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Aluminum has been wildly volatile over the past two years, with the industrial metal seeing massive price swings between scarcity-driven rallies and demand-led collapses.

Savvy commodities investors who can time the dips and peaks stand to profit enormously.

This detailed guide explains all the recent volatility, how to buy from derivatives, and some considerations when trading the commodity.

 

What's Behind Recent Aluminum Price Moves?

Aluminium prices on the London Metal Exchange (LME) rallied to a 13-year high above $3,000 per metric ton in March 2022 due to strong demand and restricted Russian supply.

Prices had increased through most of 2021 as stimulus-driven industrial activity accelerated post-pandemic.

However, lightweight base metal prices have fallen over 30% from their peak to nearly $2,000 per ton since June 2022.

What changed to reverse aluminium's price trajectory? There are a few factors at play:

Demerging Growth in China

China, which consumes over 60% of the world's aluminium, saw its construction and manufacturing activity slow through 2022.

Lockdowns, a housing slump, and an energy crisis weighed on Chinese aluminium demand through the second half of 2022, removing a key pillar of support for global aluminium prices.

Recession Fears

With most major economies expected to experience recessions in 2023, fears of an industrial downturn have pressured aluminium.

Construction, machinery, electronics, vehicles, and other key demand sources could decelerate.

Rising Energy Prices

The production of aluminium via electrolysis is extremely electricity-intensive. Spiking natural gas and power prices have forced some smelters to cut production, but higher energy input costs are also squeezing profit margins for producers.

Interest Rate Hikes

Aggressive interest rate hikes from central banks have strengthened the US dollar, making dollar-denominated commodities like aluminium more expensive for foreign buyers. This weighs on import demand.

Russian Supply Concerns Ease

 

Aluminum Ingot storage in indoor warehouse for export. Vintage color

 

Although aluminium supply from Russia remains disrupted, traders have become less concerned about further export reductions.

More Russian aluminium and semi-finished products have flowed into Asian markets, alleviating fears of extreme shortages.

With aluminium prices falling significantly from their peak, the market may be presenting an opportunity to buy the dip ahead of the next cyclical upswing.

 

Take a look at this article: What Are Cyclical Stocks?

 

How to Buy the Dip in Aluminum

If you agree with the bullish demand outlook due to the factors mentioned, how can traders take advantage of recent price weakness and buy the dip? Here are some of the best ways to gain exposure:

1. Aluminum Futures

Experienced commodities traders can directly buy aluminium futures contracts on the LME via brokers that offer access. Each lot represents 25,000 lbs of aluminium, and prices are based on dollars per ton. You'll need to manage margin account levels.

2. Aluminum Options

Options on LME aluminium futures allow directional bets with defined reward/risk levels. Call options benefit if prices rise, while put options profit from further weakness. No margin maintenance is needed.

3. Exchange-traded Funds (ETFs)

For indirect aluminium price exposure, Exchange-traded funds like the iPath Bloomberg Aluminum Subindex Total Return ETN (JJU) reflect LME aluminium price moves. As an exchange-traded note, no active management is involved.

4. Miner Stocks

Alternatively, consider shares of leading aluminium producers like Alcoa (AA), Rio Tinto (RIO), and Century Aluminum (CENX). Their profits and valuations will amplify any aluminium price gains. Their stocks were beaten down significantly in 2022.

 

Best Entry Points for Trading Aluminum

Technically, aluminium prices have found good short-term support, near $2,200 per ton, but remain in a downtrend below the 200-day moving average at $2,500. Look to buy dips conservatively below $2,400 and then add exposure if prices break out above $2,600.

The adverse price moves witnessed in 2022 seem overdone, given the bullish demand drivers emerging.

Buying aluminium near the low end of its recent range could offer excellent reward over risk if fundamentals recover as expected. Use futures, options, ETFs, or miner stocks to capitalize!

 

Give this article a read: 5 Common Trading Mistakes to Avoid

 

Considerations Before Buying Aluminum

While the bullish arguments for aluminium seem compelling, there are still risks to consider:

Ongoing Slowdown in Top Markets

If the expected China rebound fails to materialize quickly and Europe plus North America enter severe, prolonged recessions, aluminium demand could continue languishing. Consumer durables would be hit hardest.

Sudden Jump in Chinese Exports

With most Western smelters running at full capacity, a surge in Chinese aluminium exports could lead to oversupply and renewed price weakness. However, export taxes in China and environmental curbs on production make this unlikely.

Faster Shift Away From Internal Combustion Engines

If electric vehicles displace a greater-than-expected share of auto sales in coming years, aluminium demand could decelerate. Battery-powered EVs utilize much less aluminium than conventional vehicles.

Energy Price Resurgence

Thus far, lower European natural gas and Asian coal prices support producer margins. However, smelting cutbacks could whipsaw aluminium prices again if the global energy crisis worsens due to the Russia-Ukraine war or weather events.

Dollar Strength

 

Concept idea of FED, federal reserve system is the central banking system of the united states of america and change interest rates. Percentage icon and arrow symbol on wooden cube

 

With the Federal Reserve committed to keeping US interest rates relatively high, extended dollar strength versus global currencies could stall aluminium's recovery and hurt imported demand outside North America.

Traders will have to weigh these lingering demand risks against the constructive supply and demand drivers underpinning a likely aluminium price recovery in 2023-2024.

The market may remain choppy, but the long-term outlook based on fundamentals has turned favourable again for investors.

 

You might also like to read: List Of Precious Metals Worth Trading Today

 

Closing Thoughts

After a highly volatile 2022, aluminium prices have returned to more attractive levels from a demand recovery perspective.

Bullish drivers are reasserting themselves on critical fronts like China's reopening, recovering transportation demand, restocking in heavy machinery, and benefiting low inventory levels plus existing smelter constraints.

Traders and investors now have an opportunity to buy into aluminium price weakness. Gaining exposure through futures contracts, related options strategies, physically-backed ETFs, or leading producer equities can pay off if positive demand trends reemerge.

Keep position sizes reasonable and average into positions since temporary dips are still likely.

With demand projections improving and the limited ability of the market to quickly boost production, aluminium prices look ready to bounce back from their 2022 lows.

Keep an eye on the recommended buy entry areas and consider building exposure to benefit from the next cyclical upswing in this vital industrial metal.

 

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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”

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