How to Invest in Aluminum

Aluminum has many uses.

Aluminum has many uses.

Aluminum is the most abundant metal in the Earth's crust, and at the same time, there's a high demand for it in the construction of many items. That extensive level of demand makes this commodity a tempting investment. There are no direct ways to invest in aluminum, but you can invest indirectly through futures contracts, ETFs that invest in futures contracts, and the mines themselves. The latter two choices are available through the stock market. Futures contracts are a bit more complex. A futures contract is a guaranteed trade in the future for a certain number of units of a commodity at a certain price. That price is called the strike or delivery price, and the goods are delivered and payment made on a specific delivery date.

Investing Through the Stock Market

Study the supply-and-demand situation for aluminum, and how different circumstances affect the spot price. The spot price is the cost for immediate delivery of a certain quantity of aluminum and is the price that all investments are based on. Futures contracts are active and hover around the spot price, and the difference between the price on the contract and the spot price determines the level of success the trade has. Since ETFs invest through futures, understanding the interaction between the spot price and futures helps monitor the investment. Aluminum has a global supply and demand. Certain major events might affect supply, like earthquakes, bad storms, or political upheaval. Also, mining is subject to environmental policies of the local government, which can be severe. Demand can be more geographically concentrated at factories and other similar locations. The tsunami that hit Japan had an effect on demand because automotive production was curtailed, (as that is a major production area). Aluminum mining is more spread out over continents around the world, so one event is unlikely to massively affect supply.

Compile a list of ETFs that invest in aluminum through futures contracts. If you want to invest in aluminum extraction, you can invest in mining companies like Alcoa or Rio Tinto. ETFs can be found online at the ETFdb, and the two major aluminum ETFs (at the time of writing) have the symbols JJU and FOIL. You can also go with ETFs that take positions in many metals, though aluminum would only form a part of these.

Research the ETFs and companies that you want to invest in. For ETFs, keep an eye on the expense ratios and transaction fees. Researching the volatility would be useful as well, because futures contracts tend to jump around more. Companies can reduce volatility through futures contracts, but the futures market itself can have wild swings. For the companies, use the analytic steps you would use to determine any good stock investment. Look at metrics like profitability, debt vs. cash, and growth. Growing earnings with strong cash flow and low debt are a few of the factors that determine a good investment, but there are many more, including ones specific to individual companies (such as management experience and acquisitions).

Buy the ETFs and companies that look good to you. Monitor both on a regular basis. Companies can form a very long-term investment if that's your style, but since the aluminum market is subject to the ebbs and flows of demand, the market rises and falls regularly. The futures market reflects this, and since the ETFs try to mirror the market they focus on, aluminum will not simply continue to appreciate far into the future. The price rises and falls depending on factors like the global economy and the profitability of mining operations.

Investing Through the Futures Market

Apply for futures privileges in your brokerage account or open a new one with a futures firm. The process is simple at some brokerages with a simple application with a few questions. E*Trade and TD Ameritrade have sections for all the privileges in your account with links to apply to new ones.

Learn about how the futures market works. The futures market is not the same as the stock market. You want to be a buyer on a contract if you expect the price to rise above the price of your contract. You have a guaranteed delivery at that price. If the price goes higher, you can resell that quantity at a higher price and collect the difference. This is all done through paper agreements, and you do not need to take delivery of the actual commodity. It is possible to practice trading futures before actually starting to trade if your brokerage has a system in place. Mastering the interface for your brokerage is a good idea as well, because you do not want expensive trading errors. The trading hours for aluminum futures are 6:00 pm through 5:15 the next day, Sunday through Friday, which are shared with all the other metals markets.

Start trading futures in aluminum once you're comfortable with the actual process. Since the market is almost 24 hours a day, 6 days a week, the time commitment can be substantial. Futures contracts are for fixed quantities per contract, and the capital requirements can be very high.


About the Author

Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.

Photo Credits

  • Hemera Technologies/ Images