Aluminium trading can be an effective way to diversity your investment portfolio. Read on for a dive into what trading aluminium is, a brief history, factors that influence its price, how to trade this commodity, the benefits, the drawbacks, some strategies and a step-by-step guide to getting started. We also list the best aluminium brokers in 2022.
What is Aluminium Trading?
Aluminium trading involves an investor selling or purchasing some form of a financial asset that is based on the price of aluminium, be it futures, ETFs or bullion. In doing this, the trader is essentially making a prediction that the value of the commodity will either rise or fall over time, depending on the asset they purchase, and staking some of their capital on this fact.
Aluminium trading is most often done in the retail trading space through CFDs and futures contracts. Each of these allows investors to predict whether the value will rise (going long) or fall (going short) compared to another financial asset (usually USD). If the trader correctly predicts the movement of the aluminium price, they will make a profit, otherwise, they will make a loss.
History Of Trading Aluminium
Aluminium contracts first became available to trade on the London Metal Exchange in 1978, spearheaded by huge growth in demand for aluminium. This resulted in the volume of aluminium production growing substantially worldwide, reaching 19 million tonnes by the start of the 1990s.
Russia, before the dissolution of the Soviet Union, was a huge producer of the metal, though it was soon overtaken by China, whose aluminium production grew from roughly 900 tonnes to 10 million tonnes in less than 20 years. This led to the formation of China’s own commodity exchange, which merged with the Shanghai Futures Exchange (SHFE). The UAE is also a notable player in aluminium production due to access to cheap oil and natural gas.
The market experienced overproduction following the 2008 global recession, leading to a 50% drop in price. Nowadays, aluminium is mostly traded on the LME, SHFE and the New York Mercantile Exchange (COMEX).
What Influences The Price Of Aluminium?
Factors that directly impact the supply and demand of aluminium ultimately impact the price of the commodity:
- Mining & Processing: Aluminium is produced from refined and smelted bauxite ore, so any factors that can impact the process of mining, refining, and smelting, impact the global value of aluminium. For example, a mining strike or protests against fossil fuel burning for smelting.
- Cost Of Electricity: Nearly 2% of energy production worldwide is used to produce aluminium. This indicates that energy is a huge cost of production for aluminium, so events such as a rise in the cost of electricity due to increased fuel costs will impact the price.
- Industry Trends: Aluminium is used primarily in the aerospace, automotive, packaging, construction and machinery industries, so factors that influence these industries can have a knock-on impact on aluminium prices. This includes technological advances that reduce the cost of production, so reducing the price. Likewise, a big shift away from cars as a popular mode of transport due to the environmental crisis would cause the price to drop.
- Chinese Demand: China is the largest producer and supplier of aluminium, so changes in its demand for the commodity can have a huge impact on global values.
- Globalisation: Any event that can have an impact on trade and globalisation can have a huge effect on the value of aluminium as trading happens on an international scale and is not limited to domestic trading; China alone makes up more than a quarter of demand.
- World Economy: For similar reasons to globalisation, the economy of foreign countries will also impact the price of aluminium. Major changes in significant economies, such as that of, Japan, the USA and Germany, can impact the metal’s demand. Keep an eye out for recessions, currency deflations, investment in the infrastructure of countries entering a period of growth, election results in politically volatile countries etc.
Ways To Trade Aluminium
Here is a catalogue of different aluminium products to serve as a window into how it can be traded.
- Aluminium Futures: Aluminium futures are much like regular futures contracts. As derivatives, there is no physical aluminium handover, the value of the metal is instead used to speculate against. These contracts are an agreement between the buyer (trader) and the seller (broker) to settle the difference in the value of aluminium at a fixed future time compared to the current time. Your profit or loss will then depend on the resulting delta between the strike and settlement values.
- Aluminium CFDs: Contract for difference (CFDs) are short-term derivatives contracts that are very popular in the online trading world. As derivatives, no physical asset changes hands. Instead, CFD trading involves the agreement between the buyer and seller to exchange the difference in the value of aluminium between when the contract was opened and when it was closed. This is much like a futures contract, though the buyer can decide to close the position whenever they like.
- Aluminium Options: Aluminium options are much like futures, though without the obligation to settle the contract at the agreed time. This means that, if the option would settle “out of the money”, the trader has the option to back out, only losing the purchase price of the contract.
