Chinese cobalt smelters express concern about pricing basis LME

Some Chinese cobalt smelters have expressed reservations about using the London Metal Exchange prices in their long-term contracts.

Freeport McMoRan’s decision last month to attempt to sell all of its cobalt basis London Metal Exchange prices from January 2014 paved the way for discussions about pricing mechanisms in China at last week’s Antaike cobalt conference.

While interest in the LME contract is growing, Chinese cobalt market participants, who have traditionally relied on Metal Bulletin’s twice-weekly price assessments to settle long-term contracts, expressed a reluctance to immediately move onto exchange-basis pricing.

“I don’t think it is realistic now to change pricing to base on the LME,” a major Chinese smelter said.

“The LME cobalt contracts are not active at all, therefore, it has no value as a pricing reference,” the smelter added.

Others noted that the level of understanding of the LME contract among Chinese participants was low.

“For so many years, we have used Metal Bulletin prices to import raw material and export products […] Participation in the LME cobalt market is low. People don’t have enough understanding of the LME market,” another major smelter said.

“The LME cobalt trading is not mature enough. While electronic trading may be fairer, the point is, trading volume needs to increase. If the volume is not enough, the market is easy to manipulate,” a third major smelter, who has been importing raw material, claimed.

“Cobalt trading volumes on the LME are smaller than on the China Stainless Exchange. It is so easy to speculate on LME cobalt prices. One only needs $100,000,” a major trader and importer said.

But US miner Freeport, which sells large volumes to the Chinese market, said last month it will price its cobalt transactions on the basis of the LME prices from January 2014.

Freeport said it was drawn to the LME by the increased liquidity of the cobalt contract and the fact it assists in providing greater risk mitigation potential for all parts of the cobalt supply chain.

“The volume of LME cobalt transactions has increased steadily and we believe there is general acceptance among customers and suppliers to move to LME-based pricing for cobalt,” said David Elliott, vp sales at Freeport-McMoRan.

In October, LME traded volumes reached 1,197 lots, up from 507 in the corresponding month of 2012. Stocks stood at 533 tonnes at the end of October, having risen steadily since its 2010 launch.

editorial@metalbulletinasia.com