Commodity Trading In Aluminium, Profit From Base Metals

The potential gains from commodity trading in aluminium are quite substantial, given that this metal is in such high demand and has a wide range of industrial applications.

It can be a competitor with steel for some applications and has key advantages such as being much lighter with a very good strength to weight ratio, being an excellent electrical conductor, resists corrosion and alloys to make strong materials.

The refined metal is traded on the major commodity futures markets of the world which are used by producers and end users to hedge risk, as well as providing profit opportunities to traders.

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You can hardly go about your daily life without coming into contact with aluminium. Just consider its use in construction (22%) where light construction units, windows and doors all use the metal.

Then there is transport (27%) not least in motor vehicle parts and in aerospace where aluminium alloys can make up to 80% of an aircraft’s weight.

Packaging (22%) for food and drinks and power cables (8%) also find uses for this versatile metal.

So it is no surprise that this base metal is the most consumed among the industrial metals, especially when we see the huge demand from emerging economies like China and India.

Where does the story start?

The majority (99%) of aluminium metal is produced from alumina, which is an aluminium oxide which in turn is processed from bauxite, a dull, reddish-brown rock, which contains hydrates (water).

So when bauxite is processed into alumina this involves removal of the water element. World bauxite production increased 43% from 126 million tonnes (mt) in 1997 to 180 mt in 2006.

The major sources of bauxite are Australia, with 62.6 mt production in 2006 (35%), followed by Brazil (22.02 mt), Guinea (18.18 mt), China (18.00 mt) and Jamaica (14.87 mt).

These top five countries provided 75% of world bauxite production in 2006, according to the World Bureau of Metal Statistics (WBMS).

Aluminium metal is produced by refining alumina by dissolving oxide in molten cryolite, after which the aluminium is isolated by electrolysis.

Production of refined aluminium

World refined production of aluminium increased 56% from 21.80 mt in 1997 to 33.95 mt in 2006.

The main producing countries in 2006 were China (9.35 mt; 28% of total), Russia (3.72 mt; 11%), Canada (3.05 mt; 9%), USA (2.28 mt; 7%) and Australia (1.93 mt; 6%), Brazil (1.6 mt; 5%).

Clearly, China is the dominant producer of the refined metal and along with Russia and Brazil ensures the BRIC (Brazil, Russia, India, China) countries are now dominating base metal production.

In 2006, China overtook for the first time the production of the whole of America , 7.825 mt (North and South).

World consumption of refined aluminium

Over the decade to 2006 the amount of refined aluminium consumed increased by 56% from 21.87 mt to 34.0 mt, with China (8.65 mt) consuming for the first time more than the whole of America (8.39 mt), according to WBMS.

Just to put into perspective how much the base metals in general and aluminium in particular are contributing to the rapid growth of the BRIC economies, consider that in 1997 the amount of metal consumed by the BRIC represented 17% of world consumption of refined aluminium.

And a decade later, these economies were consuming no less than 34% of total world consumption of aluminium, a doubling in relative terms. In actual terms they increased consumption from 3.76 mt to 11.55 mt, a 207% increase.

Looking ahead to future aluminium demand

Rio Tinto produced a report, entitled Value and Growth, in which it stated that it sees demand for its main three products, iron ore, copper and aluminium, doubling over the next 10 years or so.

The main driver of this change, says the company, is urbanisation and infrastructure development in China.

And the CEO of BHP Billiton, the largest mining company in the world, has said that the future prospects for the metal commodities in their portfolio is very positive, with demand remaining strong for decades to come.

Commodity trading in aluminium

There are opportunities for traders to profit from price movements in aluminium futures contracts on the London Metal Exchange and on Comex.

If you prefer not to take the leveraged futures route it is possible to use an ETF which tracks an industrial metals commodity index or even aluminium itself, where the fund invests in the metal futures contracts and then rolls them over on expiry.

With greater access to commodity markets through the use of online electronic trading platforms, the opportunities for commodity trading in aluminium have never been so good.

A combination of fundamental analysis and news with your preferred trading system is likely to contribute to your success in these exciting and growing metals markets.

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