There is a metal boom coming and you won’t believe it. It’s not gold, silver, platinum or palladium. And when it goes up, it’s going to make a lot of our daily lives more expensive.
In the 1800’s the “silver from clay” was more expensive than gold. The light, silvery metal was so rare that architects crowned the Washington Monument in D.C. with a six-pound pyramidal capstone.
The metal, if you haven’t guessed yet, is aluminum. The reason it was so rare and expensive was due to the difficulty of producing the raw metal. Most aluminum comes from bauxite, which is aluminum oxide – basically rust. It’s formed when granites break down into aluminum-rich clays.
To separate the aluminum metal from oxygen, it takes a huge amount of electricity. The final smelting process requires aluminum oxide (alumina) to be heated to more than 1,700 degrees F and chemically separating the metal. According to Yahoo Finance, every metric ton of aluminum required 14 megawatt-hours of electricity. That’s equal to powering the average American home for 18 months.
That’s why it was so difficult to make, historically. In 1852, an ounce of aluminum cost $34 per ounce. Gold was just $19 per ounce. That’s no longer the case. A pound of aluminum today is around $1.15 per pound.
But that price is going up.
What’s interesting today is that the surge of data center construction will increase demand for aluminum…and electricity. Higher power prices mean higher aluminum prices. Add to that demand for aluminum from those same data centers and we get a major market distortion.
Higher aluminum prices are going to hit consumers in weird places. Cars, windows, doors, siding, beer cans, and kitchen foil are all going to go up in price. That’s a hidden form of inflation that will hit us in the wallet.
Analysts across the spectrum expect a 16 million metric ton shortfall within the next three years. To put that in perspective, the U.S. consumes about 5 million metric tons per year. Sixteen million metric tons is about 23% of global annual demand. That will dramatically impact prices for the humble metal. Shares of aluminum producers and smelters are already rising, as you can see in the chart of Alcoa (NYSE: AA) below:
The venerable aluminum mining company is currently a $12 billion market cap. Founded in 1886, it was a world leader in the development of aluminum as an industrial metal. It’s the ExxonMobil of aluminum. If you only pick one company to track the aluminum trend, Alcoa is the one to use.
While the price of Alcoa is up substantially this year (nearly double from its April low), it’s well below its 2022 high.
The massive AI trend will have far-reaching implications for commodity prices. And while the direct investments in AI, like Invidia, Meta, etc. are all soaring, downstream players like Alcoa have not.
When you invest in commodities, you must be early. That usually means buying when other people are not. Right now, aluminum is an uncrowded trade. That won’t last long, as datacenter construction explodes around the world.
