09/06/2021 Could Soaring Prices See Copper Fly Too Close To The Sun?

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Could soaring prices see copper fly too close to the sun?

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Could soaring prices see copper fly too close to
the sun?
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,
Senior Vice President, Vice Chair Metals and Mining, argues that the threat from
aluminium as a viable energy transmission alternative is being vastly
underestimated.

In this article:

18 May 2021

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?

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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09/06/2021 Could Soaring Prices See Copper Fly Too Close To The Sun? | Wood Mackenzie

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

Can higher copper 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.

The apparent race to the top in terms of ever-higher copper price forecasts
pays scant regard to the history of material competition.

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.

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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 aluminium could lead to price pull in copper such that copper prices could
sustainably be maintained at US$10,000 per tonne when aluminium is at US$3,300 per tonne.

Elevated copper prices are not sustainable

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In conclusion, even if what we believe are fanciful forecasts of US$15,000-$20,000 per tonne
for copper prove prescient, without commensurate aluminium prices of US$5,000-7,000 per
tonne copper would see massive demand destruction, which would be accompanied after
some time lag by supply growth. Furthermore, prices getting anywhere near these levels
would send a strong signal to the market that the industry cannot meet the challenge of the
energy transition, with the result that alternatives would be sought.

So it seems appropriate to draw upon Greek mythology: when Icarus ignored Daedalus's
instructions not to fly too close to the sun, the wax in his wings melted and he tumbled out of
the sky. While I am no Daedalus, I believe stakeholders would do well to heed the warning that
excessively high prices for copper will not be good for the metal in the long term.

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