Copper is the undisputed king of industrial metals, particularly because its conductivity is ideal for most industrial uses.
But when copper prices soar relative to other industrial metals – like Aluminum – the industry usually switches to the cheaper alternative, especially for electrical purposes.
In fact, this has been happening on a gradual basis since the turn of the century.
In that time, the price for copper on the London Metal Exchange has nearly quadrupled from $1,483 per metric ton to its current price of nearly $6,900 per ton.
Historic Oversupply
Meanwhile, aluminum has remained a dog for years due to oversupply. Its price has remained mostly steady, and it’s currently trading at $2,037 per metric ton. That’s made it progressively cheaper relative to copper, as you can see below.
Right now, the price differential between copper and aluminum is reaching 4:1, a crucial inflection point at which heavy substitution usually occurs.
The Great Copper Swap
Nexans (NEXS), a French company that makes electrical wiring and cables, says that the switch from copper to aluminum is inevitable.
Its corporate purchasing director, Christophe Allain, told the CRU Group’s World Copper Conference in April that “the switch will come; the big question is when and what size it will be.”
As Nexans told the Financial Times, one reason is that aluminum cables currently cost about 40% less than copper ones – even though more insulation is required for aluminum cabling.
Developing Implications
For countries in the developing world that are still building out a power grid, that price difference is a huge deal.
China, for example, could benefit greatly from a switch to aluminum. China National Cable Engineering says the price of an aluminum alloy power cable is currently 30% less than standard copper cable. On top of that, China is awash in both aluminum and rare earths. Copper, on the other hand, is mostly imported.
The Chinese government has yet to announce an intention to move from copper cables to aluminum cables for its electricity grid buildout… but it would make sense on a price basis.
A Glistening Opportunity in Aluminum
The global aluminum market is forecast to grow about 6% over the next five years, mainly due to increased usage in the automobile industry.
Yet most forecasters are ignoring Nexans’ message about the increased usage in the power industry – especially in the emerging world – and this could turn out to be quite beneficial for savvy investors.
One company that should still have plenty of upside – even after its stock doubled in the last 52 weeks – is Alcoa (AA).
As the world’s largest aluminum producer, it makes sense that Alcoa would benefit. Yet the company’s recent emphasis on aerospace applications for aluminum should help boost prices even higher. On top of that, share prices are still far below the $38 peak they hit in 2008, just before the financial crisis.
That means there’s still plenty of room to run.
And “the chase” continues,
Tim Maverick