1) The document discusses the challenges of price discovery in illiquid commodity markets for minor metals, ferroalloys, and rare earths where transactions are infrequent and not recorded centrally. 2) It examines various approaches to price discovery such as using exchanges, industry associations, or regulators, but argues these are not practical due to the small transaction volumes. 3) The document concludes that canvassing a wide range of participants, as done by price reporting agencies, remains the most effective approach for discovering prices in opaque, illiquid markets despite some limitations.

1. Challenges of Price
Discovery in Illiquid
Commodity Markets
A White Paper about Pricing Minor Metals, FerroAlloys and Rare Earths
February 2014
Metal-Pages
Market characteristics for minor metals, ferro-alloys and rare earths
Price discovery for a commodity not traded on an exchange and where deals are largely struck in
private is challenging. This is even more so when transactions are not that frequent due to factors
such as low output and consumption volumes. In these markets price assessment, usually
conducted by price reporting agencies, takes place in conditions where there is a lack of verifiable
data.
The transactions that take place in these markets are not officially recorded in a centralised
location. The efforts of price reporting agencies in collecting these prices is the closest there is to a
centralised collection point for prices.
Transactions in these markets are either carried out directly between producers and consumers or
via specialist traders. Occasionally brokers may bring buyers and sellers together for a
commission. Traders help provide these markets with liquidity, assist with logistics, distribution
and act as wholesalers.
Traders are usually among the best informed about market conditions given the number of buyers
and sellers they communicate with. Although producers, which hold dominant market positions,
can be better informed than traders.
Transactions tend to be negotiated over the phone, by email, fax or telex. They are typically
confirmed via contract notes detailing prices and the terms and conditions of the contract. These
commodities are either bought on a spot basis, that is for prompt delivery, or on long-term
contacts.
Long-term contracts are usually quarterly, semi-annual, annual and sometimes longer.
Metal-Pages Ltd.
www.metal-pages.com
1

2. Spot market versus long-term contracts
The spot market price – published by price reporting agencies – is typically used as a reference for
long-term contracts. This is because spot market transactions tend to be more homogeneous,
repeatable, comparable and therefore easier to use as a basis for market prices.
Long-term contracts tend to contain clauses unique to the parties involved. This impacts pricing
and therefore may not be representative of the wider market. A further issue is that the details of
long-term contracts are rarely ever made public or even revealed to price reporting agencies.
Though small the markets for minor metals and rare earths are very global in nature. Ferro-alloys
are a bulk market that is also very globalised. A common characteristic of many minor metals and
rare earths is that they are produced by a concentrated number of organisations in a small number
of countries. They then tend to be consumed by a wider range of consumers. Rare earths are a
case in point. As of early 2014, nearly all the production comes from China.
Supply chains for these commodities have often formed over many years with the different
participants possessing considerable knowledge of each other.
Before finding their way into a vast array of end user applications ranging from smart phones,
medicines through to turbine blades, minor metals and rare earths tend to go through several
layers of transformation. Though critical to their functioning, rare earths and minor metals tend to
only make up a fraction of the materials contained in these end products. They often account for
only a small proportion of the overall material costs as well.
Industry associations, such as the Minor Metals Trade Association, tend to act as a central forum
for industry participants to address issues such as regulation and warehousing. However, they
normally do not collect, assess and publish prices.
Apart from supply and demand – there are a number of factors, which influence pricing.
Influences on prices
Quality – Higher purity commands higher prices due to the extra cost of processing.
Form – There are price differences relating to ingot sizes/weight or whether they are briquettes
or shot, for instance. There are also price differences between oxides and metals.
Quantity – In a balanced or over-supplied market large volumes are generally transacted at
lower prices than for smaller amounts, though it can be the opposite in a tight market.
Delivery – Incorporates cost of freight, insurance, financing and warehousing.
How prices of illiquid commodity markets are assessed
Price discovery relies on canvassing a wide a range of market participants by telephone or via
electronic communications such as email.
Once prices have been collected it is a case of making some editorial judgements over the actual
value of the commodity being assessed.
Metal-Pages Ltd.
www.metal-pages.com
2

