THE FUTURE OF COBALT PRICING: The benefits of LME-based contracts

What are the benefits of using the LME pricing reference as a benchmark for cobalt contracts?

What are the benefits of using the LME pricing reference as a benchmark for cobalt contracts?

For many years, Metal Bulletin has played a key role in providing a reference price for low-grade, 99.3% min cobalt and high-grade, 99.8% min cobalt metal.

Prices are published twice a week and have been used for decades by sellers and buyers as a basis for the pricing of long-term contracts between producers, traders and consumers.

Some years ago, the London Metal Exchange introduced a 99.3% min cobalt metal contract which, as with base metals, some expected to eventually become the industry benchmark.

The growth of the LME contract, combined with concerns about assessed prices that have largely arisen due to the reduced size of the spot market, have led some producers to consider pricing on an LME basis.

The debate over whether to base cobalt contract prices on the LME or the Metal Bulletin price is one that has been reignited several times since the LME launched its cobalt contract in 2010.

This debate was reawoken again in the fourth quarter of 2013, when Freeport McMoRan publicly announced that it would price its cobalt hydroxide on an LME basis.

Freeport, a US-listed company, is not alone in wanting to price basis the exchange.

Producers ENRC and Votorantim are also advocates of pricing basis the exchange, according to market sources.

At the end of 2013, Metal Bulletin asked its readers in a straw poll: “What is your cobalt pricing reference of choice for 2014?”

Around 43% of respondents to the online poll said Metal Bulletin, the traditional industry benchmark, with the remainder picking the London Metal Exchange.

In a market divided on the best basis on which to price cobalt, Metal Bulletin has looked at the arguments for and against the use of the LME as a basis for contracts.

So what are the benefits of using the LME pricing reference as a benchmark?

The LME contract is growing. Cobalt stocks on the LME exceeded 500 lots in December, up from 429 a year earlier and just 278 in 2010.

Unlike an assessed price, the regulated exchange provides market participants with a forum on which to trade, and gives them more transparency and forward price visibility.

Cobalt is a by-product of copper and nickel, and several cobalt market participants are used to, and comfortable with, pricing metals basis the LME.

Votorantim, for example, which has priced its contracts basis the LME for some time, is dependent on LME prices for its nickel.

Even those that cannot themselves hedge on the LME may appreciate the hedging opportunities available to others if liquidity picks up.

Freeport, for instance, does not hedge basis the LME, but its customers now have the option of hedging on this basis.

Some see the growth of the cobalt contract as a sign that cobalt is heading in the same direction as base metals.

As Metal Bulletin guest writer Derek Benham, of Benmet, an agent for Jinchuan cobalt metal sales in the USA and Europe, wrote last year, aluminium and nickel prices were quoted by Metal Bulletin back in the late 1970s and 1980s.

“The LME nickel contract was launched in 1979 and after a period of time Metal Bulletin realised that the outright price determination was best left to the LME market and there was a valuable role [MB] could play in reporting premiums for different grades and different locations of the metal,” Benham wrote.

Benham argues that with an exchange-traded metal, somebody who believes the price to be too low can buy it, while somebody who believes the price to be too high can sell it.

This option does not exist when a trade publication is setting the outright price.

Benham called for Metal Bulletin to concentrate on reporting the premiums for different grades of cobalt.

And as Metal Bulletin prepares to introduce cobalt premiums for a range of brands, Metal Bulletin would like to invite any person active in the cobalt market to have their say on cobalt pricing mechanisms.

Click on the links to find out more about Metal Bulletin's new premium system, and to have your say on the proposed changes to the current Metal Bulletin cobalt metal pricing system.

Click on the link to read about the market's concerns over exchange-basis cobalt pricing.

Fleur Ritzema
fritzema@metalbulletin.com
Twitter: FleurRitzema_MB


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