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Copper’s Spike raises the alarm about another rush to find replacements

(Bloomberg) – In the frenzy of the copper record a decade ago, wire and tube manufacturers were quick to find cheaper substitutes, which put a lasting drag on demand. In view of the renewed rise in prices, the appeal of alternatives has never been greater. On a rally above $ 9,000 a ton, copper trading was at a record multiple against aluminum, which was the main beneficiary of the last major substitution battle when the red metal hit it all. Time highs above $ 10,000 in 2011. The good news for copper bulls is that much of the low hanging fruit of replacing copper with aluminum or plastic has already been picked, with substitution seeing a significant downward trend in recent years. However, if the ratio remains at an extreme level, some consumers may be urged again to make the switch: “There is one big difference that could lead cable customers to consider an aluminum design,” said Christophe Allain, global portfolio director for non-ferrous metals at Nexans, one of the world’s leading suppliers of electrical cables. “If it continues like this and lasts this long, people will obviously ask to switch from copper to aluminum.” A bulwark against substitution this time around is that the poorer conductivity and bulk of aluminum could present technical challenges that offset the commercial benefits prevail in corners and thus the market will grow the fastest, such as electric vehicles and renewable energies. And for a recovery to take place in more traditional areas like construction, the relative cheapness of other metals would have to last much longer, according to Cochilco, the state copper agency of the highest producing nation of Chile. Supply chains would have to adjust to the fact that cost gains are worth the research effort as well as losses in electrical and thermal conductivity. Such losses would undermine the search for more energy efficiency as part of a world of carbonation. “It’s clear that the current pricing has changed,” said Jorge Cantallopts, director of research and public policy at Cochilco, in an email in response to questions. “But there is still no sign of any change in the substitution trend.” Cost Control Of course, the rally in copper has yet to continue, and substitution may accelerate as prices rise to $ 12,000 per ton. This is the level that Concord Resources Ltd. is needed to encourage miners to invest in new production, provided governments implement plans for greater electrification. However, the trading house also predicts a sharp rise in aluminum prices. In a largely inflationary environment for raw materials, manufacturers could instead look for other ways to control costs. Hedging prices near all-time highs could be a bitter pill for manufacturers to swallow, but some large copper consumers are already doing so in hopes of passing the cost on to end users. And as usage will increase in sectors like green energy, they may feel safer than last time, when Europe was in deep debt crisis and the US economy was flat. Similarly, copper sales volumes lost through substitution may be less noticeable in an environment where demand for end users is increasing sharply overall. So bulls can be confident that substitution is hardly endangering the copper rally, but prices are rising rapidly. However, discussions about the long-term consequences for consumers are becoming more and more urgent: “Substitution is one of the things that keep commodity markets and copper in particular honest “Said Colin Hamilton, director of commodities research at BMO Capital Markets, over the phone. “It would only happen if the quota is high, but it’s one of those tests and considerations that means that the commodity markets always regulate themselves.” For more articles like this, please visit us at bloomberg.com. Subscribe to us now to stay ahead of your trusted source of business news. © 2021 Bloomberg LP

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