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PrintWith little more than a month passed since molybdenum (moly) began trading on the London Metal Exchange (LME), initial signs are good that producers and consumers alike are making use of the new exchange traded mechanism for this ‘minor metal’. With this, the potential implications of exchange trading for companies in the moly market, specifically the security of a central benchmark price and the use of standardized futures contracts, looks set to increase exponentially as more and more firms take advantage of the new LME listing.
Molybdenum is a strong and useful metal with a high resistance to corrosion and an ability to withstand extreme temperatures. It is widely used as an alloy with stainless steel and is often found as a by-product of other metals, particularly copper, although can be found as the sole mineralization in an ore body. Molybdenum is actually found in many minerals, but only the molybdenite form is suitable for industrial production. The nature of moly deposits brings about three different mining types for the ore; primary mines, where molybdenite is the sole objective of the mine; by-product mines, where molybdenite recovery is an additional revenue stream for a mine which focuses on copper ores; and co-product mines, where copper and molybdenite take equal focus in the mine’s production.
This new exchange trading platform in moly will affect these three types of producers in the same manner, but naturally the impact will be greater or lesser depending on the company’s focus on moly in its mining operations.
When the LME decided to list moly contracts, as well as a series of new cobalt contracts, they cited industry demand for an exchange based price risk mechanism as their primary reason for bringing the product to market. Since their initial listing on February 22, both producers and consumers have been steadily making use of the LME contracts, with an even broader spectrum of market players using the new listing as a transparent and global reference price for their moly transactions. The latest data shows a total of six molybdenum internationally have registered their brands with the LME, and so far 462 tonnes of moly has been traded, to the value of over $18mln. Chile’s Molymet and Mexico’s Molymex are two of the latest molybdenum producers to register with the LME, with Chinese producers, including China Molybdenum and Jinduicheng Molybdenum, making up the majority of the six so far.
It is the global benchmark nature of LME price that is one of the primary implications, and one could argue benefits, of exchange trading molybdenum. A transparent and globally recognized price in any commodity reduces one of the primary concerns for both producers and consumers i.e. risk. This LME listing can now act as a benchmark price for use across the global moly market, allowing players to know a ‘fair value’ for the product and reducing possible discrepancies between the different markets. Additionally, this acts as a clear and reliable reference price for contract negotiations, even if the transactions are taking place over the counter (OTC) or in bilateral agreements. All this brings about confidence when buying and selling molybdenum, and in the longer-term makes for a more stable, reliable and liquid market.
This reduced price risk on a spot or cash basis, is mirrored over the longer-term by the new availability of the exchange traded futures contracts, which allow both producers and consumers to lock in future prices for moly products, hedging against price movements and allowing accurate budgeting and forecasting on company accounts. For producers specifically, it allows a margin to be locked in to a sale and allows them to effectively turn physical stocks in to cash holdings, shoring up their balance sheet. In turn, this will also help producers financing availability, as banks generally prefer a reasonable amount of position hedging due to the reduced risk.
Although some of these factors were not impossible without the availability of set futures contracts, firms would previously have had to undertake ‘forward’ agreements, where contracts would be negotiated on an individual basis, with varying specifications on the size and quality of the product and effectively, only the guarantee of each party that the end product would conform to the standards agreed upon. The new LME futures are standardized contracts, with strict quality specification for the molybdenum traded, and arbitrated by a well-standing, respected third party; The London Metal Exchange. This guarantee of quality and delivery is yet another boost to confidence for molybdenum producers and consumers, again limiting risk, reducing costs and helping trading activity within the global moly market.
One final but very important implication of an exchange traded market is the use of the LME’s delivery mechanism and the availability of a centralized open market to trade in. The opportunity to buy or sell molybdenum via an exchange, particularly in times of low liquidity, will offer consumers a source of material in times of shortage and offer producers a channel to sell during times of surplus. The nature of 24 hour trading means buyers and sellers will find it easier to trade globally, again helping limit risk and increase profits, as well as opening up physical inventory that otherwise may have sat in storage.
So what does all this mean for molybdenum trading firms in the coming months? As more and more players begin to use the LME to trade molybdenum, the effects outlined here will become more and more prevalent. Price risk for moly producers will shrink significantly with the new opportunity to develop a decent hedge book, allowing accurate budgeting and profit forecasting, locking in margins and helping liquidity, factors all likely to firm up a company’s balance sheet in the long-term. On the other side of the market, molybdenum consumers will also benefit from the reduced price risk and accurate forecasting, will have the opportunity to get the best available price globally, as well as satisfy their basic materials requirements when global supply is limited. Again this reduces costs and helps lock in good prices, as well as guaranteeing the quality and delivery of their raw material requirement.
On either side of the market, the listing of molybdenum on the London Metal Exchange will begin to impact the bottom line in the coming months and years, shifting trade from the riskier and less liquid over the counter transactions, into a standardized and endorsed exchange delivery system, mirroring the LME’s other minor and major metals products. Whether this shift will be quick in coming remains to be seen, but initial signs are good, and the potential benefits make it an increasingly attractive proposition.
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- [Editor:editor]
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