Thursday, March 17, 2011

WSJ: Record Copper Prices Prompt Switch to Aluminum

Copper is probably the most watched of the commodities for those with a macro economic bent; we've outlined in countless pieces its label as "Doctor Copper" as a marker of industrial health.   Hence its recent pullback in price had caused some concern.....

Rather than a copper ETF, the company Freeport McMoran & Gold (FCX) - which is mostly a copper company despite the name - has become the de facto instrument of copper speculation by the fast money crowd, especially of the hedge kind.  You can see the stock fell off sharply over the past month. 

FCX is now either dead cat bouncing or about to embark on a larger move up, mostly (it appears) based on the new hot thesis - that is "Japan rebuild".  Nevermind we are not even at "Japan containment" yet... speculators need a hot theme, and this one sounds lovely.  Remember, in the market - at least in the shorter run - a thesis need not be correct, as long as enough people believe in it and drive prices en masse in the same direction.  Keep an eye on this name, because if it breaks over this next level of resistance the fast money crowd will begin to cluck everything's back on track.  Too soon to tell where it is headed as it's still in the "making lower highs" mode.

Despite the historical "Doctor Copper" label, I've contended that like most commodities, copper prices are now more an indication of whether China is sucking it up in "huge" quantities or just "large" quantities - rather than a signal on global economic health -  as that country has become the world's marginal buyer.  Perhaps China is successfully slowing down its economy and/or prices finally reached a point where "no mas" was in order. The WSJ has an article on how copper prices have now reached a point a substitution effect with aluminum is now possible.

  • 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.
  • Markets ripe for the switch include wiring for automobiles and buildings and evaporator and condensing coils used in commercial refrigerators.
  • 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.
  • 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.
  • 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 PLC. 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.
  • 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%.
  • The head of the world's largest private-sector copper producer, Freeport-McMoRan Copper & Gold Inc., 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. 
No position

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