3. Prices are usually published in a range reflecting quantities traded and the form. Oxides, metals
and the most commonly used grades are priced separately
The main criticisms of using canvassing as a means of price discovery:
1. Lack of transparency as prices are typically collected from anonymous participants who
might be inclined to 'talk their books.' Prices potentially open to manipulation to the benefit
of those giving them.
2. Prices may not be representative because the sample canvassed might be too small.
3. Editorial judgement might be flawed.
On the face of it these would appear to be serious flaws, but it must be remembered that these are
illiquid and opaque markets. Price discovery in these circumstances will always be challenging and
open to a certain level of subjectivity.
Possible alternative approaches for discovering prices of illiquid commodities:
1. Place these commodities on exchanges to make price discovery transparent.
2. Assigning the collection of prices to industry associations.
3. A regulatory body collects and publishes prices on behalf of these markets.
4. Pass regulations forcing market participants to apply practices to make price discovery
verifiable and accountable.
5. Simply cease the collection and publishing of prices.
Though some of these approaches may appear attractive at first sight, they are on reflection
subject to pitfalls as well.
The first alternative – placing these commodities on an exchange appears to be the best solution.
1. Placing thinly traded commodities on exchanges
This is a method of price discovery that has been favoured by EU regulators such as when they
moved responsibility for LIBOR (London InterBank Offered Rate) interest rate benchmark pricing
from the British Bankers Association to the Intercontinental exchange (ICE). The belief is that
LIBOR will now be priced in a transparent fashion and be less open to manipulation. The market
will also be more tightly regulated.
For similar reasons there is a move by industry to make cobalt prices from the London Metal
Exchange (LME) the main industry price benchmark rather than relying on those generated by
price reporting agencies.
However, this white paper argues that moving many rare earths and minor metals onto exchanges
is simply not practicable. According to the US Geological Survey the annual production of
germanium only came to 120 tonnes in 2012 and the refined production of indium was 670 tonnes.
For many minor metals the volumes of production, consumption and trade are simply too small to
justify being moved to an exchange.
Metal-Pages Ltd.
www.metal-pages.com
3

4. By contrast 110,000 tonnes of cobalt was produced in 2012 according to the USGS, which is still
considered a very small volume of production compared with more mainstream metals. For
instance, for copper, which is a major non-ferrous metal, production was 19.8 million tonnes in
2011, according to the LME.
The LME has had some success with its cobalt contract, but only after a great deal of effort. It's
attempts at developing an exchange traded contract for molybdenum still had not gained much
traction at the time of writing.
This may dent the LME's enthusiasm for developing exchange traded contracts for other minor
metals.
However, not all minor metals produced in quantities of over 100,000 tonnes are exchange traded.
Most aren't. In 2012 around 180,000 tonnes of antimony was produced, according to the USGS and
price benchmarks for this metal come predominantly from price reporting agencies. Nonetheless,
it is still a small volume and it is debatable whether enough trade could be generated on an
exchange to produce more reliable prices than those published by price reporting agencies.
Many buyers and sellers generally prefer to conduct their transactions in private and would not
want to use an exchange and have the prices of their transactions made public. If regulators forced
them to do so it would probably drive the trade to some other location.
Also, it takes many years to establish new price benchmarks as contracts and industry norms have
to be revised. If market participants saw an advantage in moving the trade of minor metals, ferroalloys and rare earths to an exchange they would probably have done so by now. Most exchanges
welcome the addition of new contracts and actively search for new opportunities.
Another issue is that the flow of trades that takes place on exchanges such as the London Metal
Exchange are very small when compared with the business that takes place in private for the
metals contracts it lists. From time to time this creates industry debates over how representative
those prices are.
For illiquid exchange traded markets from minor commodities, through to shares in very small
companies and derivatives such as options, very wide price spreads and infrequent trades are quite
normal.
Often the prices quoted are based on those made by market makers, depending on the exchange,
who can change them when faced with a real buyer or seller.
Arguably prices are still open to manipulation. For instance, two parties could carry out a set of
transactions at a price designed to meet their interests and to influence the rest of the market.
In fact canvassing by price reporting agencies may well 'uncover' more trades and therefore more
prices for an illiquid commodity than an exchange would generate.
Market characteristics can also be a barrier
It is not always just an issue of a commodity being thinly traded. Ferro-chrome, a 10 million
tonnes-a- year market, was investigated by the LME for the purpose of developing a contract. It
was eventually dropped due to issues over the practicality of warehousing large volumes of bulk
material typically involved with this market.
With commodity exchanges such as the LME much of the activity is driven by hedging, investing and
price discovery rather than physical trading. Therefore much of the metal stored in LME
warehouses will not be consumed for many years.
Metal-Pages Ltd.
www.metal-pages.com
4

