The aluminum value chain
The aluminum industry has a long value chain. 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 of the value chain’s components. The above chart shows the presence of different companies on the aluminum value chain.
First, let’s look at upstream operations. It begins with mining bauxite. Bauxite is the most abundant metal in the earth’s crust. Because of bauxite’s many impurities, it must be refined to produce alumina. Alumina is then processed to produce raw aluminum. Other major raw materials required include electricity and carbon. Companies like Rio Tinto (RIO), Norsk Hydro (NHYDY), and Alcoa (AA) have aluminum upstream operations. Century Aluminum (CENX) doesn’t own any bauxite mines, but it does produce raw aluminum by sourcing alumina from outside parties.
Upstream aluminum companies are especially prone to volatility in aluminum prices. These companies sell primary aluminum. The prices are tied to the London Metals Exchange’s prevailing prices.
Upstream aluminum producers’ earnings have been under pressure due to the steep fall in aluminum prices. However, these companies also make a windfall when aluminum prices rise. This could mean a sharp rebound in primary producers’ share prices when aluminum prices recover.
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.
The real value addition happens in aluminum downstream—or fabrication operations. Kaiser Aluminum (KALU) is a pure-play downstream company. Currently, it forms 5.11% of the SPDR S&P Metals and Mining ETF (XME). Norsk Hydro has some fabrication operations, but the company isn’t into the value-added aluminum products space.
We’ll explore aluminum downstream operations later in this series. In the next part, we’ll discuss the revenue breakup of different aluminum players.