The Global Aluminum Trade

Aluminum - Investment Channel

Aluminum is a chemical element in the boron group that is silvery-white, soft, nonmagnetic and ductile metal. It is the third most abundant element in the Earth’s crust, after oxygen and silicon, making it the most abundant metal.

In its natural existence, it is a chemical compound with oxygen, sulphur, and silicon. This natural aluminium compound has to be then extracted and produced economically.

Aluminum is remarkable for its low density and its ability to resist corrosion through the phenomenon of passivation. Aluminum and its alloys are vital to the aerospace industry and important in transportation and structures, such as building facades and window frames.

The distinctive properties and characteristics of aluminium make it feasible and useful for a lot of industries in the world. As powerful as aluminium is in terms of its weight, it can be moulded into any shapes and sizes. Aluminium acts as a great conductor of electricity and acts as its own safeguard against corrosion. This robust metal does not turn frail even in the coldest of environments. Aluminium is easily recyclable and can be made into different products. After iron, it is the most widely produced metal accounting for about 32 million tons each year. All these reasons make aluminium trading beneficial.

Key Markets

The global demand for aluminum is seeing strong growth, underpinned by the increase of the world population along with the rapid development and urbanization of the developing countries. The global consumption of aluminum is forecast to rise by 6.5% per year between 2011 and 2015, reaching approximately 58 million tons in 2015.

Being the highest producer, China is also the highest aluminum consuming country. China’s aluminum per capita consumption is estimated at 10 kg compared to 10 kg plus in developed countries.

Rapidly urbanizing India is possibly the second most promising aluminum market globally. Low level of aluminum consumption in India (today estimated at just 1 kg per capita) and high rates of urban population growth make a favorable combination: provided the country will catch up with China in terms of consumption per capita, with population of 1.2 billion people it will add 10.8 million tons to the global aluminum consumption.

Countries with largest aluminium production (in thousands of metric tons)

  1. China - 31,400
  2. Russia - 3,580
  3. Canada - 3,250
  4. India - 2,750
  5. United Arab Emirates - 2,400
  6. Australia - 1680
  7. Norway - 1,230
  8. Bahrain - 970
  9. United States of America - 840
  10. Iceland - 800

Interesting facts about aluminium 

  • The atomic symbol concerning the periodic table: Al
  • Atomic number: 13
  • Atomic weight: 26.9815386
  • Form at the room temperature: solid
  • A lot of aluminium is available in the world. According to the United States EPA (environmental protection agency), in 2012, around 1.7 million tons of aluminium was produced for vehicles, appliances, and other such goods. About 1.9 tons went towards the manufacturing of packaging and containers alone.
  • To recycle aluminium, only 5 percent of total energy is needed to extract the aluminium from the ore. This makes it effortlessly recyclable and sustainable product from nature.

Reasons to pursue aluminium trading 

  1. Aluminium is manufactured in large volumes, and manufacturing constitutes a large part of the Gross Domestic Product of the countries. So by trading aluminium, you are mostly putting a bet on the growing GDP.
  2. While trading aluminium, you are putting a bet on the extensive volume of aluminium being demanded and produced by China. The growing economy of China needs aluminium for construction and infrastructure, electronics, transportation.
  3. Aluminium trading is a fair bet on the transportation demand. The ever-growing markets of transportation systems, types of equipment for aerospace, and automobiles can fuel the demand for aluminium and increase the prices in the market.
  4. Trading aluminium is an excellent way to diversify the portfolio into metals.
  5. Rising prices of aluminium

Price drivers of aluminium

The following factors are said to be responsible for the price changes in the aluminium trading market:

  1. Demand for aluminium in China
  2. Transportation and automobile demand
  3. Input costs
  4. Industrial and construction demand for aluminium
  5. The United States dollar

Reasons for the rising prices of aluminium

  1. Disruption in supply: An interruption in supply by aluminium producing giants like Norsk Hydro plant (Brazil), Alcoa Alumina Refineries (Australia), and Rusal (Russia) has tightened the all oversupply of aluminium in the market, leading to high prices. Because of the environmental issues emerging in Brazil, Norsk Hydro had to close down its workings. Labour strikes in the Alcoa Refinery also led to uneven production.
  1. London Metal Exchange stocks: The inventories at London Metal Exchange certified stores and warehouses have reduced up to 1 million in recent times. On the contrary, the china warehouse sees a high in their stocks. This competition and trade war can increase demands of metals, especially aluminium, and thus increasing the prices.
  1. Impact of China: The plan of China to regulate the industries and the anti-pollution campaign, cutting the 40 percent reduction of heavy industries has been discarded. The production, therefore, is not hampered, and the prices are meant to rise.

Ways for aluminium trading

  1. Aluminium futures

Futures are the contracts to buy aluminium at a specified date in future. The CME - Chicago Mercantile Exchange and COMEX, which is part of NYMEX - New York Mercantile Exchange, offer futures contracts on aluminium. The contacts can be traded on the CME Globex platform for trading. The disadvantage with trading aluminium through futures is that if the prices fall, one must pay the additional margins to hold their trade. These aluminium futures expire on the due date and are settled then. A lot of factors like storage facilities, interest costs must be taken into consideration while pursuing aluminium trading through a futures contract.