- Aluminium ETFs: ETFs spread your capital over a range of different investments and securities, providing you with an inherently diverse portfolio. This can reduce the impacts on your capital of non-aluminium-related issues in individual assets.
- Aluminium Shares: It is also possible to trade stocks and shares in an aluminium trading company as the performance can often correlate to the value of aluminium and its related industries. There are many listed companies across the world, whether in Dubai, India, Singapore or Johannesburg, that are involved in the aluminium trade.
- Alumina LTD – listed on the Sydney ASX and New York OTCQB
- Hydro – listed on the Oslo OSE and OTQX international
- Century Aluminium – listed on the NASDAQ New York
- Aluminium Bullion: This is a physical form of aluminium, be it cans, coins, parts, bars etc. When trading this type of aluminium consider storage costs and insurance.
Pros Of Trading Aluminium
- Diversification opportunities
- High leverage trading rates
- Inflation protection
- Decent volatility
Cons Of Trading Aluminium
- Leverage risks
- Competition from other metals
- Historically low long-term returns
Strategies For Trading Aluminium
Having the right trading strategy for your needs can be the door to begin successfully speculating on the value of aluminium. In this section, we will go through a few examples to help you get started.
- Range Trading: This is a technical analysis strategy that follows the short-term oscillatory nature of the value of aluminium. The strategy is based on the premise that the asset will swing within a finite range for several periods before breaking out and forming a new range. Once these support (lower) and resistance (upper) levels have been identified, you would go long at the support level, before selling and then going short at the resistance level.
- Breakouts: This strategy follows on from range trading, though it seeks to profit from the non-oscillatory period of the asset’s volatility. The approach is to identify when the value of aluminium has broken beyond an established support or resistance level, before going long or short accordingly.
- Fundamental Trading: This is a very common strategy that involves looking at non-statistical price factors, such as mining production, currency values, international trade and natural disasters to inform trading positions. This approach is often used in tandem with a technical trading strategy, such as range or breakout trading, to avoid significant losses from major external events.
How To Start Trading Aluminium
- Find A Broker: To take a position on the price of aluminium, you will need a broker that is willing to act as your counterparty, unless you wish to physically trade bullion. Key things to watch out for when selecting a broker include the type of aluminium products on offer, trading platforms for strategy implementation, regulation body, account types, pricing and customer support.
- Implement Your Strategy: Once you have decided on a strategy to inform your trading positions, begin your analysis of price charts or current events and open a position.
- Close Your Position: Your strategy should dictate when it is time to close your position and take any profits or cut your losses. Once this is done, rinse and repeat, refining your strategy and approach along the way.
Aluminium Trading Tips
- Open A Demo Account: This is the best way to practise different strategies, asset types and brokers to figure out what works best for you.
- Latest News: When trading any commodity, the most important thing is to keep up to date with relevant news to avoid sharp price swings wiping out all of your capital.
- Automation: Once you are happy with the output of your trading strategy, you can think about automating it. This can often be quite easy with some of the biggest trading platforms, such as MetaTrader 5.
Final Word On Aluminium Trading
Aluminium trading is not quite as popular as gold or silver, though it can offer many of the same benefits. This includes portfolio diversification, wealth storage, hedging and more. The metal can be traded via a wide range of instruments, such as CFDs, futures, options and even equities. However, the lower popularity of aluminium as a speculative vehicle means that it does not quite demonstrate the same price stability that one would find from gold.
Use our list of aluminium brokers to start trading today.
Is Aluminium Trading Halal?
Trading aluminium can be done in a halal manner, though it is not always the case. So long as you are using valid analysis techniques and have an Islamic (swap-free) trading account with your broker, it should not be haram. However, we recommend checking with your local religious leader before you get started.
Is Aluminium Trading Risky?
All trading is risky and aluminium trading is no different. To minimize this danger, we recommend employing risk management and sticking strictly to your strategy.
What Brokers Offer Aluminium Trading?
Can I Make Money From Trading Aluminium?
To maximize your profit to yield from trading aluminium, you should follow tight risk management procedures and find a strategy and asset type that best suits your investment style.
Is Trading Aluminium Better Or Worse Than Trading Stocks And Shares?
Both commodity and stock speculation have the potential to make high returns, as well as large losses. Neither asset type is strictly better or worse than the others, it is often a very specific case that varies with your portfolio as a whole.