Riding the Aluminum Wave: Seizing Investment Opportunities Amid Rising Premiums

25 May 2024

By Eric Lee, Sales Director, Phillip Nova

The aluminium market has been buzzing with activity recently, pointing to a growing surplus that has everyone talking. It all started with falling physical premiums, a clear sign that supply was outpacing demand. Then, in a dramatic twist, the London Metal Exchange (LME) reported an 88% spike in aluminium stocks in early May 2024, leading supplies to rocket to the highest levels since January 2022. This included an eye-popping one-day deposit of 425,575 tons in Port Klang, Malaysia. This highly unusual event has industry insiders scratching their heads, with one of the traders calling it “insane”. You may refer to the Reuters links below for more details.

– Reuters article one

– Reuters article two

The chart below compares the price of Aluminium to that of Aluminium Premium. Just as the 1^st article had implied, Aluminium Premium tells us a better story about the demand for the metal and clearly there’s a strong correlation between the 2. Unlike the Aluminium Futures chart, which is very choppy, even on a weekly chart, Aluminium Premium allow traders to tell the underlying trend of the commodity much more clearly.

Shortly after the release of the 1st article by Reuters on 8 Dec 2023, we see that the Aluminium Premium (blue line), started trending higher and as of now, still in the upward trajectory. This is followed by the actual Aluminium Futures price, which only started trend up from Feb 2024 onwards.

In its recent article dated 28 Nov 2023, the World Economic Forum stated that global aluminium demand will rise 40% by 2030. If this is true, then the current run up in Aluminium prices may have legs to continue further. One way to directly gain exposure to Aluminium is through the Aluminium Futures. For an indirect exposure into the metal, investors can also consider Press Metal Aluminium Holding Bhd, listed on the Bursa Stock Exchange, with the ticker code 8869. The company is fairly large with market capitalisation of MYR44b.

Press Metal Aluminium Holdings Bhd manufactures and sells extruded aluminium and other aluminium products to customers worldwide. The company operates in two segments based on function. The Smelting and Extrusion segment, which generates the vast majority of revenue, purchases aluminum scrap and produces extruded aluminium and aluminium alloys for industrial customers. The Trading segment markets aluminium products.

The chart below compares the performances of Press Metal Aluminium shares price, its financial performances and the price of Aluminium Futures from 2017 till to-date. We can see that there’s a very strong correlation and the rise and fall of Aluminum prices had directly resulted in the performances of its business and that of its share price.

In conclusion, higher Aluminium Premiums and the forecasted rise in demand for the metal by the World Economic Forum seem to indicate that the price of Aluminium is likely to trend higher in the future. Given that this has a strong influence on the business and share performance of Press Metal Aluminium (8869), this makes the stock a good proxy for investors who would like to have some exposure to aluminium.

Currently, the stock is in consolidation, forming up to a Bollinger “Squeeze” on its daily chart. A breakout from this “Squeeze” to the upside can be taken as a buy signal for momentum traders. Please note that the company is projected to release Q1 2024 earnings results on 27 May 2024.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

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