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Copyright © DMM Advisory Group
Global Substitution Indicators
Krisztina Kalman-Schueler
Copyright © DMM Advisory Group
Legal Statement and Disclaimer
The purpose of the information in this presentation is to guide ICA programs and provide members with information to make independent business decisions.
• The information contained in this presentation has been prepared using information available to DMM Advisory Ltd. at the time of preparation and through carefully selected external information sources, but makes no warranty as to the accuracy of the information from these sources.
• Any forward looking statements in this presentation have been prepared on the basis of a number of assumptions, which may prove to be incorrect in the future. Forward looking statements, by nature, involve risk and uncertainty, and DMM Advisory Ltd. specifically warns against business decisions solely relied upon recommendation or forecasts DMM Advisory Ltd. presents in this document.
• The purpose of this presentation is to provide an educated view on likely future scenarios, which need to be further explored by the users of the information provided.
Copyright © DMM Advisory Group
Antitrust Guidelines
The following guidelines with respect to compliance with antitrust laws of the United States, Japan and European Community1 are intended to govern the conduct of participants in copper industry trade association meetings, both at the meeting itself and in informal discussions before or after the formal meeting.
Price: Competitors should not discuss future prices (including terms of sale) of their products. There is no blanket prohibition against the mention of or reference to current or past prices but limits must be observed. Such references or mentions should occur only when necessary in connection with the development of association programs. For example, reference to a particular price level in comparing the cost of a copper product to a competing product is permitted. Whenever possible, such references should be discussed in advance with legal counsel.
Competitive Information: Competitors should not discuss the market share of a particular copper producer or copper fabricator’s products. Furthermore, nothing should be said at a meeting which could be interpreted as suggesting prearranged market shares for such products or producer production levels. The overall market share of copper products may be discussed with regard to competition with non-copper products and general market acceptance.
New Products: Competitors should not encourage or discourage the introduction of a new product by another competitor or reveal a particular copper company’s plans to change the production rate of an existing product or to introduce a new product. No company should disclose to another company whether it is in a position to make or market a new product. New products may be discussed in a technical manner or from the standpoints of competition with non-copper products and general market acceptance. In addition, proposed methods for and results of field and laboratory testing can be considered.
The Role of Legal Counsel: Legal counsel attends association meetings to advise association staff and other meeting attendees regarding the antitrust laws and to see that none of the matters discussed or materials distributed raise even the appearance of antitrust improprieties. During the course of a meeting, if counsel believes that the discussion is turning to a sensitive or inappropriate subject, counsel will express that belief and request that the attendees return the discussion to a less sensitive area.
A paper entitled ‘Copper Industry Trade Associations and Antritrust Laws’ is available upon request.
10/92, 5/93, 10/10
1. Other foreign competition laws apply to International Copper Association, Ltd. (ICA)’s activities worldwide.
Copyright © DMM Advisory Group
Summary
• In 2018, substitution remained relatively low.
• As an aggregated impact of substitution loss and gain, net substitution has increased by 7.6%, but stayed relatively stable at 0.8% of the copper use in 2018.
• ‘Loss’ to miniaturization has declined by 16.9% and the total loss (substitution and miniaturization) stands at 1.2% of the copper use in 2018.
• Over the next five years, a very gradual increase of substitution and miniaturization is expected.
• In the current cost environment, substitution is stronger where alternative materials offer performance advantages and lower price, and where the material costs are a larger % share of the total costs.
• Key factors impacting substitution are relative material costs, copper price volatility, relative material weight, regulations/standards and new technologies.
• Energy efficiency standards have a strong positive impact on the preference for copper in electrical applications where aluminum generally underperforms.
• Building, electric and fire standards also continue to favour the use of copper in wiring.
• Miniaturization is ongoing, mainly driven by redesign cycles and new technologies. However, copper based miniaturization solutions generally offer a strong defence against substitution.
• China, the largest copper use region, has a preference for copper in electrical applications as it focuses on trusted materials delivering quality.
• Electrification, higher energy efficiency requirements and e-mobility hold large growth opportunities for copper over the next few years.
Copyright © DMM Advisory Group
Examples of Companies Interviewed
Fabricators: 29 OEMs: 14 End users, trade
associations, experts: 19
Copyright © DMM Advisory Group
Core Measures of Substitution and Miniaturization
Copper use - Substitution Loss + Substitution Gain = Net Substitution Net Substitution as a % of Copper Use Net Substitution - Loss to Miniaturization
= Total Loss Total Loss as a % of Copper Use.
Copper Use 2018 is the copper volume used in an application in 2018.
Potential copper use lost in the application as copper was substituted by competing materials e.g. aluminum, plastics.
Explanation
Based on certain factors, such as regulation, copper gained market share and copper use against competing materials.
The sum of the Substitution Loss and Gain is Net Substitution in 2018.
