Cobalt pricing move sets post-Libor trend When politicians fret about price benchmarks, they are unlikely to be thinking about cobalt. But the niche market for the metal, used in batteries and high-performance alloys, may show the way forward for price discovery in a post-Libor world. The $2bn-a-year cobalt market is in the midst of an upheaval. After more than two decades during which the cobalt industry has used the price assessments of journalists at Metal Bulletin as a benchmark for transactions, the market is now shifting to adopt the London Metal Exchange contract. Freeport-McMoRan, one of the world's largest miners and refiners of cobalt, last month announced that from the beginning of next year it will no longer use Metal Bulletin prices. "We believe there is general acceptance among customers and suppliers to move to LME based pricing for cobalt," said David Elliott, senior vice president at Freeport. Others are following more quietly. ENRC, another top-three producer, is also planning to introduce an element of LME pricing into its contracts from next year, traders say, selling its cobalt using a weighted average of the LME and MB prices. "We're at a tipping point," says Guy Darby, founder of cobalt trading house Darton Commodities and a former chairman of the Minor Metals Trade Association. Between them, Freeport and ENRC account for more than a quarter of global mine production of cobalt. The cobalt industry's shift has been years in the making and has a number of drivers. But traders and industry executives say it has been catalysed by regulators" recent scrutiny of benchmarks and drive for exchange-based pricing. While commodities such as copper, cotton and corn have been traded on exchanges for more than a century, others have been slower to develop. It was not until the 1980s that aluminium producers gave up trying to sell their metal at an announced price and adopted the LME contract, while the price of iron ore - one of the world's most important raw materials - was set in annual negotiations between three dominant suppliers and their customers until 2010. Cobalt itself was sold at the so-called "African Producer Price" set by Gécamines of Congo and ZCCM of Zambia until the early 1990s, when the MB index was launched. But benchmarks based on producer announcements, negotiations, or gathering of market information by so-called "price reporting agencies" such as MB have come under scrutiny as regulators have investigated one market after another, from Libor, to foreign exchange and oil. "People are definitely moving away from producer pricing and survey pricing to exchange-based pricing," says Robert Fig, business development executive at the LME. It's a culture that's spanning every commodity at the moment. The move towards the LME is also the result of several factors specific to the cobalt industry, however. For a start, the move has in part been driven by dissatisfaction among some market participants with the MB index that predates the regulatory furore over benchmarks. Liquidity in the spot European cobalt market has been thin in recent years, traders say, leading some to question the reliability of the MB index. "A $2bn-plus industry needs to get beyond being priced by one journalist sitting in London," says Mr Darby. Moreover, the LME launched cobalt trading in 2010, giving companies nearly four years to become comfortable with the contract, a situation that could not easily be replicated in other markets. And not everyone is convinced the cobalt industry will switch to LME pricing straight away. While Freeport, ENRC, and Votorantim of Brazil are leading the push towards the LME, other large producers are sticking with MB for now, traders say, arguing that the LME contract is still too illiquid. The largest miner and trader of cobalt is Glencore Xstrata. Raju Daswani, managing director of MB, says he does not believe the shift to LME pricing in cobalt is yet "conclusive," but adds that MB will respond to the industry's evolution by publishing cobalt "premiums" - or price differentials based on the LME market. Our job is to listen and move with the times. "These things don't happen overnight," says an executive at a major producer, estimating that it could be three to five years before the LME contract is universally adopted. But he adds: "It is inevitable that LME will become the benchmark for the whole industry." As such, the cobalt market may offer a sign of things to come for other larger markets such as iron ore and coal, says Colin Hamilton, head of commodities research at Macquarie. "It's a natural development of a lot of these markets," Mr Hamilton says, pointing out that the iron ore and thermal coal markets are already moving away from journalistic indices towards screen-traded pricing. The fact that the regulators are taking a point of view on these things will accelerate the process.