With the global economy really beginning show its muscles, industrial manufacturing is finally pulling ahead. After several years of drift, data from several nations are finally showing positive manufacturing numbers. Analysts predict that this is a trend that will have legs, too. As such, investors have been plowing big bucks into various industrial stocks and funds like the iShares Global Industrials ETF (EXI).

However, betting on the producers isn’t the only way to play rising manufacturing. The raw materials required to manufacture goods could be just as compelling, and few more than aluminum. The bull market in bauxite is just beginning and investors should take heed.

No Longer Oversupplied

The tale for aluminum and bauxite (aluminum ore) back in 2013 was one of falling prices and oversupply. Lack of demand for the metal caused prices for aluminum on the London Metal Exchange (LME) to fall to a four-year low. That decline spilled over into the first quarter of 2014, when aluminum sank an additional 8%.

Yet, all of that could be changing.

First, Chinese suppliers of finished aluminum have begun shutting down capacity as high costs and low prices have caused massive losses at their smelters. Russian aluminum giant United Company RUSAL (RUSAL) predicts that Chinese aluminum firms, such as Aluminum Corporation of China Ltd. (ACH), will cut output by about 3.5 million tons this year. That should satisfy China’s demands but leave the rest of the world undersupplied. At the same time, Indonesia has recently enforced a ban on unprocessed bauxite ore shipments. The emerging market nation accounted for about 60% of world’s total bauxite exports from 2007 to 2013. So cutting off that supply is a huge deal for smelters.

Meanwhile, demand is beginning to take off.

In Japan, aluminum demand has grown for the last 10 months, and recorded a 9.4% increase in April. Now that supplies have dwindled, Japanese producers have been paying record fees to import the metal. The situation is similar across Europe's developed economies and in the United States. Demand for aluminum in North America is expected to exceed production by 1.13 million tons this year and 1.255 million in 2015.

All in all, the new supply/demand dynamic in the aluminum market should help push prices up to $2,000 per ton – about $120 per ton higher than today’s price.

Giving Your Portfolio The Foil Treatment

With demand and supplies for aluminum and bauxite finally moving in opposite directions, investors may want to consider adding the metal to their portfolios. While there has been some market chatter about the creation of a physically backed aluminum ETF – one similar to the SPDR Gold Shares ETF (GLD) – that hasn't happened yet. So investors are stuck using futures in order to gain exposure to the metal.

Investment bank Barclay's (BCS) has issued both the iPath DJ-UBS Aluminum ETN (JJU) and iPath Pure Beta Aluminum ETN (FOIL). The basic difference is that JJU will roll its futures contracts on aluminum over to the next available one, while FOIL has the ability to roll over its futures contracts into any contract with various expiration dates. The idea is that will reduce the effects of contango. Both ETNs charge 0.75% in fees.

A better way could be the various aluminum producers. Smaller producers, such as Century Aluminum Co. (CENX) and Noranda Aluminum Holding Corp. (NOR), should be able to see better profits based on the higher pricing. However, if investors are looking for best player it still has to be U.S. aluminum kingpin Alcoa Inc. (AA).

After being booted from the Dow Jones Industrial Average, AA has rallied on the rising aluminum market. But more could be ahead for its shares. The key for Alcoa is the auto and aerospace industries. AA has partnered with Ford Motor Co. (F) to provide aluminum for its new F-150 pickup truck, as well as prototype sedans with aluminum frames. Automakers are starting to construct bodies out of the lighter metal instead of cheaper steel to meet increasingly stringent efficiency standards. Meanwhile, the firm has stepped up its aerospace offerings. Alcoa expects that the global aerospace market to increase by 8-9% over the next few years. Those markets should drive AA’s profits higher over the next few quarters. At the same time, AA shares are cheaper than rivals like Constellium N.V. (CSTM).

The Bottom Line

After spending much of last year in the dumps, aluminum is making a comeback. Rising global manufacturing rates are pushing up demand all in the face of dwindling supplies. That means higher prices could be ahead. For investors, the time to bet on bauxite is now.

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