Products are becoming smaller and more efficient, reducing the volume of copper used. Copper is still used in the application.
The sum of the Net Substitution and the Loss to Miniaturization is the Total Loss in 2018.
Copyright © DMM Advisory Group
In 2018, Substitution and miniaturization Loss Remained Low at 1.2% of Global Use
-11
1
-12
3
-12
6
-12
7
-13
0
-12
7
-12
0
-11
2
-12
1
-10
1
32 34 32 32 29 48 77 84 86
48
-48
5 -3
99
-48
2
-42
0
-39
8
-38
5
-37
1
-33
0
-31
1
-29
0
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
-700
-600
-500
-400
-300
-200
-100
0
100
200
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Substitution Loss, Gain and Loss to Miniaturization - in kt and % of Copper Use in 2018
Substitution loss and miniaturization have declined in 2018 mainly due to the stable relative costs, as at this level OEMs and manufacturers are not motivated to increase substitution.
Interview quotes: “There is not enough motivation to change copper to aluminum at these prices, however, more cost pressure will (likely) change the view.”
”Miniaturization is mainly technology-driven and difficult to prevent.”
Net Substitution Change 2017-18: +7.6%
Change 2017-18: -16.9%
Status 2018: 0.8% of Copper Use
Loss to Miniaturization
Substitution Loss
Substitution Gain
Net Substitution as % of Copper Use
Total Loss (Substitution and Miniaturization) as % of Copper Use
Status 2018: 1.2% of Copper Use
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.0 0%
0
10
20
30
40
50
60
70
80
90
100
200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8
0.8%
1.2%
Copyright © DMM Advisory Group
-140
-120
-100
-80
-60
-40
-20
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
8
Low Voltage Energy Cables
Cu Alloy PSSF
RBS, Bare Wires
Copper Tube
Winding Wires
Power Cables
Other Products
Telecom Data Cables
Total Loss (Substitution and Miniaturization) by Copper Products 2009–2018 in kt
Total Loss has Declined for Many Copper Products
Copyright © DMM Advisory Group 9
32 34 32 32 29 48 77
84 86
48
-11
1
-12
3
-12
6
-12
7
-13
0
-12
7
-12
0
-11
2
-12
1
-10
1
-48
5
-39
9
-48
2
-42
0
-39
8
-38
5
-37
1
-33
0
-31
1
-29
0
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
-700
-600
-500
-400
-300
-200
-100
0
100
200
Substitution Loss, Gain and the Loss to Miniaturization 2018 in kt and % of Copper Use
Interview Quote: “Energy transition holds huge opportunities for copper but may also lead to an increase in substitution and miniaturization.”
* Forecast
Loss to Miniaturization
Substitution Loss
Substitution Gain
Net Substitution as % of Copper Use
Total Loss (Substitution and Miniaturization) as % of Copper Use
• Electrification and e-mobility will increase demand for electrical applications, driving copper prices higher and possibly increasing substitution.
• New technologies will continue miniaturization.
Substitution Expected to Stabilize Before Gradually Increasing
Copyright © DMM Advisory Group 10
Copper Tubes
Low Voltage Energy cables
RBS, Bare Wire Cu/Alloy PSSFs
Copper Tube
Winding Wire
Power Cables
Alloy and Other Products
Telecom Data Cables
Distribution of Net Material Substitution by Copper Products 2018 (% of Total)
26%
17%
Net Material Substitution by products 2017–2018 in kt
Te
leco
m
Dat
a c
able
s
15%
14%
10%
8%
7% 2% -66.9 -62.3
-33.6 -42.0
-25.5 -35.5
-22.1
-35.0 -29.1
-25.0 -19.8
-19.8 -18.5
-18.0 -10.0
-4.8
-250.0
-200.0
-150.0
-100.0
-50.0
0.0
2017 2018
Total: 225kt Total: 242kt
Total: 242kt
Substitution Share
Copyright © DMM Advisory Group 11
23% 2%
9%
16%
15% 2%
14%
7%
22%
14%
26%
14%
12%
17% 18%
10%
10% 31%
7%
8%
5% 4%
14%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Copper Use Net Substitution LossLoss to
Miniaturisation
Telecom / Data Cable
Bare Cu Wire & RBS
Copper Tube
Winding Wire
Other Alloys and Products
Cu / Alloy PSSF
Power Cable
Low Voltage Energy Cable
Comparison of Copper Use, Net Substitution and Loss to Miniaturization by Copper Products in 2018 (% of Total)
Interview Quote: “Miniaturization is a good remedy against substitution. Copper is the better material for many applications and if new copper-based technologies allow miniaturization, there is no strong need for substitution.”
