Should small commodity companies trade physical aluminum?

𝗪𝗵𝘆 𝗗𝗼 𝗦𝗺𝗮𝗹𝗹 𝗖𝗼𝗺𝗺𝗼𝗱𝗶𝘁𝘆 𝗖𝗼𝗺𝗽𝗮𝗻𝗶𝗲𝘀 𝗧𝗿𝗮𝗱𝗲 𝗥𝗲𝗳𝗶𝗻𝗲𝗱 𝗔𝗹𝘂𝗺𝗶𝗻𝘂𝗺?

This is a question I’ve often asked myself, and I still don’t have a completely convincing answer. Unlike other refined metals like copper, zinc, and lead—where you must trade the physical metal to capture changes in premiums—𝗮𝗹𝘂𝗺𝗶𝗻𝘂𝗺 𝗼𝗳𝗳𝗲𝗿𝘀 𝗮𝗻𝗼𝘁𝗵𝗲𝗿 𝗼𝗽𝘁𝗶𝗼𝗻.

In the U.S., Europe, and Asia, aluminum traders can use derivative swap contracts to gain exposure to premium movements 𝘄𝗶𝘁𝗵𝗼𝘂𝘁 𝗲𝘃𝗲𝗿 𝘁𝗼𝘂𝗰𝗵𝗶𝗻𝗴 𝗮 𝗽𝗵𝘆𝘀𝗶𝗰𝗮𝗹 𝘁𝗼𝗻. This raises an important question:

👉 If traders are mainly trying to profit from premium shifts, why take on the risks of physical trading when swaps offer a cleaner alternative?

𝗧𝗵𝗲 𝗛𝗶𝗱𝗱𝗲𝗻 𝗖𝗼𝘀𝘁𝘀 𝗼𝗳 𝗣𝗵𝘆𝘀𝗶𝗰𝗮𝗹 𝗧𝗿𝗮𝗱𝗶𝗻𝗴
Trading physical metals isn’t just about premium speculation—it’s a serious commitment that requires:
✅ A full operational team (traders, logistics, finance, risk management)
✅ Significant capital to finance inventory
✅ Credit risk management for counterparties
✅ Navigating warehouse delays, shipping issues, and cash flow uncertainty

All this effort for 𝗮 𝗺𝗮𝗿𝗴𝗶𝗻 𝘁𝗵𝗮𝘁 𝗶𝘀 𝗰𝗼𝗻𝘀𝘁𝗮𝗻𝘁𝗹𝘆 𝘂𝗻𝗱𝗲𝗿 𝗽𝗿𝗲𝘀𝘀𝘂𝗿𝗲.

𝗧𝗵𝗲 𝗦𝘄𝗮𝗽 𝗔𝗹𝘁𝗲𝗿𝗻𝗮𝘁𝗶𝘃𝗲
Now, let’s say a trader believes U.S. aluminum premiums will rise in the next six months. They have two choices:

1️⃣ 𝗧𝗵𝗲 𝗧𝗿𝗮𝗱𝗶𝘁𝗶𝗼𝗻𝗮𝗹 𝗣𝗵𝘆𝘀𝗶𝗰𝗮𝗹 𝗥𝗼𝘂𝘁𝗲
🔹 Buy aluminum at a fixed premium
🔹 Finance, store, and manage the logistics
🔹Sell later at (hopefully) a higher floating premium
🔹Risk operational issues and financing costs

2️⃣ 𝗧𝗵𝗲 𝗦𝘄𝗮𝗽 𝗠𝗮𝗿𝗸𝗲𝘁 𝗔𝗽𝗽𝗿𝗼𝗮𝗰𝗵
🔹Simply buy a 𝗖𝗠𝗘 𝗮𝗹𝘂𝗺𝗶𝗻𝘂𝗺 𝘀𝘄𝗮𝗽 for the target months
🔹If premiums rise, sell the swap and lock in a profit
🔹If the market turns, exit the position quickly—no warehouses, no logistics, no financing headaches

𝗦𝗼, 𝗪𝗵𝘆 𝗧𝗿𝗮𝗱𝗲 𝗣𝗵𝘆𝘀𝗶𝗰𝗮𝗹 𝗮𝘁 𝗔𝗹𝗹?
There are nuances, of course. Global trading firms with integrated supply chains can extract more value by managing both physical and financial exposure. But for smaller traders, 𝘀𝘄𝗮𝗽𝘀 𝗼𝗳𝗳𝗲𝗿 𝗮 𝘄𝗮𝘆 𝘁𝗼 𝗰𝗮𝗽𝘁𝘂𝗿𝗲 𝟵𝟬% 𝗼𝗳 𝘁𝗵𝗲 𝗼𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝘆 𝘄𝗶𝘁𝗵 𝗳𝗮𝗿 𝗳𝗲𝘄𝗲𝗿 𝗿𝗶𝘀𝗸𝘀 𝗮𝗻𝗱 𝗰𝗼𝘀𝘁𝘀.