By ETF Heat Map Team

China is the major manufacturer of various industrial products around the globe, and the aluminum industry is no different. Currently, China produces more than half of the world’s primary aluminum and causing the market to be fraught with oversupply issues. This can be compared with 11 percent of aluminum production back in 2000. The government’s support to the industry, in terms of direct grants, interest free loans and other “incentive” mechanisms have helped the industry grow phenomenally.

China has proven itself as a raw aluminum manufacturer, but now eyes for a vertical integration towards the higher value product of the commodity. Liu Zhongtian, the founder and chairman of China Zhongwang, an aluminum company will acquire Cleveland based Aleris Corp. for $2.3 billion. The deal will provide the company with access to the American and European technology, including a new set of buyers like automobile and aerospace manufacturers. Liu said about the deal with Aleris Corp., “well-positioned to capitalize on the positive demand trends we see globally.” Other Chinese smelters have continued to expand their capacity to make the raw aluminum as well as the capacity of rolling mills that shape aluminum into higher end products.

Given such evolving trends in the industry, some Aluminum ETFs worth exploring from our ETF Heat Map screener include:

  • DBB – PowerShares DB Base Metals Fund
  • UBM – ETRACs CMCI Industrial Metals Total Return ETN
  • JJM – iPath Dow Jones UBS Industrial Metals Sub Index Total Return ETN
  • JJU – iPath Bloomberg Aluminum Subindex Total Return ETN
  • FOIL – iPath Pure Beta Aluminum ETN

DBB, a PowerShares product seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Industrial Metals Index Excess Return. It has returned 16% YTD and has a management fee of 0.75%.

DBB

Focusing on the industry dynamics, Charlie Durant, a principal analyst CRU Group in London, has said how the Aleris deal “could be the shape of things to come”. China exported only 7 percent of the world’s demand for rolled sheet and plate, last year. However, with the move towards the processed higher end aluminum the Chinese market will grow at a faster rate. Moreover, China for the first time became a net exporter of the specialized aluminum sheets used to make beverage cans for soda and beer. “Further market integration could ultimately encourage more exports out of China, particularly in higher-value-added rolled products, where Chinese players have yet to have much of an impact,” Durant said.

The aluminum industry is changing, and government around the world need to play a role in the changing environment. Zhang Shiping, the chairman of aluminum producer China Hongqiao Group Ltd., said “The Chinese government has set clear development goals for the aluminum industry that emphasize not only quantity increase, but more importantly quality improvement.” China may need to change its manufacturing style as currently it has very little capacity to manufacture products with strict specifications by the automotive and airline industries. In-order to increase market strength, China either needs to build its own plants with newest technology or acquire the technology from someone else such as a foreign firm that will also give them access to foreign market production contracts.

China is also a fast growing consumer of aluminum with annual demand to rise by 6 million tons by 2018. With an ever increasing demand in their home market and export market the aluminum industry is a very strong one in China.  However, this is not the case for other countries that face stiff competition from Chinese manufacturers. The competition has created surplus in the industry and companies are forced to close down as profit fell.

Alcoa Inc., an iconic U.S. producer for more than a century, has shut all but one smelter and plans to split itself in two. Another, Chicago-based Century Aluminum Co. may be forced to shut its smelter in Kentucky state amid stiff competition from China, according to Chief Executive Officer Michael Bless.

The aluminum industries trend of moving towards innovation and adoption of new technology and manufacturing techniques is in line with President Xi’s vision for the transition China from a pure manufacturing based economy with a relatively low degree of manufacturing sophistication to a maker of higher quality and more sophisticated goods that will be accepted both by the growing consumer domestically and internationally.