Charles Swindon on Minor Metals

Following the annual dinner of the Minor Metals Trade Association [MMTA], HardAssetsInvestor.com was fortunate to have the opportunity to talk with its chairman, Charles Swindon, about both the association and minor metals themselves.

HardAssetsInvestor [HAI]: What exactly is the MMTA?

Charles Swindon [Swindon]: The MMTA, or Minor Metals Trade Association, was originally set up to facilitate trade in minor metals and ferro-alloys between all sections of the minor metals business. The main components of our membership, at the moment, are traders, producers, consumers, financiers and warehouse people. All these people, and the assayers, are critical in making up the whole process of how the minor metals trade works, and each one of them is an important type of category to our membership.

HAI: How would you define a minor metal?

Swindon: Perhaps you could describe a minor metal as any metal which is not traded on the London Metal Exchange. There are the six major metals and, now, the two steel contracts, which are traded on the London Metal Exchange. But the minor metals are key metals which are enjoying massive growth in demand for various strategic and nonstrategic reasons.

HAI: Do you actually think we might see migration of, say, something like cobalt, from having been a minor metal, to actually being traded on the LME?

Swindon: It's interesting to see that the board of the LME appointed, for the first time, someone to look into just this area. Certainly, at the MMTA, we are very much involved and aware of what is going on in all those directions. They are looking at cobalt, molybdenum, and probably ferro-chrome, as possibilities.

HAI: How are minor metals traded if they're not traded on an exchange?

Swindon: Some of the minor metals are traded on long-term contracts between producers and directly with the consumers. And perhaps that is the majority of the business: on six- or twelve-month long-term contracts.

The rest of the business is contracted on a spot basis or on a short-term basis: two sides enter into negotiations with one another and frequently, with our increasing numbers, all the specifications of our minor metals contracts are usually adhered to and everything is referred to.

We have very strict specifications for all the different impurities, sizing and packing, warehousing and transportation for all the metals and, more recently, even the rare earths that the MMTA has started to move into (as well as ferro-alloys). Because we are very strict and tight in those areas, people are already seeing us as the standard bearer as to what makes up a minor metals contract.

HAI: What are the most well-known, and least well-known, minor metals?

Swindon: The large ones - of the minor metals produced and traded in large quantities - would be magnesium, manganese and silicon. And I suppose I have to mention the ferro-chrome and the ferro-vanadium and the ferro-moly [molybdenum]. Those three are vital for so many parts of the steel business.

HAI: And the least well-known?

Swindon: Maybe niobium, gallium and rhenium.

HAI: Are some of these metals strategic because of where they come from, in addition to what they are used for and, often, the very small amounts of them that are actually produced?

Swindon: Certainly! The geographic location, or very few geographic locations where these metals come from, make their supply very risky. If we're relying on exotic geographic locations with shaky political regimes and the ability for governments or the major producer in these places to withhold a supply of these metals for various political or economic reasons, and the West, in particular, desperately needs these metals for some of the final component parts of high-specification engines, or whatever it is, we are somewhat beholden to them.

So, in some cases, the prices will shoot up and that might redress the balance and some slightly greater flow of this metal might come into the West, but they are strategic for exactly the reasons you've mentioned.

HAI: Why do you think they're termed minor metals, when, in fact, so many of them are strategic?

Swindon: I totally agree with you that the term "minor" is detrimental and it doesn't give true respect to the fact that so many of these metals are strategic in so many ways. It's a misnomer from the past and it may well be that the importance of these metals, and the greater demands, and even the higher prices we have, make this term "minor" look more and more ridiculous...

HAI: Has there been asset inflation in minor metals?

Swindon: There has been large asset inflation in virtually all of the minor metals for the last two-to-three years.

This has gone along with the fact that many other commodities - including the nonferrous metals traded on the LME - and the gold price, and oil prices, have all shot up so much.

