Julian Kettle is the Senior Vice President, Vice Chair Metals and Mining of Wood Mackenzie and has 30 years of experience in the analysis of metals and mining. In his latest blog – ‘Could soaring prices see copper fly too close to the sun?’ (below) – Kettle argues that the threat to copper from aluminium as a viable energy transmission alternative is being vastly underestimated. He joined the BizNews Power Hour to discuss this blog and the sustainability of the copper price. – Nadya Swart
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? JulianKettle, 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.
In this article:
• Fear and wonderment: a powerful combination
• Do long term prices need to be re-evaluated?
• A failure to learn from past mistakes?
• Is aluminium a real threat to copper?
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.
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.
Elevated copper prices are not sustainable
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.
Julian Kettle on his latest blog and the sustainability of the copper price:
I wouldn’t want you to go away thinking that copper isn’t going to be very, very well at the energy transition. The question I’m asking is whether eleven $11,000, $12,000 a tonne is sustainable for copper, particularly when you consider that – whilst copper is obviously a preferred material in a number of applications – it does have a strong competitor in aluminium.
And really, I’m kind of setting my sights on what I think are fanciful forecasts of copper prices. The latest one this week was a forecast of copper prices going to $30,000 a tonne and at those sorts of levels – you will get significant demand destruction.
On the point at which aluminium starts becoming an appealing alternative to copper:
Well, there’s a couple of things. Obviously, there’s the price issue, the relative price issue. So, all other things being equal; when the copper price moves above three times the aluminium price – that’s when historically we’ve seen substitution occur. Or put another way, you start to see thrifting and lost growth opportunities.
So, if we think about the last supercycle, copper lost 2% market share to aluminium when prices moved above $3 a pound. And if you look at where copper is now, we’re in the 450 range without aluminium prices having been boosted. So, if aluminium prices were at $3,500 to $4,000 now, then copper would have no problem.
On the future of copper and copper vs aluminium:
Copper is going to do well. Whether or not you believe the copper price will be sustainable at $12,000, $15,000 – the reality is that demand for copper is incredibly strong. And so, if you’re looking at copper miners, they will do very well, nicely. They will do well at $8,000 copper, $9,000 copper, $10,000 copper.
So, I wouldn’t say that we should necessarily be looking at aluminium versus copper stocks. I would always want to have copper in my portfolio, given it’s at the nexus of the energy transition and indeed a number of existing uses. But I think we shouldn’t discount aluminium doing well out of the energy transition as well.
On whether or not we’re in a supercycle:
I’m often asked if there is a supercycle – and then I say; ‘Well, not yet’. When asked if there will be a supercycle, I say; ‘Well, there will be commodities that will exhibit supercycle characteristics, but not all commodities will benefit to the same degree. And in fact, some commodities won’t do well at all.’ So, for example, thermal coal; you know, if the energy transition accelerates, thermal coal will get hit the most because the whole point is a low carbon world.
The analogy I draw; you’re taking the kids on a long journey in the car, half an hour in they say; ‘Are we there yet?’ And you say; ‘We’re not there yet. It’s a five hour journey. We’ll get there.’ At the moment, we’re seeing transient factors driving markets. The key question is whether we will see a supercycle. I think we will start to see a supercycle from mid-decade onwards when the energy transition really takes off. The key question for me is whether prices can be sustained at the high levels until the fundamentals catch up.
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