, and China inventories have fallen since April.

  Weaknesses

  Higher Chinese production, increased Indonesian supply, and normalization of Middle East production may ease tightness.

  Comparison

  Compared with zinc and nickel, aluminium's inventory tightness is more directly reflected in low global and overseas inventories.

  Risks

  Continued growth in Chinese exports, recovery in overseas supply, and weaker demand.

• Copper

  Inventory visibility does not equal surplus; prices remain supported by tight fundamentals

  Strengths

  China inventories are falling rapidly, consumer inventories are at multiyear lows, refined copper production growth has stalled, and concentrate imports have declined.

  Weaknesses

  US and CME inventories remain high, and if financing trades release inventories, prices could face short-term pressure.

  Comparison

  Like aluminium, copper is seen by the report as a market where inventory data are misleading on the surface, but copper is more affected by cross-exchange curves and financing structures.

  Risks

  US inventory outflows, normalization of the LME-CME spread, and weaker-than-expected demand.

• Zinc

  Rising China inventories coexist with overseas shortages

  Strengths

  World ex-China faces refined zinc shortage risk, and the rise in LME cancelled warrants shows consumers competing for available metal.

  Weaknesses

  The increase in global inventories is mainly driven by SHFE inventories, so headline inventories are not low overall.

  Comparison

  Zinc tightness is not a uniform global shortage, but rather a regional mismatch between China and overseas markets.

  Risks

  Improved incentives for Chinese exports, LME prices insufficient to attract exports, and tight mine supply continuing to squeeze overseas smelting.

• Nickel

  Indonesian policy drives market rebalancing

  Strengths

  After Indonesia cut output, the global market moved into deficit in April and May, and LME inventory accumulation stopped.

  Weaknesses

  LME inventories remain high, with a large share sourced from China.

  Comparison

  Compared with aluminium and copper, nickel is more affected by single-country policy and supply quotas.

  Risks

  Indonesia raising production quotas in 2H26, causing fundamentals to weaken again.

Key data

• Global aluminium production-0.2% YoY YTDAlthough China's output has increased, disruptions in the Middle East, closures of African capacity, and losses in other regions have led to a year-over-year decline in global production.
• North American copper inventory accumulation约1.2mtThe report estimates that the US has cumulatively received about 1.2mt of copper inventories, mainly attracted by CME financing economics.
• Nickel price change从$19,600/t降至约$17,000/tThe price decline reflects market concerns that Indonesia may raise production quotas again in 2H26.
• Source of LME nickel inventories中国吨数约占70%The increase in LME nickel inventories has mainly been driven by Chinese producers.
• Copper price forecast2026E $12,888/t，2027E $15,250/tThe price forecast table shows that copper is still expected to rise over the medium term.
• Aluminium price forecast2026E $3,292/t，2027E $3,813/tThe price forecast table shows that aluminium remains supported against a backdrop of tight inventories.

Impact & implications

In terms of investment implications, the report tends to believe that downside in base metals prices is supported by inventories and supply constraints. The tight inventory thesis is clearest for aluminium and copper; although global zinc inventories are rising, overseas shortage risk may lift LME prices; nickel is more dependent on Indonesian policy, with prices likely to stabilize if supply discipline is maintained, but potentially come under pressure again if quotas are relaxed.

Risks

• Chinese base metals production or exports continue to rise, easing global supply tightness.
• Normalization of Middle East aluminium production and transport disruptions weakens support for aluminium prices.
• US copper financing inventories are released faster than expected, creating short-term pressure on copper prices.
• Indonesia raises nickel production quotas again, shifting the nickel market from deficit back to surplus.
• Global demand weakens, preventing tight inventories from translating into higher prices.

What to watch

• Whether China's aluminium social inventories and in-plant inventories continue to decline.
• The divergence between LME and SHFE aluminium inventories, and whether non-Russian aluminium inventories are further depleted.
• CME copper curve contango, the LME-CME spread, and US copper import trends.
• China copper consumer inventories, refined copper production, and copper concentrate imports.
• SHFE and LME zinc inventories, LME cancelled warrants, and China's zinc export arbitrage window.
• Indonesia's nickel production quotas and policy changes in 2H26.