Copper and aluminium battle it out for Chinese grid tenders

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The rout in commodities has seen copper and aluminium prices drop by about 20 per cent since the beginning of the year on the back of China’s slowdown. Both aluminium and copper are saddled with overcapacity, making any pockets of demand all the more sought after.

Hence the interest in this summer’s publication of national standards for aluminium alloy to be used in cables in local electricity distribution grids. China targets investment of RMB300bn in city power distribution this year alone, and RMB2tn by 2020 to keep pace with rapid urbanisation.

Cable for factories and city distribution networks currently accounts for up to 3m tonnes of copper demand a year, according to the International Copper Association.

But even if all that demand were met by aluminium alloy it would total about 1m tonnes of additional demand for aluminium, a far cry from the estimated 8m tonnes of surplus aluminium capacity in China today..

State Grid increased the disbursement of new tenders last month, in anticipation of investment in distribution grids under the upcoming five year plan.

Both industries are lobbying heavily. Substituting aluminium alloy for copper “won’t solve the overcapacity problem for aluminium and it will undermine the copper industry,” said Wu Yuneng, vice-president of Jiangxi Copper Corp, which is leading copper’s lobbying effort.

Copper has previously lost out to aluminium, when China’s State Grid adopted the lighter, cheaper aluminium for its long-distance transmission grid. But that shift happened several years ago when the economy was booming, and strong demand for air conditioners, household appliances and electronics buoyed copper prices.

The latest new standards for distribution cables are “good news” for aluminium, “but the degree to which it can help reduce overcapacity is limited, when you compare power with construction businesses and transportation,” said analyst Mo Xinda of the China Nonferrous Metals Industry Association.

It is roughly half as expensive to wire up factories with aluminium alloy, making the switch attractive for cost-conscious Chinese manufacturers. Mr Wu countered that the shift will be expensive in the long term, since aluminium alloy deteriorates faster than copper.

Typically, both industries are appealing to nationalism. Domestic aluminium smelters point out that China is a net importer of refined copper so substitution can help bolster Chinese industry and reduce imports. The copper industry counters that investments by Chinese miners overseas mean that globally, Chinese corporations control more reserves of copper ore than of bauxite, the raw material for aluminium.

Additional reporting by Owen Guo

This article has been amended following clarification from the International Copper Association of its cable market estimates

Source : http://www.ft.com/intl/cms/s/0/7be04aac-6b28-11e5-aca9-d87542bf8673.html#axzz3o3PtAzmC