Detroit 21/07/2016 - Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Detroit 21/07/2016 - Cable manufacturers have plenty of affordable and safe aluminium products to sell but many consumers remain hesitant to move away from copper.
At this week's Aluminium Wire and Cable conference here in Detroit, I learned four valuable lessons.
First, aluminium wire technology has come a long way over the past several decades. The lightweight metal is now an absolutely suitable and reliable alternative, especially for medium-voltage (MV) cables.
Second, aluminium can be significantly cheaper. For example, Southwire's XHHW-2, a 600-volt cable with a copper conductor, currently costs about $2,535 per 1,000 feet. The company's aluminium alloy AA-8176 cable costs just $900 for the same length, which is a 65-percent saving.
Installation of aluminium cables is about 15-20 percent cheaper because aluminium cables are much lighter. A 1,000 foot long 750kcmil aluminium cable weighs just 704 pounds, which is 54 percent lighter than a comparable 500kcmil copper cable that weighs 1,544 pounds.
Third, cable producers such as Southwire are fairly agnostic about which metal they put in their cables. They might make slightly better margins on copper but ultimately they are more than happy to sell copper or aluminium cable.
And fourth and most importantly, most companies still prefer to install cables with a copper core. Part of this is the negative stigma attached to aluminium ever since the metal was blamed for several fires in the 1970s. But also most engineers were taught to use copper - it's what they know and are comfortable working with.
So adding this up, I derived a thesis. There's not going to be a slow creep of aluminium penetration into MV cables. Engineers aren't going change their way of doing things for just a little savings. Copper is just too established for there to be gradual and casual substitution.
For there to be large-scale substitution, there would have to be a major price divergence between aluminium and copper. But if the price of copper were to rally dramatically, a massive wave of substitution that would happen in a very short period.
This is because the aluminium products already exist so there's not going to be an innovation lag. Wire producers can simply start feeding their machines with aluminium.
But most significantly, there's a follow-the-leader mentality in engineering. If a couple of major players decide to use aluminium in their cables, their competitors will do the same in quick fashion.
And there is some recent precedent for this in the wire and cable industry. In the 2006, the copper-to-aluminium ratio jumped to nearly 3.5-to-one from two-to-one in just a couple of months.
Substitution is possible when copper is twice as expensive as aluminium but it's only when the ratio crosses three to one does substitution between the metals gather pace.
In that year, each of the Big Three automakers in Detroit switched from copper to aluminium to power up their plants. One unnamed carmaker saved $3.5 million by wiring a Detroit area body shop and assembly plant with aluminium, according to Southwire.
But since 2011, the price of copper has dropped by about 50 percent so there's just no longer the same motivation to substitute. The copper/aluminium ratio has fallen from an all-time high of about 4.5-to-one in 2014 to below the critical three-to-one threshold earlier this year.
So this means that the market has retuned to the status quo, where most new plants will continue to install copper wiring. And it will take a strong, strong rally in copper prices to shake things up again.
(Editing by Mark Shaw)