High copper prices motivating use of substitutes

Friday, April 7, 2006

The high price of copper will increase the consumption of alternative products like aluminum and plastic in the medium to long term, Leonardo Suárez, chief economist at Chilean brokerage Larrain Vial told BNamericas.

But he stressed that "you must take into account that these substitutes will depend upon other raw materials that have also risen in price, for example plastics (like polyethylene and PVC) that are made from oil."

Meanwhile aluminum already is competing against copper and is established on the market as in the case of high voltage transmission lines. But for now Vial does not think that aluminum should worry the market.

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The issue attracted a great deal of discussion during the 5th World Copper Conference in Santiago, Chile, on April 5-6.

Copper prices hit an all-time high on the London Metal Exchange (LME) April 7 of US$2.64/lb. Aluminum prices also are high at US$1.16/lb on the LME.

Ricardo Morales, senior consultant at the business analysis and consultancy CRU, also thinks that aluminum already is crossing over into the automotive industry, which poses concern about the future price of aluminum.

"Here the relevant issue is which material will substitute [copper] and whether the prices of the substitutes are less volatile or less inflated than copper in this commodities market where no product is exempt from a price increase," he said.

Even miners expressed concern about the price, as Rio Tinto's (NYSE: RTP) chief executive of copper and exploration, Tom Albanese, told reporters that substitution is a real issue.

"At these prices we are sensitized to the fact that consumers of copper begin to look at substituting with other products, so we may see some risks to demand," he said at the copper conference.

Opportunities exist for substituting copper in areas like plumbing, "recognizing that many of the substitutes for copper - whether it's plastics for plumbing or aluminum for power - also have been going up in price," he said.

Meanwhile Chile's former mining minister Alfonso Dulanto expressed concerned, saying: "It's impossible that with the price of copper at US$2.50/lb there won't be people thinking about making aluminum radiators for cars or using more aluminum cables in houses."

"There is no doubt that there will be a strong tendency toward substitution and the industry will have to live with it," he added.

Tiberio Dall'Olio, CEO of Chilean copper products manufacturer Madeco, said that 2006 aluminum sales will be stronger because many electric companies calculate spending based on copper and aluminum conductors.

He pointed out that there has been a considerable increase of aluminum products on the market and that in 2005 tube substitution was clearly visible. "Substitution exists and we can't be against it, but we have to look for alternatives. There is a danger that the substitution could become permanent," he said.


According to Suárez, Chile needs more education and research centers in the areas of copper use, "and above everything it needs graduate students who are capable of developing new technologies."

Dulanto said it is important to promote the uses of copper and generate new applications through the Copper Development Association, which focuses on the issue.

"This is a concern that only comes up when prices are low," he said. "Everyone worries about consuming more, but maybe we need to do just the opposite when the price is high enough that we are able to balance supply and demand."

But he said that the copper industry will have to adapt at some point in the future to losing a piece of its demand.