Aluminum Commodity Forecast: Momentum Building in Key Metal

This article was written by Cole Winston, a Financial Analyst at I Know First.

Bullish Aluminum Forecast


  • Aluminum Fundamentals
  • Aluminum Exchange-Traded Notes
  • Price Action: Providing Context
  • Bullish Forecast

Aluminum Fundamentals

aluminum commodity

Comprising 8% of the Earth’s crust, Aluminum is the third most abundant element of all existing known chemical elements and the most abundant metal. Because of its valued physical and chemical properties, the metal holds a central role in the construction, manufacturing, transportation, power generation, consumer goods and packaging. So where does Aluminum come from, and what drives its market price globally? As a commodity, Aluminum is heavily influenced by the supply-demand dynamics inherent in metal markets.

On the supply side, the Aluminum value chain consists of a complicated process that sources and extracts Bauxite ore, converts this mineral into Alumina, and ultimately transforms Alumina into the desired pure Aluminum metal. Although global Bauxite reserves are heavily concentrated in Guinea, Australia, Brazil, China, and India (in decreasing order of reserve volume), China is the unmatched heavyweight producer globally, responsible for just under 60% of world Aluminum production. China therefore plays a major role, on the supply side, in determining what happens to Aluminum spot prices.

On the demand side, Aluminum is prized across a wide range of industries due to its physical and chemical properties. Specifically, the metal is relatively soft, durable, lightweight, flexible, non-magnetic, non-combustible, a great conductor, and resistant to corrosion, to name its key characteristics. Suffice it to say that Aluminum will remain one of the most highly sought-after commodities for a long time, given its outlined utility.

With the fundamentals under our belt, now is an appropriate time to examine what underlying fundamentals support the I Know First algorithm’s bullish stance on Aluminum. The thesis on Aluminum is the potential for fast-changing global supply-demand imbalances evolving from massive overcapacity and surplus to one of lowering capacity and relative shortages. There are four main factors contributing to these economic shifts.

First is China. Since joining the World Trade Organization in 2001, China has been notorious for rapidly ramping up its Aluminum production capacity and dumping (exporting at significantly lower, and therefore the most competitive and unfair, prices) its excess Aluminum everywhere where there is demand for it. However, due to the dual reasons of air pollution concerns and vitriolic criticism at the hands of the new Trump administration in the U.S., China has begun planning and/or implementing reforms and new policies to curtail or limit the amount of Aluminum coming out of the country. China’s “Air Pollution Control” regulation will force aluminum smelters to cut output by 30 percent, meaning approximately 40% of China’s production capacity will be significantly limited. This is even before taking into consideration the effect Trump’s rhetoric will have on China’s further production plans.

Secondly, a major component of the Trump campaign rested on comprehensive infrastructure spending plans to renew crumbling key American infrastructure. This would, of course, require significant amounts of Aluminum to accomplish, and has already fueled a rally in industrial base metals including Aluminum. This is expected to continue once the administration can get passed current urgent issues.

Third is the recent rise in raw material input prices required to produce Aluminum. Coal is the major fuel source used by metal smelters, and this – along with several other source minerals – have become more expensive as of late. This quite simply means that the cost structure of metal producers has worsened. Because commodity producers are generally unable to differentiate on price, the way in which they compete are by sourcing the highest quality products while also minimizing costs and expenses. Worsening cost structures will therefore hamper Aluminum production, fanning the flames of bullish price sentiment.

Fourth is the recent bans of Bauxite, Alumina or Aluminum exports in several countries in Asia and Qatar. For various reasons, different countries around the world have either voluntary imposed production and/or exporting of Aluminum (including or not including other metals), or have been involuntary restricted from doing so. In either case, the result is lower global Aluminum supply so long as these restrictions remain in place.

Fifth, and lastly, is the industrialization of developing Emerging Market (EM) nations across Eastern Europe and Southeast Asia. These regions of the world currently represent the brightest hotspots of economic growth and development. Given the state of where these countries are economically and institutionally, the economic evolution of these parts of the world will originally focus heavily on the construction and manufacturing of infrastructure and other primary and secondary sector industries.

Given all these emerging factors, it should be clear by now that the possibility of a global primary Aluminum deficit – previously unimaginable – might very well be happening over the near term; a very bullish sign for Aluminum prices.

Aluminum Exchange-Traded Notes

When it comes to trading or investing in commodities, exchange-traded products generally pose an attractive opportunity for market participants, since – as long as due diligence is performed to truly understand the product itself and the underlying index, benchmark or other assets that it tracked – the bulk of the research and analysis is already done by the product provider.

So, what is the best exchange-traded product vehicle through which to play the bullish Aluminum fundamentals? Two exchange-traded notes (ETNs), both of which are offered by Barclays Capital, stand out. These are the iPath DJ UBS Aluminum Total Return Sub Index ETN (NYSE:JJU) and the iPath Pure Beta Aluminum ETN (NYSE:FOIL).

JJU is designed to provide exposure to the Bloomberg Aluminum Subindex Total Return (BCOMALTR); a single-commodity sub-index composed of one Aluminum futures contract. It has an expense ratio of 0.75%, assets under management of $2.6 million, was created on June 24th, 2008, and is structured to mature on June 24th, 2038. JJU closed the most recent trading day at $16.70.

FOIL is designed to provide exposure to the Barclays Aluminum Pure Beta TR Index (BCNYLAPT); also, a single-commodity sub-index composed of one Aluminum futures contract. It has an expense ratio of 0.75%, assets under management of $848,431, was created on April 20th, 2011, and is structured to mature on April 18th, 2041. FOIL closed the most recent trading day at $26.21.

It is important to note that, unlike ETFs which own the underlying assets, ETNs are non-interest-paying fixed-income securities (structured senior, unsecured unsubordinated notes, to be exact) issued by banks, whose payout is linked to the performance of an underlying index and is consequently subject to the credit risk of the issuer in addition to general market risk.

Price Action

It is clear from the price action present in the charts below* that, despite recent bearish downward movements, the general trend in Aluminum-based ETNs is upwards. Recent price action stems from the degree of uncertainty and resultant market forces that are currently encompassing market participants. This is reflected in the generally sideways-bound direction of market prices. In accordance with the above fundamental analysis, the I Know First algorithm expects Aluminum price action, and therefore prices of the above ETNs, to move much higher and unleash the bullish sentiment that is, and has been, gradually building over the last little while.

aluminum commodity

aluminum commodity

*Chart Guide: white candles represent the close being higher than the open (an up candle), black candles represent the open being higher than the close (a down candle), the top chart represents monthly candles, the middle chart represents weekly candles, the bottom chart represents daily candles, the rest line on each chart represents a moving average, and price data is sourced from BATS (an electronic exchange platform).

Bullish Forecast

aluminum commodity
The I Know First algorithm is bullish on Aluminum over a 1-month, 3-month, and 1-year time horizon.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above in order to fill confident about/trust the signal.



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