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

Julian Kettle, Wood Mackenzie Senior Vice President, Vice Chair Metals and Mining, argues that the threat from aluminium as a viable energy transmission alternative is being vastly underestimated. 

The steady climb in copper prices since mid-2020 – and the more recent launch into the stratosphere – puts me in mind of Senator Gracchus in the film Gladiator. Specifically, his observation that fear and wonderment is a powerful combination. Why?  

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Well, on the one hand many investors and speculators are suffering from a 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 substantially more for their metal but without the potential to pass this additional cost on to their customers – in other words, a margin squeeze. 

On the other hand, there is a real sense of wonder from producers, investors and traders who are already invested and watching prices move so far so fast. What’s more, with the energy transition set to pick up the baton when rampant recovery-induced demand loses steam, there seems to be no end in sight. The knowledge that if demand continues to grow the supply side of the equation simply cannot react fast enough creates a heady mix sure to set hearts racing. 

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So, are copper prices soaring too high, and too fast – is the risk of substitution looming?  

Can higher prices be justified? 

The cynic might argue that producers are deliberately holding off from green-lighting projects as a means of maintaining high prices, but that’s a little simplistic. In reality, given that they are custodians of shareholder capital, producer behaviour is determined by their responsibility to investors. Copper producers would therefore argue that much higher prices are required in order to satisfy the needs of yield-hungry investors and those looking for capital growth.  

Currently the focus is on dividend distribution, but at some point investors will start to agitate for growth while continuing to expect dividend. Funding both requirements will need prices to be higher than the ~US$8,000/tonne conventional incentive price analysis would suggest. Such higher prices will have the additional benefit of compensating for the greater risk associated with projects in less favourable locations – projects that must be developed if energy transition requirements are to be met. 

A failure to learn from past mistakes? 

Despite this justification for higher prices, however, the apparent race to the top in terms of ever-higher copper price forecasts pays scant regard to the history of material competition.  

In the last supercycle the copper industry was unable to keep up with China’s insatiable demand, with the result that prices initially moved sharply higher. However, subsequent substitution in the form of switching, thrifting and ‘lost growth’ led to the copper market losing 2% or 400-500 kt per year of demand to aluminium when prices were above US$3 per lb. As Oscar Wilde wryly commented, “experience is the name we give our mistakes,” yet in this case it seems little has been learned from past experience. 

Copper is not the only solution to energy transmission 

Copper is the major metal par excellence in terms of electrical conductivity. Only the far more expensive (and much less abundant) silver eclipses the red metal in this respect. However, while aluminium’s conductivity is some 40% below that of copper it does possess attractive properties – not least its density, which is just 30% of that of copper. This means that an aluminium cable is around 52% of the weight of a copper cable with the same conductivity, a property offering handling and installation benefits.  

Too many forecasts ignore the fact that aluminium is a serious competitor to copper in a number of high volume applications, including high- and mid-voltage power cable, busbars, transformer windings and motor windings. It’s worth noting that Tiripatu Graphite PLC are working on combining aluminium with graphene to offer a product with 95% of the conductivity of copper – a development which really would put the cat among the pigeons! 

Copper versus aluminium economics: a complicated dance 

While copper is the metal with the best technical characteristics, once economics are brought into the equation its superiority is far less clear cut. In fact, given its lower cost, aluminium wins out against copper under virtually any realistic long-term price scenario.

Only at extreme carbon tax levels does aluminium’s higher carbon tax footprint at the margin lead to copper becoming competitive at price levels that historically would have been prohibitive. Cost push in copper could lead to price pull in aluminium such that copper prices could sustainably be maintained at US$10,000 per tonne when aluminium is at US$3,300 per tonne.