Aluminum appears on the periodic table of elements as part of the ordinary metals group. At one point, aluminum was considered a noble metal along with gold and silver; Napoleon III reportedly served dinner to his most prominent guests on aluminum plates. Today, aluminum is light and strong enough to be used in a variety of applications, yet inexpensive enough to be in every kitchen.
Aluminum is the most abundant metallic element on Earth but is too reactive to occur as a free metal in nature. Instead, it is found combined in more than 270 minerals including bauxite, the chief source of aluminum. Bauxite is found primarily in Australia, Brazil, Guinea, China, Jamaica and India. Through a reduction process, four tons of bauxite can produce one ton of aluminum. Further, aluminum holds an advantage over steel in that it does not rust; rather, when exposed to air, aluminum protects itself with a thin layer of corundum – one of the hardest known substances, and harder than the aluminum itself.
The largest producers of aluminum include China, Russia, Canada, and the United Arab Emirates. A prominent company in the aluminum industry is Alcoa (AA), which, in addition to mining, also refines, smelts, fabricates and recycles aluminum [see also The Ten Commandments of Commodity Investing].
Transportation is the most important sector for aluminum, and its performance is one of the largest drivers of aluminum demand. The increased need for fuel-efficient vehicles has increased the demand for aluminum, which offers a 55% weight savings over equivalent steel in automobile manufacturing, while matching or exceeding crashworthiness standards. Aluminum’s strength and weight also makes it an ideal building material for trains, ferries and tractor-trailers.
Emerging-market demand, such as China and India, also has a significant impact on aluminum prices. China is currently the leading aluminum consumer in the world, and its demand is expected to increase at a steady rate as long as its construction boom continues. The possibility of a deficit in global aluminum supplies could cause prices to rise significantly [see also 25 Things Every Financial Advisor Should Know About Commodities].
While physical exposure to aluminum is not possible at this point, investors can trade futures contracts on aluminum and trade stocks of companies actively engaged in some aspect of the aluminum industry. In addition, a small selection of exchange-traded products is available to investors wanting aluminum exposure.
- Pure Beta Aluminum ETN (FOIL): This is a passive ETN that seeks to replicate the Barclays Capital Aluminum Pure Beta TR Index. This index comprises a single exchange-traded futures contract, except during the roll period when two futures contracts can combine to make up the index. This index is different than most commodity indices in that it can roll into one of a number of futures contracts with varying expiration dates instead of automatically rolling exposure over to the corresponding futures contract on a predetermined basis. This unique roll strategy selects contracts using the Barclays Capital Pure Beta Series 2 Methodology.
- PowerShares DB Base Metals (DBB): The PowerShares DB Base Metals fund provides some exposure to aluminum, and seeks to track changes in the level of the DBIQ Optimum Yield Industrial Metals Excess Return (the “Index”), reflecting the performance of the industrial metals sector, plus the interest income from the Fund’s U.S. Treasury securities holdings. The Index consists of futures contracts on liquid and widely used base metals including aluminum, zinc and copper. Launched on January 5, 2007, DBB has an expense ratio of 0.75%.
- iPath DJ-UBS Aluminum Subindex Total Return ETN (JJU): The iPath DJ-UBS Aluminum Subindex Total Return ETN is designed to give investors exposure to the Dow Jones-UBS Aluminum Subindex Total Return (the “Index”). The Index reflects the potential returns of unleveraged investments in aluminum futures contracts and consists of one futures contract. With an inception date of June 24, 2008, JJU has an expense ratio of 0.75%.
- iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM): The iShares Dow Jones U.S. Basic Materials fund provides investors with a small amount of exposure to aluminum producers. The fund seeks investment results that correspond to the price and yield performance of the basic material economic sector of the U.S. equity market. The fund’s holdings include stocks in the chemicals, industrial metals and mining (including Alcoa Inc.), and forestry and paper sectors. With an inception date of June 12, 2000, IYM has an expense ratio of 0.43%.
The Value of Aluminum
Once considered more valuable than gold, aluminum is the most abundant metal found in Earth’s crust. Aluminum is widely used in construction, packaging and transportation, and demand is expected to increase in emerging-market economies. No physically-backed ETF exists yet for aluminum; however, this may change in the future and would likely affect aluminum prices if and when it comes to market.
Disclosure: No positions at time of writing.