Are LME Cobalt Futures on Track for a Record Volume Year?

Interest in cobalt increased recently as the price fluctuated widely during the past year.
Need buying strategies for steel? Request your two-month free trial of MetalMiner’s Outlook
One reason for the increased interest comes from the metal’s uses in advanced applications, such as in aerospace and biotech. Interest also surged due to cobalt’s use in electric vehicle (EV) automotive battery production.
In addition to strong demand, the supply portion of the cobalt story has also spurred price volatility. Cobalt comes from the Democratic Republic of the Congo (DRC), where a majority of the world’s cobalt is mined.
The London Metal Exchange (LME) cobalt contract launched in February 2010 and the exchange recently launched a new cobalt contract tied to Fastmarkets’ standard-grade cobalt price (the go-to benchmark on cobalt pricing for industrial buyers).
In this analysis, we take a look at the dynamics of the established LME cobalt contract to see if it offers a suitable hedge for industrial cobalt buyers. The LME Cobalt FM contract does not yet have a long enough track history to warrant analysis, as the price has stayed flat since the contract’s launch.

LME Cobalt Contract May Offer a Hedge Against Pricing Volatility

Based on the long-term price trend for the contract, prices fluctuated in keeping with press reports on general market conditions for cobalt pricing:

LME Cobalt daily price trend since February 2010. Source: Fastmarkets

Price fluctuations may indicate enough volume and interest behind the scenes are creating pricing dynamism.
Let’s take a closer look at the underlying trade dynamics. The vertical lines early in the timeline suggest a lack of trading activity on some days and, therefore, no reported closing price.

LME Cobalt Contract Volumes Increased Annually (Especially Since 2016)

After some occasional volume spiking in the contract’s early years, trading increased again, especially around November 2016:

Chart 2: LME Cobalt daily contract volumes since February 2010. Source: Fastmarkets

To see the long-term trend more clearly, this chart shows annual volumes, including 2019 year-to-date numbers:
Chart 3: LME Cobalt annual contract volumes since February 2010. Source: Fastmarkets

Should trading in the contract continue at the same volume as this past Q1 quarter, the contract could see a record year.
This chart shows both volume and price together on a monthly basis:
Chart 4: LME Cobalt annual contract volumes since February 2010. Source: Fastmarkets

As contract volume began to surge, pricing became more dynamic, especially into 2016.
Even though prices fell since their peak last year, contract trading volumes remain relatively high (although not quite as high as at other points).

Open Interest in the LME Cobalt Futures Contract Waned Recently

Open interest in the contract recently flattened out, which appears as a contrary indicator compared with the increased dynamism of pricing and volumes:

LME cobalt contract open interest since April 2018. Source: Fastmarkets

Still, the open interest numbers remain higher than last year.
LME Cobalt FM Contract Launched March 11, 2019
Interest in cobalt price discovery continues to grow due to new uses for the metal combined with recent wide price fluctuations.
The older LME Cobalt contract requires physical settlement by approved LME brand providers. On March 11, a new non-physically settled cash contract launched based on FastMarkets’ standard-grade cobalt price: the LME Cobalt FM contract.
So far, it’s early days for the contract and prices appear flat. The price for this new contract, however, uses the arithmetic  average of Fastmarkets’ twice-weekly price for the currently expiring contract month.

What Does This Mean for Industrial Buyers?

Given the increasing volatility of cobalt prices during the past year, industrial buyers may want to consider adding the existing metal-based LME cobalt futures contracts to the mix of buying strategies.
MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel
Buyers of cobalt looking for a price hedge mechanism could consider tracking the LME Cobalt FM contract as well. However, like most newly introduced futures contracts, it may take some time until the efficacy of the measure becomes validated through active trading and dynamic pricing.

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to Top