How minor metals have gained importance

Why should all metals not traded on the London Metal Exchange (LME) be called minor metals? Six base metals and contracts on steel introduced not very long ago, after much doubts and deliberations, leave a large family of metals in the so called minor box. This no doubt is a misnomer and a burden from the past, calling for correction.

The irritation with the “minor” nomenclature among parties involved in the production, trade and use of cobalt, molybdenum, ferro chrome, etc., is understandable since their strategic significance is growing. Minor metals, the demand for which is steadily rising, find application in aircraft alloys and making of computer components and mobile phone batteries. If the ferro alloys group is considered, then its strategic quotient further goes up because the alloys are needed for rust-proofing of stainless steel and adding strength to carbon steel.

Charles Swindon, the immediate past chairman of the London-based Minor Metals Trade Association, is so peeved with the nomenclature that he described it as “detrimental and not giving true respect to the fact that so many of these (minor) metals are strategic in so many ways.” A pall of uncertainty will continue to hang over the supply and prices of some minor metals as minerals going into their making are largely found in political uncertain zones of Africa and Latin America.

Traders and users have come to live with the fear of governments there nationalising the mineral assets and tweaking around with the supply of minor metals at any point. In spite of their net volume of business growing all the time, there is no terminal market for minor metals as of now. Deals in the nature of long-term contracts of 6 or 12 months between producers and final consumers constitute the major part of business in minors. But that leaves some space for contracts on spot basis.

What role is there then for MMTA in all these transactions? For one, MMTA has laid down very strict specifications for sizing and packing, permitted levels of impurities, transportation and warehousing for all minors. The Association claims that deals between producers and actual users are generally in conformity with its contracts specifications.

Conformity to contracts specifications is fine. But certainly negotiations between two parties across the table or by way of polling are not the best way to discover prices. That is where LME with its time honoured trade platform, a robust on-exchange cleared model and continuing large investments in systems and networks (enablers to launch new products and bring about refinements in trading) comes in.

Appreciative of the shortcomings in the way prices are settled now, MMTA is engaged in discussion with LME regarding an online price discovery system for 12 minor metals using anonymous bids and offer prices. What is going to support the price discovery operation for minors is the development of the new LME Sword, with the capability to create, store and transfer LME warrants. The launch of cobalt and molybdenum contracts will, therefore, coincide with that of Sword.

But why should LME, which in a trend defying way has done better business so far this year compared with the corresponding period of 2008, want minor metals in its portfolio when chief executive Martin Abbott himself told Richard Barrett of Metal Bulletin that “I think it is important to note that we do not expect the minors’ contracts to dramatically change the shape of the LME. They will never be copper. Taken together, they will never be zinc.”

Giving his perception of trade volumes minors may generate, Abbott says whatever that may be the minors will help in “rounding out the portfolio of products that we and our members offer.” What is going to start with launch of cobalt and molybdenum contracts will see other minors coming on LME board progressively.

Remember, on-line price discovery system is not a trading platform and therefore, will always remain outside the pale of LME’s core business. LME is still interested in building adjacent systems since these “could help to put us into the parts of the OTC markets in the long term.”

Elaborating the point, Abbott tells MB that the LME objective is to get the “large enough and liquid enough” OTC markets on the Exchange board. At the same time, some OTC markets will always stay off the exchange on low liquidity and non-fungibility grounds. Abbott is working to get LME involved in the “broader metals community” by putting to use its systems in the OTC arena.

Forays into minors make good sense. As Abbott says, “If one starts to look at all of the metals business as an interrelated community, then it makes sense for us to get involved in as many different parts of that community as possible.”