Copper's record surge spurring air-con market to mull cheaper alternatives

Copper soared to all-time highs in May and remains elevated.
Copper soared to all-time highs in May and remains elevated.PHOTO: REUTERS

BEIJING (BLOOMBERG) - Copper's surge to record levels this year is spurring buyers in a key consumer market to mull cheaper alternatives, in an early sign of how high prices might destroy demand.

Consumption is at risk in air-conditioners, an industry that accounts for a sizeable portion of global copper demand. The world's top maker of the equipment, Japan's Daikin Industries, plans to replace half of the copper in its units with aluminium by 2025. And in China, a state researcher is working with the country's top home appliances groups on using more aluminium.

"The surge in commodity prices, copper in particular, is increasing cost pressures on air-conditioner manufacturers," Mr Song Jingxue, director at the China Household Electric Appliance Research Institute, said by phone. "They can hardly pass that to consumers given low product differentiation, so many of them are considering aluminium as a cheaper option."

Air-conditioners have long been a key destination for copper. In China, the machines make up a big part of the 15 per cent of copper demand that goes to home appliances.

Copper soared to all-time highs in May - and remains elevated - amid speculation that a wave of demand from new energy sectors will leave buyers short and push prices much higher in coming years. That is part of sweeping gains for commodities that pushed China's factory-gate inflation to the highest in 13 years in August, squeezing manufacturers.

While aluminium has also surged, the moves to cut reliance on copper reflect how they are preparing for long-term risks. Copper accounts for about 20 per cent to 30 per cent of the cost of making an air-con, according to the Chinese institute.

Shifting preferences

Daikin has used aluminium in some machines since 2013 and plans to accelerate the shift given surging copper costs, spokesman Takashi Abe said. It makes more than 10 per cent of the world's air-cons and currently uses about 90,000 tonnes of copper a year.

Fujitsu General, another Japanese producer, is also taking steps to make key copper-intensive parts such as heat exchangers from aluminium, spokesman Takeshi Tobari said.

Copper is usually preferred because of its high conductivity for heat and electricity, but aluminium has its merits, including lower weight and, typically, lower cost. Copper prices above US$10,000 (S$13,400) a tonne will accelerate efforts at substitution, with heating, cooling and cabling applications at greatest risk, financial services firm Morgan Stanley said in May.

There is not much room for copper to fall given the coming demand boom in industries like electric vehicles, according to Daikin.

Mr Song's institute in Beijing is setting up a working group with leading air-con producers, including Gree Electric Appliances and Haier Smart Home, to promote the use of aluminium in heat exchangers. In China, aluminium is only used in small parts and in some exported products.

Gree and Haier said they had no specific plans to boost aluminium use, in a response to Bloomberg News inquiries.

The biggest obstacle to aluminium adoption, according to Mr Song, is resistance from air-con buyers, because they tend to prefer copper-based machines. This was an issue during previous copper booms in 2005 and 2011, which also drove talk of substitution, he said.

"People tend to think copper is stronger than aluminium, as an expensive material is always deemed as better in quality," said Mr Song. Plans for substitution "may still take a relatively long time to fulfil given these market hurdles".