Freeport switches to LME for cobalt pricing amid benchmark furor

NEW YORK Fri Oct 25, 2013 5:02pm EDT

NEW YORK (Reuters) - Freeport-McMoRan Copper & Gold Inc. (FCX.N) said on Friday it will use London Metal Exchange pricing data for some $200 million worth of annual cobalt sales, shifting from a published benchmark that has been an industry standard for decades.

Freeport said it will turn to LME-based pricing for cobalt and cobalt hydroxide supply contracts from January 1 2014, instead of Metal Bulletin, which assesses benchmark prices for global metals twice a week.

The U.S. copper and cobalt producer linked the move to improving trading volumes on the London exchange's youngest contract.

Also, increased regulatory scrutiny in the wake of the Libor rate-rigging scandal and the Platts oil-price probe has pushed commodity investors, traders, end users and producers to clear trades on exchanges. This is considered more transparent than use of published prices, and less vulnerable to manipulation.

It is unclear if other producers, traders or end users will follow the lead of Freeport, one of the world's biggest cobalt producers whose move reflects growing volume in the minor metal contract that was launched in February 2010.

"We believe there is general acceptance amongst customers and supplies to move to LME-based pricing for cobalt," said Freeport senior vice president David Elliott in a statement.

The LME's copper contract is used as the benchmark for global trade.

Even so, news of Freeport's decision comes at a sensitive time for the 136-year old exchange, which has been slapped with lawsuits and roiled by regulatory scrutiny over its handling of its warehousing policy.

KEY PRODUCER SUPPORT

Freeport sold just over 11,000 tonnes of cobalt, which is mainly used in magnets, catalyst and super alloys for gas turbine blades in aircrafts, for around $195 million last year, according to its 2012 annual report.

That equates to almost 15 percent of global annual output.

Luring a big producer to use a contract is viewed as key for a new contract's success.

Trading in the LME's aluminum contract, now by far its biggest by volume and open interest, only took off when producers started pricing off it some seven years after its launch in 1977.

Still the cobalt contract is tiny compared with the LME's more established base metals contracts and even compared with its steel billet product which has struggled amid stiff competition from rival exchanges.

In the first nine months of this year, LME cobalt turnover rose to 10,720 contracts, up 5 percent from the same period of 2012, according to LME data.

But open interest, a reflection of liquidity in a market, was just 675 lots on Wednesday, the most recent exchange data.

That's less than 1 percent of global annual output.

It also compares with volume of almost 50 million lots of primary aluminum between January and September and open interest of 1.2 million lots, equivalent to 30 million tonnes.

HEIGHTENED REGULATION

Efforts to more rigorously regulate financial benchmarks in the wake of the scandals have unnerved some metals traders that rely on the published prices for their contracts.

Metal Bulletin has said earlier this year that several companies had stopped contributing to the assessment since the Libor incident and Platts probe.

The draft law follows public outrage at European banks for fixing the Libor late last year and an European probe this year into suspected manipulation of oil benchmarks compiled by Platts, part of McGraw Hill Financial Inc (MHFI.N).

Metal Bulletin which canvasses producers, consumers, brokers, and traders for their assessment of a metal's benchmark price. The identity of these participants is not revealed, and the assessments they give can be based on bids and offers rather than actual deals done.

Freeport's Climax molybdenum subsidiary is not affected by the change, it said.

The LME's molybdenum contract, launched at the same time as cobalt, has not been as successful as cobalt, with just over 400 contracts traded in the first nine months of the year and 41 futures contracts in open interest.

(Reporting by Josephine Mason; Editing by David Gregorio)