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Copper price is flying too close to the sun - WoodMac

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(Kitco News) - Like the Greek legend, the copper market appears to have flown too close to the sun in its historic rise to record levels. Now, prices are falling back down to earth, according to one research firm.

In a report published Tuesday, Julian Kettle, senior vice president and vice-chair of metals and mining at Wood Mackenzie, warned investors not to chase copper prices as the current rally could significantly damage the market's long-term growth.

The Kettle's warning comes as copper prices have fallen sharply, down nearly 6% from their recent record highs, and are testing important support above $4.50 a pound.

July high-grade copper futures last traded at $4.59 a pound, down nearly 3% on the day.

The rally in copper has been driven by a major supply crunch in the marketplace. Demand for copper has seen significant growth as nations look to upgrade their electrical infrastructure as part of the growing green energy transition; at the same time, mine supply has been unable to keep up with this demand.

However, Kettle noted that as prices increase, there is a growing risk of substitution and thrifting among manufacturers.

"In the last supercycle, the copper industry was unable to keep up with China's insatiable demand, with the result that prices initially moved sharply higher. However, subsequent substitution in the form of switching, thrifting and 'lost growth' led to the copper market losing 2% or 400-500 kt per year of demand to aluminum when prices were above US$3 per lb," he said.

Kettle added that many forecasters ignore the fact that aluminum can be an effective substitute for copper.

"While aluminum's conductivity is some 40% below that of copper, it does possess attractive properties not least its density, which is just 30% of that of copper. This means that an aluminum cable is around 52% of the weight of a copper cable with the same conductivity, a property offering handling and installation benefits," he said.

"While copper is the metal with the best technical characteristics, once economics are brought into the equation, its superiority is far less clear cut. In fact, given its lower cost, aluminum wins out against copper under virtually any realistic long-term price scenario," he added.

Kettle added that if recent short-term price projections for copper to rise above $5 a pound prove to be accurate, it could create long-term damage to the market, especially if aluminum prices don't follow suit.

Although aluminum prices have seen a sharp rally this year, prices are still far from reaching record highs. Like copper, aluminum is seeing some selling pressure. Aluminum futures on the LME last traded at $2,426.50 a tonne, down 2% on the day.

"So it seems appropriate to draw upon Greek mythology: when Icarus ignored Daedalus's instructions not to fly too close to the sun, the wax in his wings melted and he tumbled out of the sky. While I am no Daedalus, I believe stakeholders would do well to heed the warning that excessively high prices for copper will not be good for the metal in the long term," he said.

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