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Molybdenum market reserves judgment as LME trading begins

By Andy Blamey, with Mayumi Watanabe (in Tokyo)

February 23 - Molybdenum market participants were gearing up for a brave new world the week ended February 19 as the London Metal Exchange prepared to launch futures trade in moly oxide.

And while the consensus view seems to be that the initial impact is likely to be muted, in the longer term the advent of futures trade could have significant implications for the industry.

"I think it will be a quiet start on the LME," said one producer official. "It will take a while before we actually see something that will reflect the market in terms of price."

The LME launched futures trade in moly oxide and cobalt on February 22, although cash trade will not begin until three months later.

The new contracts "will introduce regulated exchange pricing, transparency, risk management and clearing" to markets which have not previously been traded on a futures exchange, the LME said in a statement the week ended February 19.

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Market price assessments for moly and cobalt are currently produced by a variety of industry publications, including Platts. (See related chart: Platts Cobalt 99.3% Weekly (USD/LB): Jan. 2008 - Feb. 2010).

"The global economic downturn has highlighted how exchange trading and clearing bring more transparency and security to markets," Martin Abbott, the LME's chief executive, said in the statement. "We are confident that cobalt and molybdenum producers, consumers and traders will recognize these important qualities in our new contracts."

Concerns about volatility

In canvassing opinion on the pros and cons of the new LME moly contract, the word "volatility" is a recurring theme.

"I hope we won't see too much volatility due to the illiquidity of the market," said one European consumer.

But the LME maintains that it is precisely the underlying volatility of the moly market that underpins the importance of the hedging opportunities it can offer.

"Moly and cobalt are already very volatile markets. Trading on the LME will help the market to deal with this volatility," Chris Evans, the exchange's head of business development, told Platts.

An indication of that volatility -- pre-existing and/or anticipated -- is the initial margin levels for the new LME contracts revealed the week ended February 19 by clearing house LCH.Clearnet.

Taking a moly oxide price of $17/lb -- the Platts Dealer Oxide price was assessed February 18 at $16.50-17.00/lb -- the initial margin scanning range of $6,600/mt for moly would equate to some 17-18% of the underlying value. (See related chart: Platts Molybdenum Dealer Oxide Weekly (USD/LB): Jan. 2008 - Feb. 2010).

The LCH margins, derived after consultation with the LME, are based on an analysis of historic price data, Evans noted.

"They are double the rate of nickel margins, which could be taken as a reflection on the respective volatilities of both markets," he said. "We hope the moly margins will decline as daily pricing reduces price volatility."

Skeptics point to limited liquidity as a potential cause both of price volatility and price inflation.

"I don't have a clue as to how it's going to pan out. My sense is that from a consumer standpoint it'll be bad -- at least initially," said a US consumer.

"You would think that recent history would make producers all for it -- it's all been in their favor," he added. "Take nickel for example -- you've got the highest stock levels in LME history and yet the price stays at more than 100% above production costs. It's a speculative, financially dominated market."

But according to Evans, "In 2008, moly prices reached $34/lb, against production costs in the majority of cases below $10/lb, often substantially less. That's a mark-up of a lot more than 100%!"

He added, "Consumers stand to benefit substantially from more transparent pricing, the ability to fix purchase prices and to plan properly for the future."

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