Copper, which is selling for a near-record of more than $6 a pound, is being priced out of some markets forcing a switch by some manufacturers to aluminum.
Not all applications are suitable for a direct switch, but the price gap, measured as the copper-to-aluminum price ratio, has blown out to one of the highest on record.
From an investment perspective that means the copper boom of the past five years might have been issued a ‘best by’ notice as metal substitution kicks in.
One of the best examples of swapping aluminum for copper can be found in the latest cars produced by Ferrari and BMW which have a higher proportion of aluminum wiring, following a move started by Chinese electric vehicle makers and Tesla.
Major air-conditioning makers such as Japan’s Daikin are also trimming costs by increasing the use of aluminum.
The copper-to-aluminum ratio has a long-run average of 3.7, meaning a pound of copper is traditionally 3.7 times more expensive than aluminum.
The latest reading of the ratio is 4.3 with copper at $6.11 a pound and aluminum at $1.41/lb.
Thicker Wire Needed
A switch to aluminum is not simply financial. It also brings a weight saving though aluminum wiring needs to be thicker than copper wiring because it has only 61% of the electrical conductivity as copper.
Investment banks are watching the widening of the copper to aluminum ratio as a guide to future possible price moves as well as looking for a reversal in the current trend.
UBS said in a note to clients earlier this week that since 2020 the ratio had averaged 3.7 but over the last two months as the copper price has eased back by around 8% and aluminum has dropped by 16% the ratio has blown out to 4.3.
“A high copper to aluminum ratio could drive copper-to-aluminum substitution, providing support for aluminum demand relative to copper,” UBS said.
Mean Reversion
But the bank added that the ratio tends to mean revert, but it can take some time to do so.
“This reflects that behavioral substitution takes time to play through supply chains both from a manufacture’s perspective and from a customer preference perspective,” UBS said.
“While it is hard to identify catalysts ahead of time, we highlight that an elevated copper-to-aluminum ration rarely remains that way for long.”