The $2bn-a-year cobalt market is in the midst of an upheaval. After more than two decades during which the cobalt industry has used the price assessments of journalists at Metal Bulletin as a benchmark for transactions, the market is now shifting to adopt the London Metal Exchange contract.
While interest in the LME contract is growing, the cobalt market, much of which has relied on Metal Bulletin’s twice-weekly price assessments to settle its long-term contracts, remains divided on pricing mechanisms.
Freeport, which as a copper producer has expertise in hedging and fixing prices on an exchange, 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.
At the moment, only Brazilian producer Votorantim prices contracts on this basis. Others are following more quietly. ENRC, another top-three producer, is also planning to introduce an element of LME pricing into its contracts from next year, traders say, selling its cobalt using a weighted average of the LME and Metal Bulletin prices.
Although many other producers have considered pricing on this basis, and several have listed their material for delivery on to the LME, Votorantim’s decision some years ago failed to immediately lead others to pricing basis the exchange.
But as volumes pick up, other producers questioned by Metal Bulletin have expressed increased interest in offering at least some of their material to some of their customers on an LME-basis.
“We’re at a tipping point,” says Guy Darby, founder of cobalt trading house Darton Commodities and a former chairman of the Minor Metals Trade Association. Between them, Freeport and ENRC account for more than a quarter of global mine production of cobalt.
Cobalt itself was sold at the so-called “African Producer Price” set by Gécamines of Congo and ZCCM of Zambia until the early 1990s, when the Metal Bulletin index was launched.
But benchmarks based on producer announcements, negotiations, or gathering of market information by so-called “price reporting agencies” such as Metal Bulletin have come under scrutiny as regulators have investigated one market after another, from Libor, to foreign exchange and oil.
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.
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.