The LME’s minor metals contract has been up and running for two months now and although both are at a nascent stage they have already begun to exhibit diverging patterns of behavior. Molybdenum prices have stagnated whereas cobalt prices have picked up markedly. Although it is premature to be drawing any conclusions at this stage we thought it would be interesting to look into the more active to see if it is the contract or the background market that is driving the different behavior.
From a practical standpoint the cobalt contract trades 99.3% minimum purity, which is a highly tradable form of cobalt. The molybdenum contract is bagged or drummed roasted concentrate and from that aspect probably a little less flexible as a shape and storage would be more complicated. Cobalt metal is eminently usable in the metal form as it can be melted for the production of alloys and granules/powder, dissolved in acid to provide a precursor to a whole range of chemical products and many grades of fine powder or just kept in a drum as an investment. Cobalt also has a broad range of end uses and is not necessarily reliant on one main industry sector, although combined rechargeable batteries and super-alloys/hard metal/high speed steels take up over half of cobalt consumption. So from a contract point of view it could be that cobalt is finding more favor with the market because it is more flexible and hence finds more takers.
The first prompt date isn’t until May 21st and trading from this point should give a better guide as to the level of trade interest, but the initial stages of the contract must be encouraging for the LME.
We interviewed Steve English of SFP Metals, Chairman of the Minor Metals Trade Association (MMTA), an acknowledged industry expert and broadly a supporter of the LME’s development of the minor metals contracts. Cautioning that any observations are at an extremely early stage nickel and aluminum both took many years to reach a tipping point and have become accepted industry price benchmarks, these minor metals will probably take a year, possibly three, according to Steve. First, we cannot judge the success of these contracts until we see how stock levels develop on the exchange and that won’t happen in a meaningful way until after May 21. At the moment there is just 5 tons of cobalt on the LME. Any trader could pick that up and “corner the market by holding all the physical metal on the exchange. In reality, the market needs 1000 tons to function effectively and that won’t happen until the market develops a backwardation where spot is significantly over 3 months, attracting physical delivery onto the exchange. For the time being, metal is all being consumed by industry particularly in the US and Japan. Import figures for the US in 2010 are twice what they were in 2009 and the trend continues. January imports were 650 tons. February’s were 1096 tons according to Steve English. Stocks were run down severely in 2008/9 and now demand is coming back from aerospace, battery consumption and medical products. China by contrast has not seen any significant run up in prices this year as reported by our own MetalMiner IndX (free with registration) which tracks domestic China cobalt prices. So western physical demand rather than any impact of the LME contract is what is driving current price strength both physically and on the LME.
The market will be used by two kinds of players. On the one hand, there will be investors, for them at the moment the contract is not sufficiently liquid to make it an attractive market but open interest is increasing. Cobalt is clearly the more popular of the two metals in terms of open interest – currently 223 open contracts vs. 31 for molybdenum, but even so investor interest is light. The other user will be the participants for whom the contract was intended producers, consumers and in between the processors. For many in the industry the greatest benefit has always been seen as helping the processors. These are the businesses that rely on buying cobalt, putting it through a process which adds value and then selling that product on at a later date. By hedging, the price risk element can be negated (though there are cash flow implications) so the business can concentrate on what it does best and that is to improve the margin created by adding value to their product. For the processors to take up the contract will require widespread acceptance of the LME price as being the industry benchmark, adopted by both producers and consumers back to the tipping point of widespread adoption.
So cobalt at least is off to a reasonable early start. Molybdenum for the time being does not appear to be going anywhere but as we implied at the outset, a lot of water needs to pass under the bridge before a valid judgment can be made. Our thanks to Steve English of SFP Metals and other industry experts interviewed in the process of this review.