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Aluminum Over Copper for Cables Helps Rusal, Alcoa: Commodities
Feb 10,2012 09:26CST
industry news
Copper has climbed to almost four times the price of aluminum, a record ratio that’s accelerating a switch by manufacturers to using the cheaper metal in electric cables and wires.

Feb 8, 2012 -- Copper has climbed to almost four times the price of aluminum, a record ratio that’s accelerating a switch by manufacturers to using the cheaper metal in electric cables and wires, a United Co. Rusal (486) executive said.

Demand for copper is shrinking by about 400,000 tons a year through substitution, or 2 percent of global use, according to Oleg Mukhamedshin, deputy chief executive officer of Rusal, the world’s largest aluminum producer, who cited market data the company uses in its forecasts.

"More than half of this loss is to aluminum,” Mukhamedshin said in an interview in Moscow. “With copper prices at a record, further substitution is expected.”

The shift is helping the silver-colored metal rise this year after its average price slid 7 percent since 2006. That should increase revenue for producers from Rusal to Alcoa Inc. (AA), the largest U.S. producer, in the $100 billion market for the material used in aircraft, building materials and beer cans.

The current aluminum price is below the cost of production for about 30 percent of the world’s producers, according to Rusal’s data. Alcoa, Rio Tinto Group (RIO) and their global competitors are cutting production after aluminum prices declined almost 30 percent by the middle of December to $1,962 a ton from the peak of $2,797 a ton in May. Alcoa reported its first loss in two years in January, while Rusal said it may cut 6 percent of its output in 18 months.

The price of copper, half of which is used in wiring, has more than doubled since 2005 to $8,300 a ton and is more profitable for its producers, while aluminum has remained at about $2,200 a ton in the period.

High Voltage

The light metal will have the biggest annual demand increase among industrial metals through 2015, Paul Robinson, non-ferrous metals group manager at London-based researcher CRU said in October. Aluminum demand is set to rise on average 7.6 percent a year versus 4.3 percent annual growth for copper, CRU said. Aluminum will drive copper replacement in high-voltage energy cables, according to CRU.

Aluminum prices are less than 5 percent higher than average production costs of about $2,100 a ton, while copper, which is in more limited in supply, trades at twice the $4,200 cost of producing each ton, said Eric Danemar, a Moscow-based analyst with Deutsche Bank AG.

Alcoa estimates the metal may displace about 20 percent of copper usage, eroding demand for 3.8 million metric tons of its reddish substitute. In developed countries 8 percent of aluminum produced is currently used in electrical applications, including cables and wiring, according to Rusal’s data on its website.

Aluminum Surplus

"Aluminum supply will be in surplus of about 500,000 tons this year, meaning that even relatively small additional demand from the markets, which were traditionally for copper, may support light-metal prices,” Dmitry Smolin, a Uralsib Capital analyst said.

Copper may be in deficit by 160,000 tons this year, encouraging substitution, which may take place not only in wiring, but also in production of equipment for cars, he said.

London Metal Exchange aluminum forward contracts show that traders forecast the aluminum price to reach $2,530 per ton by the middle of 2015 and $2,900 in a decade. Copper forwards show the opposite trend, with the prices starting to fall by the end of the third quarter of 2013 after reaching $8,500 per ton. Copper may fall to $7,600 per ton in a decade, forwards show.

The ratio of copper’s price to aluminum has jumped to 3.7 from 1 in 1987, tempting customers to switch to the cheaper material, Danemar said.

Copper’s Properties

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.

About 3 million tons of annual copper demand has been switched to substitutes including plastics, fiber optic and aluminum in 2004 to 2011, according to estimates from the International Copper Association and Deutsche Bank.

"Despite the copper-aluminum ratio rising, the rate of substitution declined post-2007, as most easy-to-accomplish applications have been converted,” Deutsche Bank said in a report last month. Still, there is room to replace copper with aluminum for high-voltage cables and low-voltage use in commercial property and building cladding, according to Alcoa.

Power Lines

Rusal is testing an aluminum-zirconium alloy to provide a substitute for copper in the construction of power transmission lines, Mukhamedshin said. The new product will allow the lines to be more resistant to weather conditions, such as low temperatures and heavy snowfalls, he said. Demand for it may come from Russia’s Siberia and the U.S., which needs to modernize its power grids, Mukhamedshin said.

Even so, analysts are cautious about forecasting a quick comeback.

"Aluminum is plagued by oversupply and we forecast that 2012 will see the sixth consecutive year of supply surplus,” Royal Bank of Scotland said in a report last month. Meanwhile, the copper market “remains in firm supply deficit and it is hard to see this changing within the next one to two years.”

The metal “remains around its cheapest relative to copper in decades,” Nick Moore, head of commodity research at RBS, said in a report last month. “Consumers have, where possible, been substituting away from copper to aluminum in certain applications such as heat exchangers, cabling and solar panel tubing.”

Better Conductor

Vladimir Zhukov, head of the Russian equity research team at HSBC Holdings Plc, said the copper market “is not in danger.” China, the largest consumer of both metals, is still a pure exporter of aluminum, while importing copper, he said.

"Aluminum producers have been talking substitution for 30 years, and a lot of the substitution has already taken place,” Peter Hickson, a strategist at UBS AG in Hong Kong, said by phone Feb. 7. “The reality is that aluminum just doesn’t conduct heat or electricity anywhere near as well as copper does.”


aluminum Al
copper Cu

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