(Bloomberg) – In the madness of the copper record that ran a decade ago, manufacturers of wires and pipes went ridly in search of replacements for cheers, in a trend that left a lasting buck in demand. With prices rising again, the lure of alternatives has never been greater.
A rally over $ 9,000 per. Ton has left the copper trade with a record multiple for aluminum, which was the biggest recipient in the last major replacement spasm when the red metal hit record highs above $ 10,000 in 2011.
The good news for copper bulls is that much of the low-hanging fruit by replacing copper with aluminum or plastic has already been picked, as substitution has experienced a marked downward trend in recent years. However, if the relationship holds at extreme levels, some consumers may again be encouraged to switch.
“There is a big difference that can push cable customers to consider an aluminum design,” said Christophe Allain, global portfolio director for non-ferrous metals at Nexans, one of the world’s leading suppliers of electrical cables. “If it continues, and if it lasts, people will naturally ask to switch from copper to aluminum.”
A bulwark against replacement this time around is that aluminum’s poorer conductivity and larger volume can pose technical challenges that outweigh the commercial benefits in corners of the market that are destined to grow fastest, such as electric vehicles and renewable energy.
And for an uptick to take place in more traditional areas such as construction, the relative cheness of other metals would have to last much longer, according to Cochilco, the government’s copper agency at the top-producing nation of Chile. The supply chains should be familiar with the fact that cost gains were worth both the research effort and any loss in electrical and thermal conductivity. Such losses would undermine the search for greater energy efficiency as part of a carbon-free world, it said.
“It is clear that the current price situation has changed,” said Jorge Cantallopts, Cochilco’s head of research and public policy, in an email answering questions. “But there is no sign of changes in the substitution trend yet.”
Of course, the copper rally could still have additional runs, and replacement could accelerate if prices get to $ 12,000 per. Ton. This is the level at which Concord Resources Ltd. says is needed to get miners to invest in new production, provided governments follow plans for greater electrification. But the trading house also predicts large increases in aluminum prices, and in a large inflation environment for raw materials, producers can instead look at other ways to control costs.
Hedging prices near ever-highs can be a bitter pill for manufacturers to swallow, but some major copper users are already doing so in hopes of passing on costs to end users.
And when spending in sectors like green energy has started to rise, they may feel more confident about it than last time, when Europe was in the depths of a debt crisis and the US economy was flat. Similarly, quantities of copper sold that have been lost due to substitution may be felt less in an environment where the total demand for end use is roaring.
As such, bulls can be sure that substitution does not pose a small threat to the copper rally, but as prices rise at a rapid pace, discussions about the long-term consequences for consumers are nonetheless urgent.
“Substitution is one of the things that keeps commodity markets honest and especially copper,” Colin Hamilton, CEO of commodity research at BMO Cital Markets, said by telephone. “It would only increase if the ratio is high, but it is one of those controls that means commodity markets are always ordering.”
For more articles like this, visit us at bloomberg.com
sign up now to be at the forefront with the most trusted business news source.
© 2021 Bloomberg LP