With ever more bullish price forecasts, copper is flying high – but is enough attention being paid to the substitution risk associated with such high prices?

Julian Kettle, senior vice president of Wood Mackenzie, vice president of metals and mining, argues that the threat of aluminum as a viable energy transmission alternative is vastly underestimated.

The steady rise in copper prices since mid-2020 – and the more recent launch into the stratosphere – reminds me of Senator Gracchus in the movie Gladiator. Specifically, his observation that fear and wonder is a powerful combination. Why?

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Well, on the one hand, many investors and speculators suffer from the fear of missing out, having joined the copper party too late. At the same time, copper consumers face the very different fear of having to pay much more for their metal, but without having the opportunity to pass this additional cost on to their customers. – in other words, a squeeze on margins.

On the other hand, there is a real sense of wonder from the producers, investors and traders who are already invested and watching the prices move so far so fast. Moreover, with the energy transition poised to take over when the frantic demand driven by recovery loses steam, there does not appear to be an end in sight. Knowing that if demand continues to grow, the supply side of the equation simply cannot respond quickly enough creates an intoxicating mixture that will make hearts beat faster.

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So, are copper prices rising too high and too fast – is there a risk of substitution looming?

Can higher prices be justified?

The cynic might argue that growers deliberately steer clear of green lighting projects to keep prices high, but that’s a bit simplistic. In reality, since they are the custodians of shareholders’ capital, the behavior of producers is determined by their responsibility to investors. Copper producers would therefore argue that much higher prices are needed to meet the needs of yield-hungry investors and those seeking capital growth.

Currently, the focus is on distributing dividends, but at some point investors will start to fight for growth while continuing to expect dividends. To finance these two needs, prices will need to be higher than suggested by the conventional incentive price analysis of about US $ 8,000 / tonne. These higher prices will have the added benefit of offsetting the higher risk associated with projects in less favorable locations. – projects that need to be developed if energy transition requirements must be satisfied.

A failure to learn from the mistakes of the past?

Despite this rationale for higher prices, however, the apparent race to the top in terms of ever higher copper price predictions hardly takes the history of hardware competition into account.

During the last supercycle, the copper industry was unable to meet China’s insatiable demand, so prices initially rose sharply. However, the subsequent substitution in the form of change, saving and “ lost growth ” led the copper market to lose 2% or 400-500 kt per year of demand over aluminum when prices were over US $ 3 per pound. “Experience is the name we give to our mistakes,” but in this case, it seems that little has been learned from past experience.

Copper is not the only solution to energy transmission

Copper is the main metal ultimate in terms of electrical conductivity. Only the much more expensive (and much less plentiful) silver eclipses the red metal in this regard. However, while the conductivity of aluminum is about 40% lower than that of copper, it has some interesting properties. – in particular its density, which represents only 30% of that of copper. This means that an aluminum cable is about 52% of the weight of a copper cable with the same conductivity, a property offering handling and installation advantages.

Too many predictions ignore the fact that aluminum is a serious competitor to copper in a number of high volume applications, including high and medium voltage power cables, busbars, transformer windings and motor windings. It is worth noting that Tiripatu Graphite PLC work on the combination of aluminum and graphene to offer a product with 95% of the conductivity of copper – a development that would really put the cat among the pigeons!

Saving copper against aluminum: a complicated dance

While copper is the metal with the best technical characteristics, once economics are factored into the equation its superiority is much less clear. In fact, given its lower cost, aluminum trumps copper under virtually any realistic long-term price scenario.

It is only at extreme levels of carbon tax that aluminum’s higher carbon footprint at the margin allows copper to become competitive at price levels that historically would have been prohibitive. The surge in copper costs could lead to lower aluminum prices, so that copper prices could be held permanently at US $ 10,000 per tonne while aluminum is at US $ 3,300 per tonne.