Low profit margins in the refined copper business and restrictions in global scrap flows have attracted large segments of the market in Europe and Asia to diversify into cheaper equivalent grade (EQ) copper cathodes despite greater risks related to financing difficulties and unreliability of supply.
EQ grade copper cathodes refer to those that conform to grade A copper cathode specifications as described by the London Metal Exchange but are not registered and thus cannot be delivered onto any exchanges - this includes the United States' CME Group and the Shanghai Futures Exchange, which follow the same norms.
After a period of market consultation earlier this year, Fastmarkets
launched fortnightly price assessments for EQ copper cathodes on a cif Europe and cif Shanghai basis in November.
Fastmarkets assessed the
copper EQ cathode premium, cif Europe at $25-35 per tonne on November 19, while the
copper EQ cathode premium, cif Shanghai was slightly lower at $15-25 per tonne.
This compares with the
copper cathode grade A cathode premiums cif Rotterdam at $40-50 per tonne on the same day, unchanged since June 11. Fastmarkets'
copper grade A cathode premium, cif Shanghai stood at $62-73 per tonne.
Consumers seeking to offset low margins caused by weak end-user demand, slowing economic growth and increased regulatory and environmental pressure, have embraced cheaper EQ cathode material while trying to match quality requirements.
Traders have done the same, incentivized by the fact grade A cathode trading no longer generates the same returns as in the past, when premiums were very volatile and financing demand was booming. This trading advantage ended after the Qingdao warehouse fraud of 2014 and the nickel warehouse receipt forgery of 2017, with demand now more closely tied to actual end use in the power, construction and auto sectors.
"Actual demand is a key factor for EQ business," a Beijing-based copper trader told Fastmarkets. "End users are the main buyers of the material, [because] they are not registered and can't be delivered onto an exchange."
With more bankruptcies and defaults in recent years - including Kyen Resources trading house this year - market participants have highlighted that international banks are reluctant to finance EQ cathodes because there is no physical delivery back-up option. In summary, should any party to the trade default, the bank cannot guarantee some revenues by warranting the material onto an exchange.
"Popularity is increasing, market participants are buying EQ cathodes at much lower rates [compared with grade A cathodes], but it's worth noting that the material comes with less reliability," a European-based copper trader observed.
Production of EQ cathodes often takes place in sites where no LME-registered material is produced, with a substantial amount coming out of the Democratic Republic of Congo (DRC).
Both EQ and off-grade cathodes - the latter not complying with LME specifications - are also produced in Zambia, where the LME's only registered African brands - Enya Holding's Chambishi Metals, Glencore's Mopani copper mines and Vedanta's Konkola copper mines - are also produced.
EQ business is far from being the "silver bullet". Market participants wonder whether EQ consumption growth patterns and greater profit margins can be maintained over the long term, with some suggesting that getting to grips with that market is a hard ask in the first place.