Aluminium Prices Move Up
The price of aluminium has also increased over the last three years but the movement in the aluminium price has not been anywhere near as dramatic as the upward trend in the copper price. In the aluminium market the risks of supply disruptions are less important than they are for copper, but the aluminium price nevertheless moved upwards in 2006 – apparently in sympathy with the copper price. The aluminium price peaked at US$3,300/tonne in May (LME 3 month). There were times in the 1990s when the aluminium price was in the region of US$2,000/tonne, so the recent peak is not as extreme as has been experienced in the copper market.
Main Aluminium Costs in Smelting
There are some fundamental differences between the economics of the copper and aluminium industries that explain why supply constraints are generally less important for aluminium than they are for copper. Most of the total added value (76%) generated in production of aluminium arises in smelting, rather than extraction of bauxite / alumina. The raw material is abundant, and the main element of cost is electricity used in refining. Taking a long-term view, real aluminium prices have been falling as the production process has become more efficient. Over the last 25 years the typical scale of a new aluminium smelter has risen from 100,000 tonnes/year to 500,000 tonnes/year.
Global Aluminium Consumption Grows
Unlike copper, where wire & cable applications account for more than half of overall consumption, the majority of aluminium is used in non-cable applications. Over 2005 and 2006 global aluminium consumption has been increasing by 5% to 6% per year, a slower growth rate than the previous two years (8% to 10% per year). Consumption growth of approximately 5% per year is likely to continue over the next few years. Consumption in China will account for more than half of the additional aluminium demand. China has been expanding aluminium capacity and has become a large producer of primary aluminium. Despite growth in Chinese demand, the country is actually a net exporter of aluminium. This is in sharp contrast to copper, as China has been importing large amounts of refined copper and copper scrap to keep pace with the growth in its consumption.
Copper Aluminium Price Differential
Over the five-year period up to the end of 2003, the ratio of the copper price to the aluminium price (“Cu/Al price ratio”) moved in a limited range, between 1.1 and 1.3. In the early 1990s the ratio was above 2.0 for a brief time, but this situation did not recur until H2 2005. During recent months the Cu/Al ratio has jumped even higher, at times approaching 3.0. As explained later, for many applications, in order to get a fairer comparison between the metals in terms of conductance, the aluminium price per tonne should be divided by 2.0, so the cost advantage in favour of aluminium is even larger than the simple price comparison implies.