✈️ Your Guide To Investing In Aluminium, One Of The Most Eco-Friendly Metals

What happens when you eat aluminium foil? You sheet metal. Cue canned laughter.

Brief Background

Aluminium is the most abundant element in the earth’s crust. You might not realise it, but we pretty much use it in our everyday lives: cans, cars, planes, foils, laptops, you get the point. This is because its properties (lightweight, strong as steel, corrosion-resistant, sustainable, etc.) makes it the ideal metal of choice for many products. On top of all that, it’s also 100% recyclable & sustainable since recycled aluminium saves about 90% of the energy required to produce a new one. About ~75% of all aluminium produced in the US is still used today. Not-so-fun fact: according to the Aluminum Association, Americans discard more than $700 million worth of aluminium cans annually, and basically gets lost to landfills. So, please think twice before putting your cans in the bin!

What Can It Do For You

🧺 Portfolio Diversification. If you have an existing portfolio of commodities, adding aluminium to your basket will help with diversification and spread your risk out so that if on commodity falls in value, you still have others to lean on. If you don’t have an existing portfolio of commodities, it may be worth bundling aluminium with a number of other options to achieve portfolio diversification. Just a reminder, commodities in general can be a good way to balance out stocks and bonds since they tend to act differently from each other.

💰 Profit. Due to aluminium’s volatile and cyclical nature, it’s possible to gain decent speculative returns. Since aluminium is very much intertwined with the global economy, there are multiple factors that affect its price, making it swing wildly. To be able to profit successfully from aluminium, you’ll need to monitor these factors mentioned below, especially the levels of Chinese production, demand, as well as demand from the transportation industry. These are arguably the most influential price drivers for aluminium.

Price chart of aluminium over the years. Because it’s so prevalent in our lives, it’s vulnerable to shocks in the market, such as the 2008 crash, 2015–2016 stock market selloff, & the pandemic period we’re in.

What Affects Aluminium Prices

The price of aluminium can fluctuate wildly as shown above & tends to be cyclical. There are several key factors that are involved in moving the price of aluminium:

• 🇨🇳 Chinese Supply & Demand. Not only does China consume more than 40% of the world’s aluminium supply, it also produces more than 50% of the world’s supply. As you can imagine, these certainly have an effect on prices. Chinese producers are also known to oversupply the market to gain a price advantage over other producers worldwide, resulting in cheaper aluminium prices. Recently, the European Commission announced it would be investigating these practices.
• ⚡ Production Expenses. Because the smelting process to produce aluminium needs a lot of electricity, any changes in the electricity bill will be reflected in the price of the metal.
• 🏭 Industrial Demand (Especially From Construction & Transportation). Demand from the construction and transportation industry represents most of the demand for the metal, and can certainly influence the price. In developing countries where infrastructure & urban development is growing (such as India & China), aluminium accounts for ~30% of building materials. For developed countries, it’s the transportation industry (vehicles & aerospace) that drives most of the demand.
• 🔄 Substitution. Carbon fiber composites (materials mixed with carbon fiber) poses a real threat to the aluminium industry since they’re lighter, even more resistant to corrosion, and pretty much just as strong. It’s already being used in the aerospace industry and is being looked at by the automotive industry. Developments in this material that reduces its cost and increases durability will definitely impact aluminium demand.
• ♻️ Recycling Scrap. All those recycled aluminium cans & other bits of scrap, though very sustainable and eco-friendly, contributes a sizeable amount to the overall supply. The cost of obtaining these pieces of scrap can influence prices.
• 💵 US Dollar Strength. Like other commodities, the benchmark for the pricing of aluminium is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more aluminium) & drive up demand. On the supply side, a weak dollar means aluminium producers are able to receive more dollars for their goods and may incentivise them to produce more.

A map of the world’s total primary aluminium production from 2018 to 2019 by country. Note how much China has produced compared to everyone else. Click the map for more information.

Here’s a visualisation showing the world’s flow of aluminium. Note how much is recycled. Click on the image for more information.

Where Is Demand Coming From?

As a popular industrial metal, it’s used in many different industries, with the transportation industry making up most of this demand.

