While everyone's been talking about rare earths recently, it's worth keeping an eye on the trends in other major metals which are also heavily influenced by the trends in China.
This is just what the team at Wilsons Advisory have done this week, swinging their focus to the aluminium sector, where they say, for the first time in years, there will soon be a supply shortage.
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Government support strong
They also argue that the aluminium supply chain is one that governments in the West will definitely be looking to strengthen.
As they write in their research report this week:
Like rare earths, aluminium is strategically important for both defence and the energy transition. Both alumina and aluminium production are dominated by China, which underscores the desire of the West to 'reshore' the aluminium value chain.
And similar to recent deals struck by the US and Australian governments to help grow domestic processing of rare earths, both governments have in the past shown their willingness to intervene in the aluminium supply market to ensure production is not entirely offshored.
This includes a US$500 million grant from the US Department of Energy for the construction of the first new US primary aluminium smelter in about 45 years, and the Australian Government's $2 billion Green Aluminium Production Credit, which will support domestic smelters transitioning to reliable, renewable electricity before 2036.
And then there's the aluminium market itself, which the Wilsons team says, "from a supply/demand perspective, is as healthy as it has been in years''.
While aluminium has been in a structural oversupply for much of the last two decades – driven by China's massive capacity expansion – we are approaching an inflexion point where new supply is unlikely to keep pace with steadily growing demand.
Which stock to buy?
So, given all of this, how can investors position themselves to make money off this?
The Wilsons team looked at Rio Tinto Ltd (ASX: RIO), South32 Ltd (ASX: S32), and Alcoa Corporation (ASX: AAI), and came to the conclusion that the latter was the better bet.
One reason was that Alcoa gives "the purest exposure" to the aluminium market, compared to the other two major miners, which have broader exposure to other resources.
They explained further:
Alcoa is also expected to modestly grow its aluminium and alumina volumes over the medium-term. In contrast, South32 and Rio Tinto's aluminium volumes are projected to remain broadly flat or decline.
They point out that Alcoa's portfolio is supported by secure, long-term power supply agreements, which are crucial in the energy-intensive process of producing aluminium and say, generally, Alcoa has a strong operational track record.
The company is also expected to be a net beneficiary of US tariffs, with its US operations expected to benefit from margin expansion as a result.
And while it's not covered in the report, Alcoa was also recently singled out for special treatment under the new US-Australia critical minerals framework, with its gallium refining project in Western Australia winning a promise of concessional equity financing. At the same time, the US government will also make an equity investment in the project, which is a joint venture with Japan's Sojitz Corporation.
