Tuesday, September 25, 2012

Copper Substitution by Aluminium

In previous posts we have looked at the relative conductivity of Copper and Aluminium and at their price ratio time series. Both suggested that copper substitution with aluminium is expected to take place.

It is interesting to hear what major copper and aluminium producers have to say about copper to aluminium substitution.

From BHP Billiton ("copper remains a material of choice", "overall substitution remains small", "substitution has not significantly increased penetration"):

From Hydro ("copper substitution represents major potential", "aluminium has almost replaced copper in automotive precision tubing over last 30 years", "the leading position of copper in buildings has remained unchallenged ... until now"):

This is what DB has to say (presented at an ICSG meeting in April 2012) speaking from a copper industry point of view:

Black Rock's Cathrine Raw believes that substitution has already occurred:

“It’s now been fully substituted on the demand side. We’ve seen high copper prices for the past five years, and so in terms of substituting it for aluminum, all of that has occurred already. So unless there is a significant technological change on the demand side, there isn’t really a demand destruction you would expect if prices do raise.
Reuters echoed a similar narrative in their August 2011 article: "Copper's green appeal shields against substitution".

Bloomberg Businessweek provides a balanced view of opinions in their February 2012 article: "Aluminium over copper for cables helps Rusal, Alcoa", citing both substitution bullish voices (such as Rusal and Alcoa) and substitution bearish opinions (such as the above cited ICSG/DB presentation). However, we disagree with the following paragraph:

Copper is at least 65 percent more effective than aluminum in three key properties: electrical conductivity, thermal conductivity and ductility, according to Deutsche Bank. This implies that copper should cost 1.65 times more than aluminum. When that ratio climbs to 2-to-1, an economic incentive to substitute copper with aluminum arises, according to the bank.

Conductivity is a dimensional property while prices are quoted per weight unit. This means that for a cable of the same size (say 1 km length, 1 cm diameter), the copper cable has indeed a 65% higher conductivity compared to aluminium. However, for a copper cable of the same weight, the conductivity for the aluminium cable is almost twice the value of the copper cable (copper's specific weight is more than three times higher than aluminium's specific weight). This implies that purely from a conductivity perspective the price ratio floor would be 0.5 rather than 1.65, although without any doubt other characteristics play an equally important role (ductability, fire resistancy, oxidation etc), so for the last 60 years the price ratio floor was around one.

Street Authority's Nathan Slaughter states in his July 2012 article "one of the biggest opportunities in commodities since 1997" that

with aluminum rapidly replacing more and more copper every year, I believe prices will converge not by copper falling, but by aluminum rising. And there are several other factors at play that point to the exact same conclusion.
Groven and Partners also shares the opinion in their July 2012 post "a copper caper" that substitution will play a role, but sees convergence of the copper aluminium price ratio through lower copper prices rather than higher aluminium prices.

Our basic idea is that the copper market is vulnerable because of (i) economic shocks from macro headwinds, (ii) substitution effects, (iii) a widespread and misplaced belief in Peak copper and (iii) structural changes in the copper market (financialization effects) that exaggerate demand.
We also share the view Peak Copper is not an issue at the moment (i.e. for the next 10 to 20 years).

Finally Goran Djukanovic indicates in an article ("Aluminium versus copper – substitution on the way") in the April 2012 edition of the International Aluminium Journal (pp. 20-23) that:

There is no firm evidence that copper will be replaced by aluminium and alternative materials to an extent that would significantly influence future demand and result in lower prices. The prices of metals and materials (plastics, composites) that replace copper will also rise in future on increased demand, so limiting the extent of substitution and at the same time risking that these materials, in turn, may eventually be replaced.


  1. Check out the following interview: http://www.mineweb.com/mineweb/view/mineweb/en/page96990?oid=157374&sn=2010+Detail&pid=92730

    GEOFF CANDY: Looking at the substitution issue and its one you mentioned earlier, how significant is that going to be going forward, because surely it would at least theoretically put a cap on prices if you see a significant amount of substitution?

    SIMON HUNT: I don't know about a cap on prices because as I said earlier it comes back to the money game. But substitution going forward is going to probably be at a rate faster than we've actually seen since 2005, and that in itself has been pretty big. I would say averaging close to half a million tons a year. We've got new technologies coming in, high temperature super conductors, carbon nanotubes, we're seeing aluminium now being used in aircon compressors which has never happened before, and currently from what I hear probably around 20% of the compressor market in China is now using aluminium wiring. So everybody, every end consumer is doing their utmost to limit the amount of copper that they use either through improved designs or by outright substitution or by technology. That is because of the absolute price and the volatility of price - the two together.

  2. Copper being twice as efficient a conductor by weight, means it is more than 4 times as cost effective at current prices. Substitution will indeed continue while this discrepancy persists. There are not so many applications where density is a more important factor than cost or weight. Their is a tradition and cultural bias to overcome however and this could take time.

    One other factor in the decision is the recent but rapidly growing phenomenon of copper theft. In many instances this may make copper a poor choice for infrastructure. Security hasn't been a consideration in the past and will certainly increase the cost. It is an indication that copper has become too expensive for its most basic purpose. It may have to choose between being an industrial metal or a financial metal, to be hoarded like gold, rather than consumed.