Total: 242kt Total: 28,920kt* Total: 101kt
* Forecast
Substitution and Miniaturization Occur Across the Market
Copyright © DMM Advisory Group 12
Distribution of Substitution Loss, Gain and Loss to Miniaturization to Geographic Regions 2018 (in kt and % of Total)
Regions with strong cost pressure will have higher % Net Substitution on Copper Use.
Loss to Miniaturization
Substitution Loss
Substitution Gain
Net Substitution as % of Copper Use
Total Loss (Substitution and Miniaturization) as % of Copper Use
China’s Net Substitution as % of Copper Use is at 0.6%. This is lower than in other regions.
-47 -15 -13 -8 -10 -4 -4
-108
-46 -37 -38 -24
-19 -17
20 6 10
3 5 2 2
-0.6%
-1.0% -0.7%
-1.3%
-0.8%
-1.3%
-1.1%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
-165
-145
-125
-105
-85
-65
-45
-25
-5
15
China OtherAsia/Australia
EuropeanUnion
NorthAmerica
North-EastAsia
Other Europe/ FSU / Africa
Latin America
-1.0%
-1.4%
-1.1% -1.3% -1.3%
-1.6% -1.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0 %
China Contributes Most to Substitution and Miniaturization in Absolute Terms but Least as a % of Use
Copyright © DMM Advisory Group 13
China Substitution Loss, Gain and Loss to Miniaturization 2014–2018 (in kt and % of Copper Use)
Loss to Miniaturization
Substitution Loss
Substitution Gain
Net Substitution as % of Copper Use
Regional Substitution Factors in China
• China’s approach to substitution is not only dominated by drivers usual in other regions. Factors such as social responsibility and long investment horizon play a key role in substitution decisions, especially for state-owned utilities.
• Tradition strongly impacts material decisions in China ,with a high threshold for substituting copper, the trusted and proven material.
• The relatively tight structure of urban areas in China also creates a preference for copper in electric wiring and cabling.
• In the Chinese A/C market, the widely used dual heating and cooling units restrict substitution of copper HEX tubes.
• Expected cost pressure in the coming years will reduce Chinese manufacturers’ and OEMs’ preference for copper. At the same time, tradition, quality requirements and a focus on reducing failure risks will restrict copper substitution in China.
-54 -52 -50 -55 -47
-148 -145
-131 -120
-108
21 32 34 39
20
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
-250
-200
-150
-100
-50
0
50
2014 2015 2016 2017 2018
China’s Preference for Copper is Driven by Focus on Quality and Tradition
Copyright © DMM Advisory Group 14
Net Substitution by Materials as % of Total Substitution
25
%
37
%
33
%
39
%
51
%
55
%
52
%
58
%
58
%
57
%
57
%
57
%
54
%
53
%
18
%
18
%
21
%
20
%
15
%
16
%
18
%
16
%
18
%
20
%
22
%
21
%
22
%
20
%
32
%
27
%
26
%
21
%
15
%
15
%
16
%
14
%
13
%
14
%
14
%
13
%
14
%
12
%
25
%
17
%
20
%
20
%
18
%
15
%
14
%
11
%
10
%
8%
8%
9%
9%
14
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Aluminium Various other Plastics Optic fibre/WiFi
Interview Quotes: “Copper is better than aluminum for electric and thermal conductivity, but aluminum-based technologies are (attempting) to close the performance gap.”
“New materials bring new improved technologies.”
Total: 242kt
Material Alternatives
um
Copyright © DMM Advisory Group 15
Main drivers or constraining factors of substitution and miniaturization:
• Building wires: building regulations.
• Automotive Wires: fuel efficiency and the related relative weight, footprint and flexibility of the material.
• Power Cables: relative costs, electric conductivity and cost pressure from utilities.
• Telecom/Data Cables: technology change.
• Winding wires: relative costs, energy efficiency regulations, new electric motor types, strength, flexibility of the material.
Interview Quotes: “Fuel efficiency objectives put extreme pressure on automotive manufacturers to reduce weight. Reducing weight is sometimes even more important than saving costs.”
“If technology improvements bring material reduction and improved performance, there is no need to substitute copper with aluminum.”
