Copper's price surge this year is sparking a switch among
manufacturers to another electricity-conducting metal:
aluminum.
Makers of automobiles, air conditioners and industrial
components are increasingly turning to the much cheaper metal to
help offset rising cost pressures as the global economic recovery
gains steam.
The difference between the prices of copper and aluminum is now
enough to cover the costs of retooling some manufacturing processes
and pay for the extra aluminum it takes to conduct the same amount
of electricity as copper.
"There is a lot more engineering and development activity as
these companies think about how to replace copper with aluminum,"
said Charles Belbin, spokesman for Atlanta-based aluminum producer
Novelis Inc., a unit of India's Hindalco Industries Ltd.
(500440.BY).
Markets ripe for the switch include wiring for automobiles and
buildings and evaporator and condensing coils used in commercial
refrigerators.
"There will be a new wave of relooking at products and seeing if
there is a substitution available," said Joe Walton, owner of
Williams Metals & Welding Alloys Inc., a Wayne, Pa., processor
and distributor of metals including copper and aluminum.
Such substitution has been on the rise over the past decade as
demand from China and constrained mine supply have boosted copper
prices. From February 2001 through last month, the metal had risen
more than fivefold while aluminum gained 66%.
Although copper's recent record-setting rally to more than $4.60
a pound has been clipped by worries about Japan's nuclear crisis
and fears that high oil prices will damp the global economic
recovery, the metal remains well above the key $3.50-a-pound level
where it often becomes more economical to use aluminum instead of
the copper. Aluminum now costs around $1.15 a pound.
"With copper being at historic levels, there has been global
interest in going to aluminum cables in cars," said Chris Burns,
North American engineering director with U.S. automotive parts
supplier Delphi. "You get a lot more bang for the buck."
On average, automobiles destined for developed markets contain
about 20 to 23 pounds of copper, while more-basic models built in
emerging markets have about 5 to 6 pounds. Within five years, if
copper rises to the $5-to-$6 range, Burns predicts aluminum will
replace 30% to 40% of the copper in automobiles.
Major aluminum maker Alcoa Inc. (AA) is trying to gain a bigger
foothold in the auto market by developing new aluminum alloys and
coatings to improve its performance in conducting electricity.
"This is a very strong target area for us," said Mohammad Zaidi,
Alcoa's head of research and development.
If copper prices keep rising, aluminum could end up being
substituted for 20% of the global 19 million metric ton annual
refined copper market, according to Alcoa estimates. At current
copper prices, that figure is 4% to 5%, or about 800,000 fewer tons
of copper being used.
Annual copper substitution losses over the last five years have
averaged 425,000 metric tons, or about 2% of the market, according
to estimates by Anglo-Australian mining giant Rio Tinto (RIO). The
mining company expects losses to increase to around 3% of the
market in 2010 and 2011.
The substitution may end up tempering copper prices somewhat.
But most see prices generally trending higher as burgeoning demand
from the recovering global economy is expected to outstrip mine
supply, leaving industrial companies and their customers in the
lurch until they can find substitutes.
St. Louis-based diversified industrial company Emerson Electric
Co. (EMR) has increased spending over the last year to reduce its
use of costly inputs like copper.
"We're definitely going through a major redesign effort on
trying to figure out how to get certain materials out," Chief
Executive David Farr said in a recent call with analysts. "Given
the fact that now we're seeing (the prices of) certain commodities,
like copper, running at much higher levels, we're going to have to
figure out how to use less copper."
For the construction industry, sales patterns at Graybar, a St.
Louis-based distributor of electrical products, suggest that
builders are likely to use more aluminum wiring during this
summer's construction season than they have in recent years.
Graybar's sales of a type of copper wire commonly used in
construction slipped 6% from the last half of 2009 to the same
period last year, while sales of similar aluminum cable rose 6%,
said Kent Duran, national product manager with Graybar.
"It's reasonable to think that our aluminum building wire sales
will go up a minimum of 10%" this year over last, he said.
Condenser coils and heat exchangers in commercial refrigeration
applications could also be ripe for substitution, said Talbot Gee,
chief operating officer with trade organization Heating,
Airconditioning & Refrigeration Distributors International.
Commercial customers have been willing to spend more on large
refrigeration units, so the units have been less sensitive to high
copper prices. Now, the price of copper has been so high that even
these units will probably see copper-to-aluminum substitution.
"There's still more room for transition away from copper," Gee
said.
The head of the world's largest private-sector copper producer,
Freeport-McMoRan Copper & Gold Inc. (FCX), played down the
threat of substitution, but acknowledged in a recent call with
analysts that some customers are getting jittery.
"They're concerned about high copper prices because of...the
potential substitution, but offsetting that substitution is new
markets," Chief Executive Richard Adkerson said.
He cited the potential copper demand from hybrid and electric
cars, as well as increasing uses of electronics, where aluminum
isn't as easily substituted because of space limitations.
-By Matt Whittaker, Dow Jones Newswires; 212-416-2139;
matt.whittaker@dowjones.com
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