Aluminum Hitches A Ride On The Strong Copper Price

Aluminum prices have risen to a three-year high but are likely to rise above the current price of $1.43 a pound as it attracts interest as an alternative to copper, which has risen deeper and faster.

Rapidly growing demand for electricity is driving growth for both metals, with copper being the most popular due to its excellent conductivity, but its rise of 170% over the past five years to $5.90/lb provides opportunities for aluminum, which is also a good conductor of electricity.

High-precision aluminum plates produced in a factory in China. Photography: Tang Ke/VCG via Getty Images)

VCG from Getty Images

Although there are no clear rules, the mining industry has long recognized that aluminum becomes attractive as an alternative to copper when the price ratio is between 3.5 and 4. Currently 4.1.

Supply and demand fundamentals for both metals are improving as the spread of electric vehicles (EVs) around the world, the rapid adoption of battery energy storage systems (BESS) and the construction boom of artificial intelligence (AI) data centers lead the electrification of everything.

When it comes to electrification, copper is the metal of choice in any case, but aluminum performs almost as well in some uses, such as power lines, and its lower price encourages substitution.

Investment bank UBS said in a research note yesterday that improving aluminum fundamentals will support higher prices.

4 rules

Morgan Stanley agreed, telling its clients that the copper/aluminum ratio was well above its 10-year average and at its highest since early 2021, when the ratio peaked at 4.3, but fell to 2.7 in early 2022 after Russia invaded Ukraine and aluminum prices surged.

A third bank, Citi, declared itself structurally bullish on aluminum, forecasting prices of $1.54/lb and copper at $6.35/lb by mid-year – a ratio of 4.1 today.

Morgan Stanley said that copper prices have strengthened recently due to U.S. supply disruptions and tight inventories outside the United States, and as buyers look for alternatives to high-cost copper, aluminum prices are likely to move higher through increased substitution.

“Replacing aluminum with copper becomes economically attractive when the ratio exceeds 3.5 to 4, typically in applications such as heating and air conditioning, power transmission lines and high-voltage cables for electric vehicles,” Morgan Stanley said.

Aluminum, a metal that has been in excess supply for the past few years, is expected to enter a shortage starting later this year due to increased demand and tight supply, with few new sources of the metal being developed.

Morgan Stanley said that in addition to Indonesia’s abundant low-cost coal power, there are a growing number of forces that are challenging new supplies, but there are restrictions everywhere.

competition for energy

“Competition for electricity is a key supply constraint,” the bank said. “The advent of AI and data centers means aluminum is now competing with AI for power.”

Norway’s Norsk Hydro is the bank’s preferred aluminum investment company, with 80% of its forecast earnings this year expected to come from aluminum and aluminum extrusions.

Two Australian diversified mining companies, South32 and Rio Tinto, are also beneficiaries of rising aluminum and copper prices. 70% of South32’s revenue comes from the aluminum value chain.