Workers use a hoist to stack copper ingots at the Norddeutsche Affinerie works in Hamburg, Germany. Roland Magunia/Bloomberg News
Peter Koven, Financial Post · Friday, Feb. 18, 2011
With copper trading at unprecedented highs, the question is being asked: isn’t there anything cheaper we can replace this stuff with?
The answer, according to experts, is not much, and not easily.
Since bottoming out in early 2009, the price of copper has nearly quadrupled, driven by strong demand from emerging markets, shrinking inventories and lack of new supply. The metal, which traded around US70¢ a pound through the 1990s, is now worth about US$4.50 and hit a new record earlier this week. When priced in tonnes, it recently passed the landmark level of US$10,000.
The gains in the copper price have dramatically outpaced the other base metals, leading to more talk about substitution. It echoes the debate in the energy sector, where people want to replace expensive oil with cheap natural gas.
“We would say there’s about half a million tonnes of copper substitution going on a year now at these elevated prices,” said Tom Albanese, the chief executive of Rio Tinto Ltd., in a recent interview.
That is not a heck of a lot in a market where demand is nearing 20 million tonnes a year. And experts said that while more substitution is likely, it will be tough to do.
The one metal that is regularly substituted for copper is aluminum. According to Desjardins Securities analyst John Hughes, a large part of that replacement has already been done. To do more will be expensive and challenging.
“It’s just a very difficult thing to re-tool for aluminum, whether you’re a wire producer or a pipe producer or whatever,” he said.
To take one example, copper is more conductive than other base metals, which makes it hard to replace in electrical applications.
Even aluminum is almost useless as a replacement for copper wire because of fire hazard risks. When the United States made a big push towards using aluminum wire in the 1960s, the result was an outbreak of fires, according to Barclays Capital. Don’t look for that to happen again.
Copper has earned the nickname “Dr. Copper” because its many applications make it a solid economic bellwether — it shows up in everything from construction materials to electricity transfer to consumer products.
Other metals do not have as many practical uses. For example, the vast majority of nickel goes into one product: stainless steel.
Most analysts still have a very healthy outlook for copper prices. They do not think that demand destruction is imminent, even at such elevated prices.
“If you think of copper, whether it be in an automobile or a house, there’s not many pure applications for it. It’s generally a smaller cost of a large cost unit. We’re not going to stop making cars because we go to US$6.00 copper,” Mr. Hughes said.
Mr. Albanese said that rather than demand destruction, the big risk is that these prices will encourage a wave of new production, which could create an oversupply situation in the future. But that is certainly not imminent.
The other thing that could sink the copper market would be an economic downturn, much like the one in 2008. During that collapse, copper fell all the way down to about US$1.20 a pound. There is a legitimate risk that it could happen again. But for now, the red metal rules.
Financial Post
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