LME no longer fast-tracking cobalt for responsible sourcing standards

The London Metal Exchange has abandoned a planned accelerated timeline for its cobalt contract to meet new responsible sourcing principles, chief executive officer Matthew Chamberlain said on Tuesday April 23.

This comes as the LME launched a formal market-wide consultation on proposed rules for the application of responsible sourcing principles to all LME-listed brands. These rules build on the strong engagement with market stakeholders to the LME’s October 2018 position paper.

In a position paper published in 2018, the LME suggested that cobalt could deliver compliance on a more expedited timeframe. It proposed that the classification of cobalt brands as automatic higher-focus.

But feedback from the position paper raised concerns and the LME said it had now changed its view on the cobalt timeline.

Producers of LME-listed cobalt brands will instead be required to undertake the red flag assessment, the same as all other metals, and will be classified as either higher- or lower-focused brands on the basis of those results.

“If this assessment demonstrates potential responsible sourcing red flags, then that brand will be classified as a higher-focus brand and will also need to be audited as compliant with an OECD-aligned standard by the end of 2022,” the LME said.

“Looking back to the position paper, it did initially suggest an accelerated approach to convergence to standards for cobalt because of those industry concerns about insuring the supply chain was diligent,” Chamberlain said during a press call.

“That was originally our position but the feedback we received, from a very broad range of stakeholders, was in balance not in support of that accelerated approach,” he added.

Market feedback said that it felt LME’s proposed transitional provisions for cobalt were unfair, anti-competitive, represented serious market risks, and did not properly allow for the complexity of identifying the risks associated with the cobalt supply chain.

The LME also said a small number of participants disagreed with the LME’s assessment of lower price being an indicator of risk and felt that it was a presumption of guilt that did not properly take into account other market factors that can affect price.

The exchange said it has accepted that its original timeline was too ambitious and therefore amended it, so that the requirements for cobalt and tin are in line with other metals and cobalt’s compliance with Organisation for Economic Co-operation and Development (OECD) guidance will now be delivered on the same amended timetable.

“There was a real concern that if we accelerated it (also for tin) there may also be an advantage handed to the larger producers who have the ability to comply in a quicker timeline,” Chamberlain said.

“The acceleration of the cobalt requirements could have harmed smaller-scale cobalt brands and lost them from the LME altogether even if they were doing the right thing. There is a timeline on the table to demonstrate that doing the right thing will be rewarded,” he added

Better aligned to PRAs
On March 11, the LME launched a new cash-settled cobalt contract settled against the benchmark standard-grade cobalt price assessed by Fastmarkets.

Chamberlain said he believes the push for LME-listed brands to be standardized means its existing physically-delivered cobalt contract, which was launched in February 2010, could become more aligned to the new cash-settled contract.

“When we launched the cash-settled contract, we recognized the market uses different prices and obviously these have a different set of brands. I think having the two prices on the LME at the moment is the right thing to do,” Chamberlain said.

“But I do think the responsible sourcing guidelines means that there is the possibility that there may not be as much differential between the two prices. They will be more aligned,” he added.

Fastmarkets’ price assessment for standard-grade cobalt – the benchmark used across the physical supply chain – stands at $15.60-16.75 per lb, as of April 17, down from $26.50-28 per lb at the beginning of the year.

The LME’s physically-settled cobalt contract last settled at $34,500-35,500 per tonne ($15.65-16.10 per lb) on April 18.

Over the past year, however, there have been instances of a pronounced difference between the PRA and exchange price.

The LME contract settled at $45,000-45,500 per tonne on November 2 last year, for example, down from the previous day’s settlement of $59,000-59,500 per tonne, with one lot (1 tonne) trading. At the same time, the Fastmarkets price was unchanged at $33.50-34.45 per lb ($73,855-75,950 per tonne).

Fastmarkets’ standard-grade cobalt price assessments take account of trade and market activity of Chambishi broken cathodes, CTT broken cathodes, Katanga cathodes, Ambatovy briquettes and Murrin Murrin briquettes.

Chambishi, CTT, SMM cut cathodes, Freeport powder, KLK broken cathodes, Jinchuan cut cathodes, Vale rounds and Yantai Cash cut cathodes are deliverable against the LME’s cobalt contract.

There is total of 906 tonnes of cobalt in LME warehouses, with 475 tonnes in Rotterdam – the majority of which is in the form of cut cathode.

“Of course the prices will not fully converge but they will be more aligned,” Chamberlain said.

“But as a growing market, we are trying to provide all options to hedge and trade.”

Charlotte Radford in London also contributed to this report.