Interview: The LME’s new cobalt contract

The following is an interview by Cobalt 27 Capital (TSX-V: KBLT; US-OTC: CBLLF) chairman Anthony Milewski with the London Metal Exchange’s Product Development department to discuss the LME’s electric-vehicle battery materials initiatives and the launch of its new cobalt contract.

Anthony Milewski: What is the London Metal Exchange and what does it offer as a platform?

London Metal Exchange: The London Metal Exchange is the world centre for industrial metals trading. The prices discovered across the LME’s three trading platforms — the Ring, the inter-office ‘telephone’ market and LMEselect, our electronic trading platform — are used as the global reference price and, both the metal and investment communities use the LME to transfer or take on risk, 24 hours a day.

AM: The LME has had a cobalt contract since 2010. Why is the Exchange launching a new cobalt contract now?

LME: The LME launched its physically-settled LME Cobalt contract in 2010, which has been a steady performer amongst a core group of supporters for a physically settled contract. That said, the LME has also seen growing appetite for a cash-settled contract over recent years with the rise in demand for Electric Vehicles (EVs) and battery metals.

Last year, we consulted the market in order to identify the best risk management solutions. Following extensive engagement with the market, on March 11, 2019, we launched a cash-settled LME Cobalt (Fastmarkets MB) contract, to complement our existing physically-settled offering.

This new cash-settled contract is settled against the Fastmarkets MB Standard Grade index, allowing market participants who have exposure to the aforementioned price in their physical contracts, to hedge across the cobalt value chain with no basis risk.

AM: What are the differences between the new cash-settled LME Cobalt (Fastmarkets MB) contract and the existing physically-settled LME Cobalt contract?

LME: There are several differences between the two contracts, but the most relevant are the settlement structure, settlement price and prompt date structure.

Designed to mirror physical trading, daily prompts enable users of the physically-settled LME Cobalt contract to accurately hedge their physical transactions down to the day.

The LME Cobalt (Fastmarkets MB) contract settles on the last business day of each month in accordance with the LME trading calendar, out to 15 months, to the price of the Fastmarkets MB Index. In contrast, the physically-settled LME Cobalt contract offers daily prompt dates out to three months, weekly prompt dates between three and six months, and monthly prompt dates from the sixth month onward out to 15 months.

Cash settlement is a method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual physical underlying asset but instead transfers the associated cash position.

For sellers who do not wish to take actual possession of the underlying cash commodity, cash settlement is a more convenient method of transacting futures and options contracts.

Cash settlement is also preferred by financial investors who bring additional liquidity reducing the bid-offer spread, and thus lowering the cost of trading.

AM: And what about the physical delivered contract? What will happen to that now?

LME: The LME recognizes the ongoing market support for its physically-settled cobalt contract which has seen a steady uptake in recent months, with an increase in both trading volumes and stocks, and as such it will continue to offer a physically-settled option alongside the new cash-settled LME Cobalt (Fastmarkets MB) contract.

Physical settlement enables short position holders to deliver warrants — a warehouse warrant for the storage of metal, issued by a LME-listed warehouse and in a form approved by the Exchange — against their positions, whilst long position holders will receive warrants, and ultimately, take physical delivery of the metal or close out their position.

Physical settlement is preferred by a number of market participants such as cobalt producers who prefer the option of physical delivery, and the steady growth of the battery metals market in recent years has opened up the cobalt market to a number of new market participants wanting to gain exposure to the cobalt price and have the tools available to manage their price risk.

In recent months we have heard of a number of cobalt producers who are interested in listing their brands on the LME and as part of our ongoing commitment to lowering barriers to market entry and serving the physical market, the LME has recently waived all brand listing fees for cobalt producers wanting to enter the market and list their brands on the LME.

This waiver will last for 6 months, until October 2019, and any producers interested in listing on the LME should reach out to the team who will be happy to discuss this in more detail.

AM: Who is the new cash-settled contract for?

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