Very important Important Relevant Applicable Not relevant
Relative
material
costs
Relative
weight
Relative
Footprint
Relative
Material
Flexibility
Relative
Material
Strenght
Relative
Conductivit
y
Technology
/Connectiv
ity with
Other
Systems
Regulatory
pressure
Pressure
from
OEMs/end
users
Low Voltage Energy Cable
Building Wire
Automotive Wire
Equipment Wire
Power Cable
Industrial Power Cable
Utility Power Cable
Telecom / Data Cable
External Telecom Cable
Internal Telecom/Data Cable
Winding Wire
Electric Motors
Transformers
Other Winding Wire
Factors influencing material decisisons
Color code:
Factors and Influences 1
Copyright © DMM Advisory Group 16
Main drivers or inhibitors of substitution and miniaturization
• RBS/Bare Wire: relative costs, connecting technology in busbars
• Cu/Alloy PSSF: Relative conductivity, flexibility and strength of the materials
• Plumbing Tube: technology change to PEX (plastics). Relative costs and pressure from construction companies/plumbers
• Industrial Copper Tube: relative costs, weight, footprint, aluminum microchannel technology
• Alloys and Other Products: relative costs, safety and health regulations and strength of the material
Relative
material
costs
Relative
weight
Relative
Footprint
Relative
Material
Flexibility
Relative
Material
Strenght
Relative
Conductivit
y
Technology
/Connectiv
ity with
Other
Systems
Regulatory
pressure
Pressure
from
OEMs/end
users
Bare Cu Wire & RBS
Copper Rods Bars and Sections
Bare Wire
Cu / Alloy Plate, Sheet, Strips and Foil
Electrical / Electronic PSSF
Other PSSF
Copper Tube
Plumbing Tube
Industrial Tube
Other Products
Alloy RBS
Alloy Tube
Alloy Wire
Foundry Products
Other Non Mill Products
Factors influencing material decisisons
Interview Quotes: “Efficiency, functionality and price have been the key considerations for material selection for a Chinese motor producer.”
Very important Important Relevant Applicable Not relevantColor code:
Factors and Influences 2
Copyright © DMM Advisory Group
0
50
100
150
200
250
300
350
400
450
500
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan
-05
Jun
-05
No
v-0
5
Ap
r-0
6
Sep
-06
Feb
-07
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
Jul-
12
Dec
-12
May
-13
Oct
-13
Mar
-14
Au
g-1
4
Jan
-15
Jun
-15
No
v-1
5
Ap
r-1
6
Sep
-16
Feb
-17
Jul-
17
Dec
-17
May
-18
Oct
-18
Price RatioCopper-Aluminium
Price RatioCopper -Stainless SteelSS304
NetSubstitution inkt
17
Price Ratios (Cu-Al, Cu-SS304) and Net Substitution in kt
Cu-Al price ratio stabilizes at high level with annual substitution declining
Widening Cu-Al price ratio triggering substitution
Softening Cu-Al price ratio
Cu-Al price ratio stabilizes at lower level with annual substitution stable
Strong correlation coefficient copper / aluminum price ratio and Net Substitution 2010–18: +0.8
Correlation With the Copper-Aluminum Price Ratio
Copyright © DMM Advisory Group 18
Importance of Pressure from Regulations in the Material Decision (1: Not Relevant, 2: Applicable, 3:
Relevant, 4: Important, 5: Very Important)
Environmental Regulations as a Substitution Driver
• Energy efficiency standards have strong impact on the material decision in winding wire and other electric applications.
• Fuel efficiency objectives are key to all automotive parts including automotive wiring, alloy wiring and other alloy products.
• Electric mobility regulations will have a significant impact on copper use, but the impact is not yet felt other than utilities install larger capacities for an expected increase in load.
• REACH restricts the use of lead-containing brass and may have an impact on the use of plastics with food or water contact in future.
• End-of-life recycling/disposal regulations impact the construction of the units but do not seem to impact copper substitution.
• Green city/ green home concepts impact copper use and miniaturization as opposed to substitution.
Non-Environmental Regulations as Substitution Drivers
• Building, electric and fire standards constrain copper substitution and it is expected that these standards will become stricter over the next five years. N
et S
ub
stit
uti
on
as
a %
of
Co
pp
er U
se 2
01
8
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1 2 3 4 5
The importance of regulatory pressure as a substitution driver varies across copper products independently from the extent of Net Substitution Interview Quote: “We don’t have any latent substitution plans ready for
when the copper price will increase. However, it is always possible to substitute.”
Energy Efficiency Standards and Fuel Efficiency Objectives are Currently the Key Environmental Regulations Impacting Substitution
Copyright © DMM Advisory Group 19
Copper Use in 2018
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
-4% -2% 0% 2% 4% 6% 8%
Expected Future Annual Growth of Copper Use (CAGR 2018–23) in % Su
bst
itu
tio
n L
oss
as
a %
of
Co
pp
er U
se in
20
18
Auto. Wire
Telecom & Data Cables
Plumbing Tube
Winding W. in Transformers
Power Cables
E&E PSSF
RBS, Bare Wire
Alloy RBS
Building Wire
Other PSSF
E. Motors
Active development
Foundry
Ind. Tube
Alloy Wire
Adverse Growth
High expected future growth of copper use and relatively low substitution in 2018
Moderate Growth Strong Growth
Lower substitution
in 2018
Higher substitution
in 2018
The Majority of Copper Products Experienced Low Substitution in 2018 and Expect a Moderate to Strong Future Growth of Copper Use
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