London, 16 February 2011

Copper prices are becoming "unacceptable" and substitution of the metal is gathering pace in some uses, UK copper products distributor Cubralco said after the metal hit a record high $10,190 a tonne on Tuesday. Copper for three-months delivery on the London Metal Exchange this year breached $10,000 a tonne for the first time, extending a rally that has lifted prices more than 200 percent since late 2008 and stoked worries about demand destruction.

"$10,000 is a big milestone," said Chris Egginton, managing director of the supplier of copper tube, coils and fittings for domestic, industrial and engineering applications. The threat of substitution of copper in building products remained, he said. "For areas where there is possible substitution, it is gathering pace."

Aluminium and plastic, both cheaper than copper, are major beneficiaries of substitution of the metal used in power and construction. Aluminium, currently trading at around $2,500 a tonne, is a quarter of the price of copper.

In copper's defence, however, the metal's unrivalled conductivity means it can be all but irreplaceable in some electrical applications.

Copper applications most under threat, Egginton said, were plumbing tube, roofing and uses in the refridgeration and airconditioning installation industry, which he said were all being substituted out quite strongly now.

"This morning I've already had three conversations with customers who are looking at alternatives," he said, adding one of these customers was seeking roofing applications and the other two plumbing tubes uses of copper.

"UNACCEPTABLE" PRICES

At levels above $10,000 a tonne, copper is currently priced above 6,000 pounds a tonne in the UK, a level which is "considered unacceptable," Egginton said. "That's what people are thinking, it's just hugely over-priced," he added. The market is betting on copper holding strong for now, as robust demand from top metals consumer China and supply constraints -- such as falling ore grades in top producer Chile and project setbacks worldwide -- support prices.

Manufacturers, too, are feeling the heat of high prices. "I've had manufacturers of the products we sell offering alternatives to copper," Egginton said. Roofing copper, which used to be a very traditional building product in Europe and the UK, is being increasingly substituted out for zinc and other coated metals, he added.

LME Zinc , like aluminium, was last at around $2,500 a tonne. "I think we will see copper being very volatile," he added, looking ahead. "We could see copper rise another 20 or 30 percent from here, (but) it could quite easily come back as well," Egginton said, adding the price had been fuelled by speculation not by physical demand. "It's an everyday occurrence," he said of substitution. "We're getting it all the time."

High copper means shorter payment terms need

Record high copper prices mean payment terms with end-users need to be shortened, Swedish copper fabricator Elektrokoppar said on Tuesday. Copper for three-month delivery on the London Metal Exchange hit a record high of $10,190 a tonne on Tuesday.

The copper price looks set to stay robust, with the market expecting a deficit this year due to strong demand in top consumer China, global labour issues and falling ore grades in top producing countries such as Chile.

"With end-users it has been a necessity to shorten payment terms," said Astor Brorsson, head of marketing, sales and metal procurement at the major European copper wire rod producer.

"With the high copper prices, fabricators cannot act as bankers and therefore we have shortened payment terms by nearly 50 percent compared to last year to customers," he told Reuters.

He said Elektrokoppar had decided to cut production, reducing the stock level needed to be financed. He said this was not due to financial constraints.

"Due to the high copper price, we have made a decision to reduce production, so we are cutting the production on semis on low-added value products," he said.

"It's about a 20 percent reduction in production of the copper wire rod compared to the previous year ... In the main rod mill we have gone down from 4 shifts to 3 shifts." The changes will come into place at the end of the month.

"We strategically have decided to cover the north European market rather than selling on other markets with high freight rates and high financing costs when the copper price is about $10,000," he said.

"The high price is of course difficult for all fabricators." He added demand in Europe was still "good", seeing a 3 percent rise in the first quarter from the last quarter in 2010.

Commodities are benefiting from the global recovery but investors are keeping an eye on any potential monetary breaks that could affect demand. "If there will be changes, will the purchasing willingness from people still be there?," he said.

On Eletrokoppar's order book, he said: "The order book is similar somewhat, a little bit better than last year due to some infrastructure investments done by our customers." High prices have stoked market worries about substitution of copper by cheaper materials like plastic or aluminium.

However, its unrivalled conductivity and alternative technologies is seen ultimately limiting this trend. Brorsson said substitution was a concern for certain areas. "On high voltage cable projects for infrastructure investments, where you have a lot of copper in these kind of cables such as submarine cables for windmill park projects ... there you see changes from copper to aluminium which are due to price," he said.

Ends --

By Rebekah Curtis and Marie-Louise Gunuchian, Reuters - for Commodities Now.