The New LME Cobalt Contract

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Minor Metals

The LME is due to launch their Cobalt contract shortly. Cobalt and molybdenum will be the first new metals introduced onto the exchange since steel last year but may bear more of a resemblance to aluminum introduced in 1978 or nickel in 1979. When those metals were launched there was considerable resistance from the industry. The producers in particular resented the threat to their right to set a market price, the producer price, and felt the volatility would be damaging for everyone. Cobalt has met no such resistance. The LME has worked to garner wide support from producers, consumers and the trade, and have largely been successful. The contract specifications at 99.3% purity and higher in industry consumed forms such as cathode, briquettes and powder, and traded in one ton lots packed in drums mean contracts are directly applicable to what the industry uses. Delivery points will be Rotterdam, Baltimore and Singapore according to a report given to the recent Lisbon Cobalt conference given by the LME so there is a good geographic spread for suppliers and consumers looking to take or make physical delivery.

Cobalt is not a volume product. Only some 60,000 tons per annum are traded worldwide according to the Cobalt Development Institute website. The biggest concern was whether sufficient liquidity could be generated to establish a price that was fair and representative of true supply and demand. Some comfort has been taken by the success of the Credit Suisse and Glencore Cobalt Index which has proved to be well accepted and free from manipulation. In some respects, the size of the market and limited number of players is itself a barrier to manipulation. As one industry insider commented to us, if any party takes up a sizable position on the exchange they are at considerable risk if they have to unload quickly. The cobalt market will not be as liquid as copper or aluminum. Large positions cannot be built up without the exchange authorities getting sight of it and more importantly cannot be unloaded quickly. There will just not be enough buyers to sell to. Furthermore markets like cobalt are not beyond physical manipulation anyway as happened with the Zambian market in the early 90’s. Indeed the chances of physical manipulation are probably higher than on a futures exchange.

Others are concerned that a futures exchange will introduce more speculators into what has been a relatively minor and almost totally physical market up to now. It’s true to say the major market makers will want to see greater volatility, that’s when they traditionally make their money, but the market cannot exactly be said to have been dormant over the last few years even without a futures market. The price has displayed all the volatility seen in other base and minor metals throughout this decade and will likely continue to do so with or without the LME.
What the exchange will provide is a more transparent price, hitherto the industry has relied largely on the Metal Bulletin price which is believed by many to have been distorted in the past and is not widely respected by market players.
Although the new market will allow producers and consumers to hedge their forward sales and purchases, the greatest beneficiaries will probably be the smaller processors in between who will be able to hedge the exposure on their work in process. This folio management should significantly reduce the risk smaller players will face, allowing them to lock in their profit and making the processing market generally more efficient.
So the new contract looks like it should be well received when it comes to the market next year. We will watch with interest how it is taken up by market players and the degree to which industry participants feel it strengthens their risk management strategies.

–Stuart Burns

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