5. With minor metals the market is primarily driven by physical trade and industrial demand.
Therefore convenient warehouse locations are very important.
Some of the applications for minor metals are so particular that one parcel of metal cannot always
be substituted for another due to slight variations in form, quality and metal composition. Impurity
tolerances for base metals are generally higher.
Still a role for PRAs with exchange generated pricing
Even in cases where an exchange traded metal becomes the established benchmark for prices –
there is still a role for price reporting agencies. Price premiums and discounts to the benchmark
price can come about due to issues such as origin, physical form, metal content and any impurities
present in the metal.
For example, at the time of writing there was an active discussion in the cobalt industry about the
need to quote premiums and discounts to the LME cobalt price for various physical forms of cobalt
metal (e.g. cut cathode, ingot, broken cathode and briquettes) and reflecting variations in cobalt
content and impurities, should the LME become the pricing benchmark for cobalt in the long term.
Price reporting agencies already publish "physical" premiums to LME base metal prices to reflect
the cost involved in processing material (e.g. cutting of nickel cathode) and taking the metal out of
the exchange's bonded warehouses. The reason they do so is that the industry needs this
information to establish the actual level of transacted prices for the material they buy or sell in the
physical market.
Speculative distortions
Another point with exchange traded commodities is that it can attract speculative interest. An
example of this phenomenon is the Kunming-based Fanya Metal Exchange. The exchange has
listed contracts for a range of minor metals and has marketed them as investment products to
retail investors in China.
From 2013 an influx of investor money has driven up prices of indium and bismuth to levels that do
not reflect fundamentals of production and industrial consumption. The higher prices on the
exchange caused suppliers to deliver more metal to the exchange, diverting it from the physical
market, and this in turn fuelled a rise in physical prices.
From time to time minor metals are subject to speculative and investor interest. Often following
some technological breakthrough, which will generate more demand. But the levels of speculative
interest in indium are unprecedented. The Fanya Metal Exchange is acting as the main conduit for
speculative funds into that market.
In minor metal markets, where supply volumes are limited and prices can rise or fall on a small
volume of trade, speculative interest can have a major distortionary impact on the market.
This becomes a source of concern for the industries which produce and consume these metals.
Consumers pay more than fundamentals justify as they compete with investors for material. It also
potentially encourages over-production by producers.
Then if those investors should decide to liquidate their holdings it could drive prices down to levels
that are uncompetitive for producers. This could lead to them experiencing financial difficulties and
create issues of under-supply further down the line, which could take years to resolve.
Metal-Pages Ltd.
www.metal-pages.com
5

6. 2. Price assessment by industry associations
One of the main reasons why price reporting agencies have evolved is because of their neutrality.
Publishing companies do not trade or invest in the commodities they assess for price purposes.
Most of them have in place policies banning their employees from having a financial interest in the
markets they assess for price purposes.
Trade associations have tended to steer clear from getting involved in price assessment due to
anti-trust laws in the US. Also, trade association members depending on whether they are
producers or consumers have very strong biases on where prices should be. Arguments over
pricing could potentially create bitter divisions within an association. It is therefore convenient to
leave price assessment to neutral third parties, such as specialist publishing companies.
3. Price assessment by regulators
Apart from not possessing the set-up to assess the prices of various metals and rare earths they
would also be playing an active role in the markets they're regulating, potentially leaving them
open to accusations of bias and conflicts of interest.
This could result in reputational damage and call into question their ability to properly regulate the
markets.
4. Make participants liable for the prices they give to price reporting agencies
Many market participants give prices to price reporting agencies on an informal basis, but on the
understanding that this information is given anonymously. Usually, these individuals are not named
in market reports explaining price levels.
The European Commission has suggested that price collection and assessment should be
formalised. However, the idea of making market participants legally liable for the prices they give
out would almost certainly guarantee that most would refuse to cooperate.
This would make price collection and assessment by price reporting agencies almost impossible
leaving the market devoid of any price benchmarks to guide transactions.
Another suggestion is to make price reporting agencies legally liable for the prices they publish.
This could have one of two outcomes. Some could cease publishing prices altogether or simply
pass on the costs of potential fines etc.. to subscribers. Both outcomes would be bad for the
market.
5. Ceasing price assessment
One radical alternative could be to cease all price assessment leaving it to individual participants to
discover prices for themselves. This would certainly suit some industry players, particularly those
with more in-depth and up to date market knowledge. Less market information would give these
participants a strong negotiating advantage.
Typically, large traders, which have a view of buyers' and sellers' intentions, a knowledge of stock
levels and where they are located have a commercial advantage. The same can be said for leading
producers.
The real losers would be consumers from the component manufacturers all the way up to the
retail customer buying the end products.
Metal-Pages Ltd.
www.metal-pages.com
6

