Must-know: Playing the aluminum value chain

Bauxite is the most abundant metal in the earth’s crust. Because of the many impurities in bauxite, it must be refined to produce alumina.

Mohit Oberoi, CFA - Author

Nov. 20 2020, Updated 1:24 p.m. ET

The aluminum value chain

Aluminum manufacturing is quite a long process. You can break it down into three parts—upstream, midstream, and downstream operations. There are several listed companies you can use to play the aluminum value chain. Some companies specialize in a particular area of the value chain, while others can give you access to all components of the value chain.

Aluminum upstream operations

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Let’s look first at upstream operations. It begins with mining bauxite. Bauxite is the most abundant metal in the earth’s crust. Because of the many impurities in bauxite, it must be refined to produce alumina. Alumina is then further processed to produce raw aluminum. Other major raw materials include electricity and carbon. Companies such as Rio Tinto (RIO) and Alcoa Inc (AA) have aluminum upstream operations. Century Aluminum Co (CENX) does not own any bauxite mines, but it does produce raw aluminum by sourcing bauxite from outside parties.

Understanding aluminum midstream operations

Midstream operations convert raw aluminum into aluminum sheet plates and foils. Although some value addition occurs at this stage, commodity-type products are the end products of these operations. Century Aluminum is active in midstream operations.

Must know: Where Constellium sits in the aluminum value chain

Companies such as Constellium N.V. (CSTM) and Kaiser Aluminum Corp. (KALU) are pure downstream operations. These companies don’t produce aluminum, but source it from primary aluminum producers. This aluminum is then given custom shapes and sizes. Custom products sell at higher prices, which means that downstream operations generally have higher margins than primary aluminum producers.

Exchange-traded funds such as the SPDR S&P Metals and Mining (XME) can give you a diversified exposure to the metals industry. Meanwhile, to be prudent, you should look at a financial comparison of various aluminum companies before investing. This will help you better understand the dynamics of the aluminum value chain. In the next article in this series, we’ll look at some key financial metrics for aluminum companies.


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