Copper faces risk from China’s aluminum shift

Copper which is down heavily more than 20% from 2014 peak might face further headwinds as China is shifting from heavy copper user to aluminum user as it finds more use for the white metal.

Historically copper has been the barometer for growth and its price has been good proxy for Chinese industrial and real estate growth, now the red metal faces risk of losing its prime position.

• China's State Grid plans to replace copper with aluminum in power cables. Air condition producers are using aluminum insulators and pipes instead of copper.

It also makes sense for China's regional governments since most of Chinese cities have their own aluminum smelter, which can be run in overcapacity to reach stipulated GDP growth target.

• China is heavily reliant on Copper imports whereas aluminum resources are sufficient. China imports about 75% of its copper demand.

• Current copper prices are also high, almost 3.5 times that of aluminum, which makes the substitution profitable proposition.

This will lead to heavy demand reduction from China, and increase the likelihood of global oversupply of copper in the market.

Copper prices as well as its major producers, such as Chile, Peru face significant risk if the scenario plays out.

Copper is currently trading at $2.73/pound and is likely to go down further. Selling the rallies are recommended. Important resistance lies as $2.79 and $2.86 and $2.53 likely to provide necessary support.