Aluminium is the clear winner in the game of substitution with copper

While the opportunity varies by application, aluminium is the clear winner in the game of substitution with copper and to a much lesser extent steel, likely to bear the largest brunt of aluminum's gain. While the market opportunity for aluminium as a replacement for steel is much larger than as a substitute for copper, the steel sector dwarfs the base metals in size and thus is unlikely to feel as great of a hit.

Aluminium should make the most headway in the automotive industry as a replacement for both cabling and vehicle bodies. In our view, energy prices are the largest hindrance to aluminium when it comes to more environmentally friendly applications. Wind turbines, solar panels and hybrid cars are all likely to stick with copper for their wiring as efficient energy transfer is paramount in such applications. However we think the metal markets are probably not the only place aluminium is likely to gain some share. For example, aluminium is recently attracting more attention as a substitute for plastic and glass in the packaging sector, particularly in emerging economies.

Within the aluminium sector, we don't think any of the major players Alcoa, Rio Tinto, UC Rusal, Hydro, Aluminium Corporation of China have a particular unique edge to take advantage of these trends at the expense of peers. Aluminum's high value and weight ratio makes it a globally traded product and its standardized price as traded on the London Metals Exchange, reflects changes in consumption all over the world. But we think our view of the substitution potential fits with the narrative that aluminium producers give on the direction of the market. Alcoa expects the size of the aluminium market to double to more than 80 million tonnes by 2020. We think the company is banking on some support from substitution to meet this target rather than pure growth in its traditional end markets.

Among steelmakers, those that make flat-rolled steel largely for the automotive and appliance sectors are most likely to feel the pressure from aluminium substitution, but not enough to materially threaten their sales in the next decade. Copper is similar to aluminium in that it is a globally traded product with standardized pricing, and thus we think the substitution burden will be equally shared by copper producers. The direction of copper prices relative to aluminium will play a big role as to the long term impact on the market for copper.

Retooling requires new equipment and new processes that carry risks, and manufacturers are generally resistant to take a chance on a path less travelled. But if the spread in metal prices was enough to initiate some of this change in cable and wiring applications, there likely will be an even quicker reaction back to the tried-and-true metal should historical pricing patterns resurface. So while copper is the most at risk, it also has the greatest likelihood to maintain its market position, as the decision to use aluminium in place of copper hinges more on flexible prices than rigid regulations and climate change initiatives as is the case with steel.