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.

Monday, September 10, 2012

Luxury Car Ownership per Capita (1 of 2)

Somewhat lighter programming today: a friend recently asked me whether I knew which country had the highest per capita Ferrari ownership. Off course I didn't know and offered a guess that it might be some of the usual suspects including Hong Kong, Singapore, Qatar, UAE, Luxembourg or Switzerland.

Turns out he didn't know either and there are really no good statistics available. So I became interested (in an admittedly rather irrelevant data point). As a first step I decided to make the exercise a little bit broader and included the following brands:

Ferrari I http://www.ferrari.com
Maserati I http://www.maserati.com/
Aston Martin UK http://www.astonmartin.com/
Lamborghini I http://www.lamborghini.com
Bentley UK / D http://www.bentleymotors.com/
Lotus UK http://www.lotuscars.com/
Rolls Royce UK / D http://www.rolls-roycemotorcars.com/
Morgan UK http://www.morgan-motor.co.uk/
Fisker US http://www.fiskerautomotive.com
Wiesmann D http://www.wiesmann.com/
Artega D http://www.artega.de
McLaren UK http://www.mclarenautomotive.com
Tesla US http://www.teslamotors.com/
Bugatti F / D http://www.bugatti.com

I appreciate that the list is somewhat random.

The following two approaches provide at least a a relative indication of car ownership per capita.

  1. Counting car dealership per brand (which is public domain information and available on the above listed sites)
  2. Counting used car offered online for individual national markets (which can be retrieved from used car websites or corresponding aggregators)
This post will focus on the first approach. Plotting the number of luxury car dealerships (per country) against population results in the following (own data compilation).

The car dealership metric is clearly biased towards smaller markets and comparison probably only makes sense for countries of similar population sizes. From smaller to larger population, Monaco, Luxembourg, Qatar, Switzerland, Italy, UK, Germany and USA are at the top of their respective population brackets. Italy, UK and Germany are closely clustered whereby for the first two there is clearly a home market advantage. Singapore, Hong Kong and UAE are in same population bracket as Switzerland but have a much lower number of luxury car dealership (so at least on this one my initial hunch was not confirmed).

For Ferrari the number of dealerships per million population looks as follows (also here eliminating countries with only one dealership to increase the meaningfulness somewhat) with Italy highlighted:

For Aston Martin the number of dealerships per million population looks as follows (also here eliminating countries with only one dealership) with the United Kingdom highlighted:

In one of my next posts, I will look at used car offerings as an an alternative to determine luxury car ownership.

Data can be retrieved here.