7. Manufacturers, which use these materials, are often among the participants with the least market
knowledge. Many purchasing departments procure a vast array of raw materials and are unable to
closely follow all the different markets. For this reason many purchasing managers subscribe to
specialist publications and price reporting agencies to enhance their market knowledge.
In that sense price reporting agencies, which publish prices and articles about these markets, help
level the playing field for consumers. Armed with better information they are more able to
negotiate prices, which better reflect true supply and demand fundamentals.
Therefore any regulatory move, which would make it difficult or impossible for price reporting
agencies to operate would be to the detriment of consumers. It could also be detrimental to
western economies and their efforts to promote high-tech industries which rely heavily on minor
metals and rare earths.
Best practices for assessing prices of illiquid commodity markets:
1. Employ experienced reporters who are familiar with the markets they are assessing.
2. Ensuring as many market participants as reasonably possible are contacted for price
information.
3. Implementing a code of conduct for staff ensuring they have no personal interest in
actual price levels and do not collude with industry participants. There should also be
disciplinary procedures for breaches of conduct.
4. Carry out internal audits ensuring prices are being correctly collected and assessed.
5. A complaints procedure for industry participants if they believe prices to be incorrect.
6. Banning market participants from holding shares in price reporting agencies and vice
versa.
Conclusion
Collecting prices from market participants and working out an average price, which sometimes
includes making editorial judgements as to their true levels, may be far from perfect.
This potentially leads to the criticism that price reporting agencies in general do not use precise
pricing methodologies and algorithms, which would create greater market transparency and
predictability.
However, a precise pricing methodology is vulnerable to being gamed by market participants. This
was shown to be the case with the LIBOR scandal where participants were able to manipulate
interest rates to their advantage because they worked out how to play the rules.
In the case of price discovery for commodities traded in illiquid and opaque markets the current
approach used by most price reporting agencies of employing journalists to apply an editorial filter
is still the most effective approach.
By their very nature illiquid and opaque markets are challenging for price assessment purposes.
Metal-Pages Ltd.
www.metal-pages.com
7

8. Moving them on to exchanges is unlikely to make the process of price discovery much clearer.
There is also the issue of getting the industry to transact via an exchange. The vast majority of
commodity business is still conducted privately.
Nonetheless, price reporting agencies themselves are subject to market pressures, which impose
their own discipline.
Most minor metals, ferro-alloys and rare earths markets are covered by two or more price
reporting agencies. Those which become 'captive' to certain market interests or fail to assess
prices properly soon lose credibility. That in turn leads to losing subscribers.
This in itself places a strong onus on price reporting agencies to try and publish prices, which are
as accurate as possible.
Generally industry participants appreciate having a number of price reporting agencies. Some for
instance chose to collect prices from all of them and average them out to obtain what they believe
is a clearer picture of the market.
Whilst some may argue that an individual price on a particular day may be wrong, over time the
prices published by price reporting agencies tend to be broadly accurate. For that reason contracts
by industry tend to be signed on average prices over a period of time. Prices usually end up being
corrected due to complaints from users and investigations by the price reporting agencies.
In practice prices published by price reporting agencies do tend to be quite close to each other.
For many metals and rare earths there are often substitutes. If prices of these commodities rise to
the point of challenging profit margins of manufacturers then they quickly seek to first optimise
their usage and then to introduce cheaper substitutes.
There has been a revolution in recycling and it is steadily becoming more viable to extract smaller
and smaller amounts of minor metals and rare earths from spent products. There are a raft of
industry initiatives in countries such as Germany and state sponsored programmes by the
European Commission and the Japanese government to make recycling even more effective.
In effect high prices encourage more recycling and once this becomes more established it can have
a smoothing effect on pricing.
In both cases the extra transparency provided by price reporting agencies can make these natural
market cycles work more effectively allowing participants to make better judgements in terms of
making investments and planning their R&D.
For further information please contact: Justin Pugsley, Markets Data Manager at justin@metalpages.com
Metal-Pages Ltd.
www.metal-pages.com
8