There are many issues facing world markets for specialty metals. Most of these markets are relatively small in size. They are not sufficiently large and liquid enough to have price discovery in an exchange. They are small, highly specialised, non-exchange traded metals with relatively small numbers of producers, processors, traders, and users.
At metals conferences around the world, outside of those in China, a recurring topic is the fact that many specialty metals prices globally are based off of prices in China. This is a normal occurrence, given that China represents the largest producer, refiner, and user of many of these metals. With the bulk of supply and fabrication demand occurring in China, it is logical that prices in the Chinese market would be the prices at which metals change hands.
Outside of China, many metals prices are based on Chinese market prices, adjusted for shipping, insurance, and other variables. There is a perception or desire that there needs to be metals prices in Europe, North America and Asia ex-China that reflect market conditions in each of these regions ‘more accurately’ than those derived from the loco China prices adjusted for some of the differences in markets and transportation costs.
There is a way to develop specialty metals prices based on market conditions in specific parts of the world, not based on prices in China.
CPM has employed this approach in platinum, palladium, rhodium, and molybdenum for clients at times since the 1990s. The solution is for producers to sell at least a portion of their output via long-term offtake agreements.
These agreements are designed to provide the producers with prices that cover their costs and provide at minimum a reasonable profit, while preserving exposure to rising prices. They provide industrial users of these metals with increased surety of supply and more stable and predictable prices for their raw materials.
If insufficient interest exists on the industrial user side, trading firms and a full range of institutional investors are interested in taking that side of the agreements.
In a way, these offtake agreements are partnerships. In-deed, they can easily be structured as Sharia-compliant partnerships, opening up large numbers of Islamic investment firms that would be interested in investing in the price exposure to specialty metals. Many institutional investors around the world are interested in finding ways to buy exposure to rising specialty metals prices but find the opportunities few to non-existent.
For these purposes, in our view such offtake agreements There are many issues facing world markets for specialty metals. Most of these markets are relatively small in size. They are not sufficiently large and liquid enough to have price discovery in an exchange. They are small, highly specialised, non-exchange traded metals with relatively small numbers of producers, processors, traders, and users.
At metals conferences around the world, outside of those in China, a recurring topic is the fact that many specialty metals prices globally are based off of prices in China. This is a normal occurrence, given that China represents the largest producer, refiner, and user of many of these metals. With the bulk of supply and fabrication demand occurring in China, it is logical that prices in the Chinese market would be the prices at which metals change hands.
Outside of China, many metals prices are based on Chinese market prices, adjusted for shipping, insurance, and other variables. There is a perception or desire that there needs to be metals prices in Europe, North America and Asia ex-China that reflect market conditions in each of these regions ‘more accurately’ than those derived from the loco China prices adjusted for some of the differences in markets and transportation costs.
There is a way to develop specialty metals prices based on market conditions in specific parts of the world, not based on prices in China.
CPM has employed this approach in platinum, palladium, rhodium, and molybdenum for clients at times since the 1990s. The solution is for producers to sell at least a portion of their output via long-term offtake agreements.
These agreements are designed to provide the producers with prices that cover their costs and provide at minimum a reasonable profit, while preserving exposure to rising prices. They provide industrial users of these metals with increased surety of supply and more stable and predictable prices for their raw materials.
If insufficient interest exists on the industrial user side, trading firms and a full range of institutional investors are interested in taking that side of the agreements.
In a way, these offtake agreements are partnerships. Indeed, they can easily be structured as Sharia-compliant partnerships, opening up large numbers of Islamic investment firms that would be interested in investing in the price exposure to specialty metals. Many institutional investors around the world are interested in finding ways to buy exposure to rising specialty metals prices but find the opportunities few to non-existent.
For these purposes, in our view such offtake agreements are better metals pricing mechanisms. They offer prices to producers that more closely relate to their business. They offer industrial users more predictable supply and prices. And they offer investors who seek ways to buy exposure to specialty metals a means to accomplish this.
CPM has long experience in assisting mining producer clients as well as industrial user clients in negotiating long-term, often open-ended offtake agreements. We serve as honest advisors without conflicts of interest.
CPM has the capacity to create synthetic option pricing that allows for pricing the offtake model in a way that provides benefits for both the producers and users or investors. It creates synthetic options models for the metal, just as it has for platinum, palladium, rhodium, and molybdenum in structuring past offtake agreements. This provides a quantitative basis for determining a ‘fair’ minimum and maximum price range and volumes for the offtake agreement, rather than having the two sides agree to completely arbitrary price ranges and levels.
Users seeking reasonable prices can reach long-term price agreements with producers based on producers’ costs and reasonable profits. Clauses for extraordinary market developments provide flexibility and protections for both parties.
In addition to using a partnership-like structure, such offtake agreements rely on greater transparency and information exchanges than many western mining executives and financing groups are comfortable with, but they can be stronger and longer lasting exactly because both parties develop a sense of trust and cooperation with each other.
On one side of the offtake agreement is a producer or would -be future producer that is willing to accept a pricing scheme that would provide it a floor price that covers its costs and provides an acceptable minimum profit. It would participate in higher prices should they occur, but it would share a portion of its profits with the other side of the agreement should prices rise particularly higher than the threshold price set in the agreement.
On the other side of the offtake agreement would be either an industrial user or commercial entity interested in having a long-term supply of the metals, or one or more investors interested in having price exposure to the metal.
By Jeffrey M. Christian, Managing Partner, CPM Group LLC
CPM Group is an independent commodities research, consulting, and investment banking advisory company headquartered in New York. The company is considered the foremost authority on markets for precious metals, along with manganese and molybdenum. Its entry into tantalum research came through a new collaboration with Andrew Matheson and Patrick Stratton, who are both recognised experts in the tantalum market.
