How aluminum became a commodity to rival gold in 2022

The stock market downturns of 2022 has seen investors turn to precious metals as a means of safeguarding their wealth as traditional stocks take a tumble. Although gold has experienced growth in its role as the quintessential safe haven asset, we’re now seeing the emergence of aluminum as a key investment option. 

According to Maxim Manturov, head of investment advice at Freedom Finance Europe, Aluminum is a particularly interesting stock due to its importance to the construction of aircraft - which may see higher demand as ongoing geopolitical conflicts cause widespread revisions of defense budgets around the world. 

“Aluminum is used in the aircraft industry. Nickel in stainless steel and batteries for electric cars. Platinum in electronics (medicine, chemical industry). Palladium in electronics and the production of catalytic converters for cars. There are big risks with exports from the Russian Federation. Russia's share in global aluminum production is 6%, nickel (high grade) - 22%, platinum - 15%, palladium - 45%,” Manturov noted, exploring investment opportunities surrounding a range of metals. 

As the past year’s performance of Aluminum shows, the commodity is up more than 25% in the past year, with the value spiking in early March before a correction took place. 

With the prospect of more demand for aluminum rising, there are plenty of places where investors can buy into the metal. Stocks like Alcoa (NYSE:AA), Arconic (NYSE:ARNC), Century Aluminum (NASDAQ:CENX), and Rio Tinto (NYSE:RIO) are examples of companies that specialize in aluminum - with all possessing a multi-billion dollar market cap. 

One of the most effective ways of buying into aluminum is through adding ETFs to your portfolio. At present two of the top exchange-traded funds are the iShares U.S. Basic Materials ETF (IYM), and the iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU). 

The iShares U.S. Basic Materials ETF isn’t focused solely on aluminum, but it does offer investors some valuable exposure to the aluminum industry through fund holdings like Alcoa and Newmont Mining. This ETF tracks the investment results of an index composed of US equities in the basic materials sector, and offers exposure to companies domestically that are involved in the production of raw materials like metals, chemicals, and forestry products. 

For a more aluminum focused investment, the iPath Series B Bloomberg Aluminum Subindex Total Return ETN essentially mirrors returns available through an unleveraged investment in aluminum futures contracts. The underlying index is representative of one aluminum futures contract that’s perpetually rolled into the subsequent trading month. 

China Drives Further Growth

Although geopolitics is likely to ensure that aluminum remains a popular investment option over the coming months and years, China has also ramped up its production involving the precious metal. 

In spite of a recent flare up of Covid-19 cases and subsequent lockdowns, China has a recovering primary metal smelting sector with greater power supplies. The aluminum production capabilities are likely to grow as the winter months end and environmental controls become more relaxed. 

Although global aluminum output reportedly fell by 1.5% year-over-year due to higher power costs, China’s aluminum output actually grew during the same time frame. The country climbed from a -3.2% output to -2.1% year-over-year - a rate of growth that’s representative of around 11.6% month-over-month. 

This level of output must be regarded as impressive in spite of the widespread disruption still being caused by Covid-19 domestically.

Perhaps tellingly, China has been left largely unscathed by the global rise in inflation rates that’s seen the cost of power increase dramatically in recent months. Furthermore, the country opted against imposing sanctions on Russia in the wake of its invasion of Ukraine - in a move that leaves China’s path to economic recovery relatively intact. 

Although Capital Economics has noted that it expects the imposition of lockdowns in China to affect the country’s aluminum output, these issues are likely to ease away as Q2 2022 progresses. 

Threat of Excess Supplies

Despite positive price movements for aluminum across global markets of late, it’s worth noting that the risk of excess supplies may hinder the short term prospects for the precious metal. 

Since its all time high of $3,985, China’s ongoing Covid-19 crisis has seen stocks retrace sharply towards $3,000. China’s lack of industry has meant that inventory has begun to build up domestically. Although this surplus can devalue the metal, we may see more export opportunities occur should restrictions ease. 

The global aluminum market saw a deficit of 1.2 million tons last year due to lower outputs from China and Europe owing to the emergence of record-breaking costs of energy. The surplus stood at 1m tons in 2020. 

However, geopolitical tensions are likely to create a growing need for aluminum as the world works on revising its defense budgets. Should China’s lockdown measures nip the growth of Covid cases domestically in the bud before we see infection rates accelerate further, aluminum markets may be in high demand around the world - despite the country’s current surplus. 

As ever, during times of unpredictability, it’s worth investors monitoring the situation as China’s industry looks to pick up in the wake of pandemic-related setbacks.