LME Moves to Save the Cobalt Contract

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Chris Titze Imaging/Adobe Stock

You can’t please all of the people all of the time and the more people you are trying to please the harder it gets.

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When you are the largest and oldest metals exchange in the world and are trying to balance often competing priorities of a very diverse range of stakeholders — not to mention avoid potential litigation for just saying the wrong thing — it is hardly surprising the London Metal Exchange falls out of favor with one group or another from time to time.

Look at the aluminum load out queues some years ago, hated with a passion by consumers, loved by the warehouse operators and the LME in between facing litigation from Rusal over its efforts to find a solution.

Once again, the LME finds itself the object of someone’s ire.

This time it is a range of nongovernmental organizations (NGOs), including Amnesty International and Global Witness, upset with the LME’s plan to enforce standards of responsible sourcing and environmental stewardship on suppliers (or face their brands being banned from LME approval).

To be fair, the NGOs are not upset that the LME is taking the initiative — they are upset that it does not go far enough.

According to Reuters, the NGOs are complaining the LME’s plan does not tackle issues like corruption seriously enough and that the OECD standards the LME have co-opted as a benchmark do not provide for full transparency and continuous improvement.

But in an interview this week with MetalMiner, LME chief executive Matthew Chamberlain explained that where the NGOs and the LME diverged was not so much on the objective as on the approach.

NGOs, it has to be said, are driven by high ideals that we can all buy into but in the real world can be very challenging to achieve.

Chamberlain explained that the LME treads a balancing act between the interests of consumers, the needs of producers and avoiding litigation from a host of interests in the wider market. The LME is a physically delivered market, meaning buyers have no control over which brands they receive if they take delivery of metal from the exchange, warrant holders will inevitably deliver their least desirable brands — for cobalt, that is those brands with the least scrupulously audited provenance.

When there are serious worries about the supply chains of a brand, it begins to impact the price. However, for the reasons outlined above, that discount taints all brands on a market like the LME.

With two-thirds of the world’s cobalt coming from the Democratic Republic of the Congo (DRC), it is hardly surprising that the cobalt contract in particular has suffered from market fears that a buyer could receive delivery of a brand with questionable credentials, one that has not yet been able to prove it does not employ child labor or is conflict-free.

As a result, the LME cobalt contract has been trading at a $12,000 discount to the Fastmarkets MB published price and is at risk of becoming irrelevant if a solution is not found.

But while the LME is a choke point through which the world’s cobalt trades, if not physically at least in terms of contractual standard, it has limits to what it can reasonably enforce.

The LME needed an agreed common standard to work to and Chamberlain advised the decision was taken that the OECD standards, formulated by 35 OECD members, and eight non-members and adopted by other non-members — such as China — at least formed a common platform that was ratified at a governmental level. Since its formation in April 2016, the OECD Due Diligence Guidance has been incorporated into agreements ratified by some 72 countries and adopted as the basis for regional agreements made by the European Union and China. It may not be perfect, but in an imperfect world it goes a long way toward setting humanitarian and environmental standards that have met widespread approval and adoption.

Of course, some may be asking: why doesn’t the LME simply ban all brands that originate from smaller artisanal mines?

It would be an easy answer, but what would be the result?

Those mines would not stop, they would simply be forced underground – figuratively, not literally – selling their product at a steep discount on the grey market and worsen the lot of workers and communities affected. Nor are all artisanal miners employing child labor or forced on local communities in conflict zones, some are cooperatives organized for the benefit of communities seeking to make a living in a country with little or no rule of law or administrative control.

What would be left if they were forced off market? Exactly what the NGOs fear — large miners, employing foreign workers and running mechanized operations providing very little back into local communities, the same large miners about which rumors swirl of governmental and bureaucratic corruption.

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Some may suggest the LME’s plans are imperfect, but with so many competing priorities it would be implausible that everyone was totally onboard. Maybe the initiative should be seen in the same light as the Dodd-Frank Act’s conflict minerals provision, a practical attempt to make companies more accountable.

Will it remove corruption? No, but it’s a step in the right direction.

More to the point, will it save the cobalt contract?

That remains to be seen.

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