All the minor metals are quoted in U.S. dollars. If you consider the massive depreciation of the U.S. dollar over this two- to three-year period, some of the massive bull run in prices that we have seen has been mitigated, or even driven upwards, by the weakness of the dollar. And so that is a key component in this price, and you may wonder, how can so many of these consumers still afford it? Well, at least in Japanese yen and euros, the prices are not quite so phenomenally high.

HAI: Have you seen an influx of speculation and investment in minor metals per se, as opposed to their continuing use just in industry?

Swindon: It's difficult to define, but I am certainly aware from various sectors of the nontrade side of minor metals that there is increasing interest from many different types of investors.

There's massive interest overall in commodity hedge funds and pension funds to go into commodities. That is the biggest influence. There are a few private individuals who are starting to dabble in the minor metals, but obviously the impact of that compared to the large commodity and pension funds is minute. The question they are asking themselves, I suppose, is how they can be more involved in minor metals.

HAI: How would you answer that?

Swindon: Some of the key banks are starting to offer commodity swaps even in the minor metals, and that is possibly of some appeal to these investor clients, as well as the trades - to some extent. The advantage of these swaps may be that it's not necessary for the investor to put up 100% cash collateral in the first instance, whereas if you buy a minor metal from a producer or a trader, this involves 100% payment for it up front.

HAI: Do you think there is any room for minor metal ETFs, or minor metal ECNs or ETNs? Or not at this stage?

Swindon: I think creative financial types are going to start to do all of these things - probably. But what the MMTA is concerned about is that many of these products might come onto the market over which we have no control. The MMTA is an unregulated market and we don't want to see overregulation coming in; we don't want to see any regulation coming in to our products. But the market makers in these derivatives are fully regulated and so this could become an area of greater and greater regulation in all aspects of our trade.

HAI: What currently are the most important influences on the prices of minor metals?

Swindon: The key influence in this current leg-up in the prices that we've seen in 2008 is the fact that there is great uncertainty of supply from many parts of the world.

China is manipulating and tweaking around its import and export rebates, and that is causing increasing uncertainty because they are such important suppliers.

But if we look at other key supplying areas to the minor metals trades, like Africa and South America, there is considerable political uncertainty in both those areas, too, and even a threat of re-nationalization of many of these minor metals industries in many of the countries.

HAI: How has the price performance of minor metals differed over the past several years from that of either base or precious metals?

Swindon: I think over the bull run that we've seen for the nonferrous metals on the LME, precious metals and now the minor metals, they have more or less enjoyed the same cyclical run. Even though, I think, if you take the two sectors that you referred to - the base metals and the precious metals - the sentiment in them usually rides over to affect everything going up or everything going down.

I think the difference with the minor metals is that, because there is not a terminal market where they can be traded, the real fundamentals of supply and demand will mean that not all of them will go up at once or go down at once. They are not governed so much by these passions of sentiment, and true fundamentals come through.

So, if you're evaluating a particular minor metal, and what it might do for the next six-to-twelve months, you should put aside sentiment and look at the real supply and demand, and so the price directions will be much more mixed and not all in the same direction.

HAI: Do minor metals work on different economic cycles from base and precious metals?

Swindon: No, I don't think so. Certainly with both nonferrous base metal producers and precious metal producers, and considering that several of the minor metals are by-products or even by-products of by-products, the trading of these minor metals is enjoying exactly the same economic cycles.

HAI: As even the precious metals? It's not just coincidental?

Swindon: I don't think it's a coincidence. I think certain industries are doing better than others at the moment, but this is a global picture. If we've got a downturn here in the United States at the moment but prices are not going down, it's because the overall global economic cycle is still encouraging people to invest in metals, including the minor metals.

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More Information:

International Minor Metals Conference:

The MMTA will be holding its International Minor Metals Conference in Istanbul, Turkey, April 27-29, 2009.

Further details can be obtained from:

Minor Metals Trade Association

Comments

[Clavis]

MM could be an interesting play, especially if coming from a 'secure' resource area. More homework!