• 🚗 Auto Industry. Used in hoods & a number of other car parts that benefits from aluminium’s lightweight properties.
• ✈️ Aerospace Industry. Because it’s very resistant to corrosion, it’s used in all kinds of air travel, from planes (aluminium makes up ~80% of the plane’s airframe), to rocket technology, to space travel.
• 🏗️ Construction Industry. Aluminium is arguably one of the most energy-efficient & sustainable building material. It’s also weather-proof & corrosion-resistant, which means minimal maintenance is required.
• 🥫 Aluminium Cans. Not only can they preserve the quality and flavour of our favourite drinks & food, they also chill pretty quickly, which is pretty handy on a hot summer’s day. They’re also the most sustainable beverage package, as long as you recycle! There are recycling facilities that are willing to pay for your cans, so make sure to look out for them for a quick return on your purchase.
• 🔌 Electricals. Aluminium is also a great conductor. being used in national grids and wiring in homes, buildings, appliances, and more.
• 💻 Electronics & Appliances. Yup, aluminium is in your appliances too. This includes washers, refrigerators, dryers, HDTV, and your laptops.
• 🍫 Foil & Packaging. Foil can be used for your food, insulation, electronics, as well as art & decoration. Fun fact: the earliest commercial production of foil was in Switzerland in 1910. Then, in 1911, Tobler began to wrap its chocolate bars in the foil.
• ⚡ Others. There are a couple of other applications where aluminium is used. This includes solar panels and aluminium-air batteries for electric vehicles.

The Case Against Aluminium

Aluminium doesn’t act like precious metals. It’s not considered a safe haven asset since it doesn’t really protect you from inflation. Furthermore, your investment options with aluminium are more limited than with precious metals because they either involve complex and leveraged investment vehicles like futures, or they don’t have full direct exposure to physical aluminium. Because it’s used in so many products and infrastructure, its price can wildly fluctuate and is vulnerable to shocks in the market. So, when the global economy slows down or enters a recession, you can expect it to impact aluminium prices since demand will slow down. So, any unexpected changes in industrial demand or supply will definitely affect its price.

The Case For Aluminium

Aluminium price volatility isn’t necessarily a bad thing. It offers an opportunity for you to gain speculative returns provided your timing is right. Because its price is so tied to industrial demand, any movements can arguably be easier to track than precious metals since you know what factors to monitor. Using this information will help you identify a good point in the market to enter a trade. Also, demand for aluminium will always be there because it’s so prevalent in our lives, and is expected to continue to grow.

Popular Ways To Invest In Aluminium — Pros/Cons of Each

Unlike precious metals, you can’t really invest in physical aluminium. Instead, here are some of the methods you can use to invest in the metal. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

• Aluminium ETFs/ETNs. Depending on your preferences, there are several different ETFs/ETNs to choose from. There are no ETFs/ETNs that invests in physical aluminium.

~ ETNs that only invests in aluminium futures contracts

~ ETNs that invests in a basket of commodity futures contracts which includes aluminium

~ ETFs that only invests in aluminium-producing companies

~ ETFs that invests in a number of companies that produce a range of commodities, not just aluminium

Note about ETNs: If you want a direct investment in pure aluminium, there are a few aluminium-focused ETNs (Exchange-Traded Notes) that invests in continuously rolling aluminium futures contracts. The main difference between ETNs & ETFs is that ETNs don’t buy & sell the actual goods and works more like a bond. This means when you buy into an ETN, you’re not buying physical aluminium that the fund buys and sells, but rather you’re locking in the price of aluminium that the fund follows in the hopes that when aluminium prices increase, you can sell your share of the ETN & profit. This also means that the risk profile is different to ETFs. The ETNs ability to pay you when you sell depends on their financials & credit rating. If they’re unable to pay, then the ETN’s value could go down, or worse, they could default. If the ETN value goes down, then it could also deviate from tracking the price of aluminium. Whichever ETF/ETN you choose, be aware of the fine print — the risks and costs.

• Aluminium Stocks. These are shares of aluminium-producing companies. You may find that these companies don’t just produce aluminium, and are involved in a number of other operations. As such, they don’t necessarily follow the price of aluminium. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
• Aluminium Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell aluminium at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in aluminium can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. It doesn’t act like other precious metals and is tied to the global economy. So, when there’s a global economic slowdown, its price will be expected to fall. That being said, adding aluminium to an existing portfolio of commodities, or bundling it up with other commodities, can be a good way to achieve diversification so that when one falls in value, others in the basket can offset this loss. Furthermore, because it’s volatile, it presents an opportunity for you to gain decent speculative returns if your analysis and timing is right.

🧺 If you are considering adding aluminium to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your aluminium position so you can take advantage of the volatility in the market.

💰 If you are considering adding aluminium for speculation and profit, you may want to monitor the factors that affect aluminium prices mentioned above, especially production levels and demand in China. New-build projects whether it’s for infrastructure or housing developments in either developed or developing countries will increase demand, so keep an eye out for the general global economic status. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on aluminium’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can swing unexpectedly, so be prepared and have an exit plan in place.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.