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How to Trade Aluminum


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3 Reasons to Invest in Aluminum

Many industries use aluminum in their products, so aluminum demand is a good barometer of the strength of the manufacturing economy. Manufacturing represents an important part of GDP, particularly in the fast-growing emerging economies, so investing in aluminum is a way to bet on global GDP growth.

Some of the best specific reasons for investing in aluminum include:

  1. Bet on Chinese Demand
  2. Bet on Transportation Demand
  3. Portfolio Diversification

Betting on Chinese Demand

China produces and consumes a large percentage of the overall global aluminum market. The fast-growing Chinese economy has needed aluminum in recent years for construction, transportation and electronics, and Chinese companies supplied the metal.

However, as Chinese GDP slowed, internal demand could not absorb the large supply, and Chinese producers increased exports of aluminum to the United States and other countries. If Chinese economic growth picks up, then the country’s demand for aluminum will grow. This could create a supply shortage and higher prices.

Speculating on Transportation Demand

The global economy depends on transportation to support growth. The market for aluminum in aerospace equipment and automobiles could grow as the global economy expands. Individuals need cars and trucks to travel to work.

Pro-growth policies in industrial and emerging economies should boost demand for aluminum in transportation products.

Diversify Your Portfolio 

Investing a portion of a portfolio in aluminum along with other metals and other commodities in general is a great way to achieve asset diversification. Baskets of commodities including aluminum insulate traders from declines in any one particular commodity.

Should I Invest in Aluminum?

Investors should consider both the pros and cons of investing in aluminum. Some of the best reasons for making an investment include:

  1. To divest your portfolio
  2. To bet on global growth
  3. To bet on manufacturing growth

Portfolio Diversification

This may be the best reason to invest in aluminum. Commodities such as aluminum provide traders with a way to mitigate the risk of having assets concentrated solely in stocks and bonds.

Global Growth

Investing in aluminum is a great way to bet on a global growth boom. Both developed and emerging countries will need aluminum for transportation and construction projects in the years ahead. If growth accelerates in both the emerging and developed world, there could be fierce price competition for industrial commodities such as aluminum, and prices should respond favorably.

Manufacturing Demand

Strong global growth usually boosts demand for manufactured goods such as refrigerators, cars, electronics and packaged goods. Investment in aluminum is a way to bet on a robust manufacturing economy.

3 Risks in Investing in Aluminum

  1. Overproduction glut
  2. Advances in composite materials
  3. Strengthening US Dollar

Investing in aluminum, however, has its risks. There are three compelling reasons aluminum prices might decline in value:

Overproduction

The Chinese have a recent history of overproducing commodities and dumping them on global markets. If internal demand for commodities does not pick up in China, markets might suffer from a glut of aluminum supply.

Substitution Effect

Aluminum faces serious competition from composite materials. Technological innovations have created products that are lightweight and priced competitively. If these advances continue, then aluminum prices could suffer.

Strong US Dollar

A strong US currency is usually the enemy of commodity prices. If the US Federal Reserve turns hawkish and aggressively raises rates, the dollar may rally and commodity prices including aluminum may suffer.

What Do the Experts Think About Aluminum?

Experts are ambivalent about the prospects for aluminum prices over the coming years. Some analysts optimistic on the commodity point to the correction of global supply/demand imbalances.

JPMorgan, for instance, notes that supply reform should lift markets in the future. It points to the closing of smelters in China as a positive catalyst, although it also notes that these smelters will likely reopen as the price of aluminum rises.

Andrew Estel, vice president of strategic planning and analysis at Alcoa, said that Chinese demand for aluminum is expected to increase by 7 percent this year, ahead of the global rate of 5 percent. Estel said China represents over 50 percent of world demand for primary aluminum. He notes that growth in Chinese demand should exceed the rest of the world, but that Chinese surplus production remains an overhang on prices.

How to Trade in Aluminum

Method of InvestingStorage Costs?Security Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Aluminum FuturesNNYNYY
Aluminum ETFsNNNYNY
Aluminum SharesNNNNYY
Aluminum CFDsNNNNYY

Aluminum traders have several ways to invest in the commodity:

  1. Aluminum futures
  2. ETFs
  3. Shares of Aluminum Companies
  4. CFDs

Aluminum Futures

The COMEX, which is part of the New York Mercantile Exchange (NYMEX) and Chicago Mercantile Exchange (CME), offers a contract on Aluminum MW US Transaction Premium Platts that settles into 25 metric tons of the metal.

The contract trades globally on the CME Globex electronic trading platform. Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.

Aluminum futures contracts expire on the last business day of the contract month and are financially settled. Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do.

There are currently two exchange-traded funds (ETFs) that invest in aluminum futures:

  • iPath Dow Jones-UBS Aluminum ETN (NYSEARCA: JJU)
  • iPath Pure Beta Aluminum ETN (NYSEARCA: FOIL)

There are also several ETFs that invest generally in industrial metals including the following:

  • UBS E TRACS CMCI Industrial Metals Total Return ETN (NYSEARCA: UBM)
  • SPDR S&P Metals & Mining ETF (NYSEARCA: XME)

*UBS E TRACS CMCI Industrial Metals and SPDR S&P Metals & Mining invest generally in industrial metals.

Shares of Aluminum Companies

There are many companies engaged in mining and processing bauxite and other ores. While these companies are not pure-play investments in the commodity aluminum, the performance of their shares is generally correlated with the price of aluminum and other industrial metals.

A few popular mining stocks include:

Top 5 Aluminum Stocks by Market Capitalization

 Current PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
Rio Tinto 

Developed some of the world’s largest and best quality mines and operations.New York (NYSE)
London (LSE)
Sydney (ASX)
187350,000The Rio Tinto (Red River) mines in Spain, dating back to about 750 BC and once supplying the civilisations of ancient Greece and Rome
Alcoa 

Invented the aluminum industry in 1888 and continue to innovate with new technologies and processes.New York (NYSE)188814,000Originally called The Pittsburgh Reduction Company
Hydro 

A global, integrated aluminum company.Oslo (OSE)
OTCQX International
190535,000Hydro was created to help meet the growing need for food. With its unique process for manufacturing fertilizer, the company became one of Norway’s first industrial giants
Alumina Ltd 
Invest in bauxite mining and alumina refining through Alcoa World Alumina & Chemicals (AWAC)Sydney (ASX)
New York (OTCQB)
19615,100Owns and runs a shipping operation that transports alumina, aluminum and raw materials around the world.
Century Aluminum 

Global producer of primary aluminum. Operates aluminum reduction facilities in the US and Iceland.NASDAQ (New York)19951,300Also own a carbon anode production facility located in Vlissingen, the Netherlands.

Aluminum CFDs

There is an easy way to trade aluminum that is superior in many ways to the alternatives discussed in this guide. Through a derivative instrument known as a contract for difference (CFD), traders can speculate on aluminum prices without actually owning physical aluminum, mining shares or financial instruments such as ETFs, futures or options.

Many regulated brokers worldwide offer CFDs on aluminum. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to aluminum without having to purchase shares, ETFs or futures. Traders also don’t have to worry about getting the timing and size of markets move correct in order to profit on their trades – like they would trading aluminum futures.

CFDs are still high-risk financial instruments, however, and your capital is at risk so you should be an experienced trader or seek out a broker that offers a demo account to allow you to develop your knowledge in advance of risking real money.

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