Indonesia Export Ban Could Bolster Aluminum ETNs

Indonesia’s export ban on raw ore sent nickel prices surging this year, but aluminum prices, along with related exchange traded notes, have been left behind. Now, some traders are pointing to potential opportunity in aluminum.

From 2007 to 2013, Indonesia accounted for 60% of global exports of bauxite, a clay-soil mixture that is refined into alumina for use in everything from cans to car bodies, reports Xan Rice for Financial Times.

Last year, China, the world’s largest producer and consumer of aluminum, imported about two-thirds of its bauxite from Indonesia.

“Just like with nickel, there is no alternative supplier of bauxite of a sufficient scale and quality to replace the Indonesia material,” an Asia-based metals trader told Financial Times. “I think aluminium looks an interesting bet.”

While a prolonged ban could instigate other countries to begin expanding their own aluminum operations, Indonesia’s actions will have a large effect on short- to mid-term supply. Unlike some other industrial metal suppliers, aluminum smelters and refineries are expensive and time consuming.

“From mid-2015 to late 2016 the market could find itself quite short of bauxite,” Nic Brown, head of commodities research at Natixis, said in the article. “If that happens you would expect the price of aluminium to go up.”

Despite Indonesia’s export ban on mineral ore going into its fifth month, aluminum prices on the London Metal Exchange were slightly down for the year, with LEM 3-month aluminum futures trading around $1,770 per ton.

Year-to-date, the iPath Dow Jones-UBS Aluminum Subindex Total ReturnSM ETN (NYSEArca: JJU) is down 4.4% and iPath Pure Beta Aluminum ETN (NYSEArca: FOIL) declined 4.9%.

Potential investors should be aware that the two ETNs are relatively small. JJU has $3.1 million in assets under management while FOIL holds $2.5 million. However, with a tighter global supply, more investors could turn to the ETNs as their source of exposure to aluminum markets, similar to the large run up in the nickel-related ETNs.

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