Cobalt and Molybdenum go Live on the LME

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The London Metal Exchange started trading today of the long awaited cobalt and molybdenum contracts. A lot is riding on them; the exchanges previous new products, plastics and steel have been respectively a failure and at best a muted success. Plastic was removed from open cry trading this month and steel billets, currently traded as Mediterranean and Far East deliveries are to be merged as one global contract largely because volumes have not materialized as expected. Volumes reached about 3.3 million metric tons worth $1.4b since they were introduced two years ago.

According to Bloomberg, the LME handled $7.41 trillion worth of contracts last year, of which 49.7m contracts were in aluminum and 26.5m in copper, compared to Mediterranean steel billet at 30,000 contracts. Some question whether cobalt and molybdenum will have the critical mass to make successful contracts. Production of molybdenum last year was just a whisker under 200k metric tons, that of cobalt just 54k metric tons according to CRU quoted in the article. Steel was 1,200,000,000 tons and still hasn’t generated sufficient interest.

Success will be measured for the exchange in terms of volumes transacted. Success for the industry will be whether the prices traded fairly reflect real life transactions and the extent to which real life contracts begin to use the LME as their benchmark for contract awards. Small and medium consumers are hoping it will attract the interest of the industry majors because only by so doing will liquidity be created and a transparent open market created. So far industry interest seems to have been largely confined to 12 producers registering their brands for “good delivery in exchange parlance. Both major producers and consumers are non committal as to whether they will use the exchange contracts for hedging sales or purchases.

The exchange is clearly hoping that at some point the major producers like Chile’s Codelco will want to hedge their production Chile has already gone on record as saying they won’t. They don’t hedge their copper sales they say so why would they hedge their molybdenum (often mined as a by- product of copper). If not the producers then maybe the consumers. b=But ArcelorMittal and Outokumpu both declined to comment in the article as to whether they would use the new contract to hedge supplies of molybdenum for stainless production. Rolls Royce, a major consumer of cobalt in jet engines, likewise declined to give the new contracts any endorsement. Of course behind the scenes they may well use the market, but their overt rather than covert participation would encourage others in sooner.

It is early days. We hope it will attract interest and be a success, if for no other reason than we believe transparent open market prices are desirable, even if they are at the risk of speculative volatility because we believe that speculative element can be in non futures markets as readily as futures markets it’s just not so easy to see what’s going on.

–Stuart Burns

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