The LME's New Cobalt Contract: A History of Cobalt on the London
Metal Exchange
Toronto, Ontario, Canada --
April 10, 2019 -- InvestorsHub NewsWire -- Anthony Milewski,
Chairman and CEO, Cobalt 27 Capital Corp. (TSXv: KBLT)(OTCQX: CBLLF)(FRA: 270), met
with the London Metal Exchange's Product Development department to
discuss their electric vehicle battery materials
initiatives. The London
Metal Exchange (LME) is the world centre for industrial metals
trading. With the launch
of its new cobalt contract, we reached out the LME with some
questions that we felt investors and Cobalt 27 shareholders would
find interesting.
What is the
London Metal Exchange and what does it offer as a
platform?
The London Metal Exchange
(LME) 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.
The LME has
had a cobalt contract since 2010. Why is the Exchange launching a
new cobalt contract now?
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 11 March
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.
What are the
differences between the new cash-settled LME Cobalt (Fastmarkets
MB) contract and the existing physically-settled LME Cobalt
contract?
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.
And what about the physical
delivered contract? What will happen to that now?
The LME recognises 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.
Who is the new cash-settled
contract for?
Over the past few years, we have seen extreme
volatility in the cobalt market which has a knock-on effect on the
entire value chain, causing operational concerns - increasing
financing costs, increasing counterparty risk and, ultimately,
increasing the price of goods for consumers.
Furthermore, the significant growth in EVs in
recent years has bought new players to the metals market, with
considerable capital to invest in this space. Up until now, these
new market participants have struggled to manage their exposure to
the cobalt price, especially along the forward curve, as they have
not had the tools available to them. The new cash-settled LME
Cobalt (Fastmarkets MB) contract provides exposure to the
Fastmarkets MB Cobalt Standard Grade price, helping market
participants to manage risk along the entire cobalt value chain. A
few examples of market participants who can benefit from these
hedging tools include:
-
Miners, traders and hydroxide
producers, as well as traditional consumers like the super alloy
industry, whose procurement contracts are linked to the Fastmarkets
MB Cobalt Standard Grade index
-
Cobalt sulphate producers and
consumers whose procurement contracts are linked to the Fastmarkets
MB Standard Grade price, including the EVs and Lithium-ION
batteries industry
As liquidity grows, we expect a number of
financial participants including funds and money managers to take
an interest in the contract.
The LME Cobalt (Fastmarkets MB) contract will
be available to trade 24 hours a day across the LME's telephone
market and from 01:00-19:00 London time on LMEselect, the LME's electronic market.
What liquidity can we
expect?
Building liquidity is always the biggest
challenge for new exchange-traded products generally, and
especially for small markets like cobalt, but we expect liquidity
to grow progressively as our members deploy the infrastructure
upgrades that allow them to access this market.
As observed in similar markets, we expect to
see the majority of initial liquidity on the telephone market.
However, over time we hope to see an increase in the amount of
physical players benefiting from the contract and contributing
towards an increase in on-screen liquidity and deep order book -
providing the transparency and exposure that market participants
require.
We have also introduced a new membership
category of Registered Intermediating Brokers (RIBs). These are
brokers who facilitate trades between two parties - either LME
members or clients - helping to grow liquidity in smaller niche
markets such as the cobalt market. We have seen in the past how
RIBs have greatly supported the initial liquidity in other new
markets such as LME Steel Scrap and LME Steel Rebar, playing an
integral role in helping these markets to grow.
For more information about the LME's cobalt
offering, please contact one of the team at product.development@lme.com
I welcome shareholders to get
in touch with any comments.
Anthony Milewski,
Chairman and
CEO
Cobalt 27 Capital Corp.
About
Cobalt 27 Capital Corp.
Cobalt 27 Capital Corp. is a
leading battery metals streaming company offering exposure to
metals integral to key technologies of the electric vehicle and
energy storage markets. The Company owns physical cobalt and a 32.6%
Cobalt Stream on Vale's world-class Voisey's Bay
mine, beginning in 2021. Cobalt 27 is undertaking a friendly
acquisition of Highlands Pacific which is expected to add increased
attributable nickel and cobalt production from the long-life,
world-class Ramu Mine. The Company also manages a portfolio of 11
royalties and intends to continue to invest in a cobalt and nickel
focused portfolio of streams, royalties and direct interests in
mineral properties containing battery metals.
For further information please
visit the Company website at www.cobalt27.com
Forward-Looking
Information: This interview may
contain certain
information which constitutes 'forward-looking statements' and
'forward-looking information' within the meaning of applicable
Canadian securities laws. Forward-looking statements
address future events and conditions which involve inherent risks
and uncertainties. Actual results could differ materially from
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information and assumptions include future estimates of the
worldwide supply and demand for cobalt and other metals and the
effect that these changes could have on the short term and long
term price of cobalt and other metals on the world markets,
statements regarding the future operating or financial performance
of Cobalt 27 including the net present value, metal recoveries,
capital costs, operating costs, production, rates of return and
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and uncertainties surrounding future expectations. Among those
factors which could cause actual results to differ materially are
the following: market conditions and other risk factors listed from
time to time in Cobalt 27 Capital
Corp.'s reports filed with
Canadian securities regulators on SEDAR at
www.sedar.com.
In some cases,
forward-looking statements can be identified by terminology such as
"may", "will", "should", "expect", "projects", "plans",
"anticipates" and similar expressions. These statements represent
management's expectations or beliefs concerning, among other
things, future operations and various components thereof affecting
the economic performance of Cobalt 27. Undue reliance should not be
placed on these forward-looking statements which are based upon
management's assumptions and are subject to known and unknown risks
and uncertainties, including the business risks discussed above,
which may cause actual performance and financial results in future
periods to differ materially from any projections of future
performance or results expressed or implied by such forward-looking
statements. Accordingly, readers are cautioned that events or
circumstances could cause results to differ materially from those
predicted.
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