  1. Exchange-traded funds

The exchange-traded funds are traded the same way as stocks on exchanges. Currently, there are two ETFs that deal in aluminium trading:

  • Pure Beta Aluminium ETN - NYSEARCA: FOIL
  • Dow Jones-UBS Aluminium ETN - NYSEARCA: JJU

Apart from these two, there are various ETFs that trade in metals in a general format and not specifically for aluminium.

  1. Aluminium Contract for Difference (CFDs)

Through CFDs, the trader can speculate on the prices of aluminium in the market without holding the real aluminium, shares, or ETFs. However, CDFs are not available for speculation in the United States of America due to the regulations there.

  1. Stocks of aluminium mining companies

There are a lot of companies which engage in processing and mining the ores. While these companies may not only engage in aluminium mining and processing, their performance in the share market is mostly correlated with aluminium and other metals.

Here is a list of some famous mining stocks:

  • Alcoa (New York) - Invented the industry of aluminium in 1888 and are continually updating the technology behind aluminium production.
  • Rio Tinto (London, Sydney, New York) - Responsible for development of largest operating mines.
  • Hydro (Oslo) - A globally interconnected aluminium industry.
  • Century Aluminium (New York) - A global producer of aluminium and also operated the reduction in the aluminium system in the United States of America and Iceland.
  • Alumina Limited (New York, Sydney) - The largest producer of alumina, which is the main component in the processing of aluminium.

Top three exchange-traded funds for aluminium trading

  1. iShares U.S. Basic Materials Index

This ETF does not solely focus on aluminium trading but offers the benefit of equity centric ETF that includes the subjection to aluminium through large institutions like Newmont Mining, or Alcoa. The aim of this ETF is to be a replica of the Dow Jones Materials Index. The iShares U.S. Basic Materials Index is appropriate when you want an exposure to aluminium trading to diversify the portfolio. It is not meant for full focused aluminium trading.

  1. iPath Dow Jones-UBS Aluminium Subindex ETN

This ETN is more appropriate for traders and investors looking to pursue more of a direct investment in aluminium trading. This ETN is issued by Barclays bank. The expense ratio of this ETN is about 0.75 percent. The iPath Dow Jones-UBS Aluminium Subindex ETN aims to replicate the returns of investments in futures which are unleveraged. This ETN is based on the product; therefore, there are no dividends paid.

  1. Pure Beta Aluminium ETN 

Pure Beta Aluminium ETN is an alternative to the above-mentioned iPath Dow Jones-UBS Aluminium Subindex ETN. This ETN also represents futures contracts that are not leveraged. The difference here is of a distinctive investment strategy offered by Pure Beta Aluminium ETN. This ETN is issued by Barclays bank. The expense ratio of this ETN is about 0.75 percent.

Advantages of Aluminium Trading

  • Portfolio diversity - This is one of the best reasons why you pursue aluminium trading. Diversifying your portfolio towards commodities like aluminium helps the trader and investor balance the risk factors by not just focusing on stocks or bonds in the whole portfolio.
  • Demand related to manufacturing - The ever fast globally growing economy hikes up the demand for manufactured and consumer goods like refrigerators, automobiles, electronics, packed consumption goods, and more. All such goods require the usage of aluminium. Trading aluminium is betting on the growing manufacturing sector.
  • Growth of the world - Trading aluminium is like betting on the growth of the world. Both the developed and developing countries require aluminium for infrastructure, construction, transportation, electronic, automobile, and other more purposes. When the goeth of countries are on the rise, the demand and prices of industrial commodities like aluminium rise.

Disadvantages of aluminium trading

  • The negative effects of substitutes - Aluminium has to face extreme competition from other substitutes and composite materials. Due to innovations in technology, many materials which are comparatively cost-effective and lesser in weight have been developed. With the continuation of such innovations, prices and demand of aluminium are meant to see a down road.
  • Overproduction - Recently, China has been overproducing commodities like aluminium, and the dump is burdening the global markets. If the internal demand of aluminium does not hoke up in china, the chances are that prices of aluminium might suffer from the excess supply.
  •  Powerful U.S. dollar - When the dollar stands firm and strong in the market, it becomes the opponent for commodities in the market. When the tastes of the U.S. dollar are on a hike, the prices of commodities like aluminium suffer.

What are the opinions of experts on aluminium trading?

Experts are a bit uncertain about the prices of aluminium in the future years. However, some experts see the positivity in the prices to an extent where the commodity can correct the variance between the supply and demand throughout the world.

JP Morgan thinks that changes in supply will help in lifting the future markets of aluminium trading. China is seen as a positive force to hike up the prices and demand for aluminium worldwide.

The vice president of strategic analysis and planning, Andrew Estel, said in an interview that the demand for aluminium is expected to hike up by at least 7 percent which was earlier noted as 5 percent.

Conclusion

Like all other commodity trading instruments, aluminium trading has its pros and cons. Since most experts think that aluminium is expected to rise in demand and turn rise in prices in the coming years, it can be seen as a fair investment deal. However, one must not focus a significant chunk of their finance on aluminium trade. Trading in aluminium and other such metals is a helpful way to diversify the portfolio in commodities and mitigate the risks.

Also, the amount you ought to invest in any trade depends on your financial plan and goal.

If you are inquiring about a broker to facilitate trade in aluminium and other metals, we would recommend Roinvesting. It  is an online regulated broker that deals in instruments and securities like ETFs, CFDs, forex, indices, stocks, commodities, metals, and more. They also offer an all-inclusive, lucrative platform to learn about different trades, tools and strategies of the financial world.

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