* Unable to hedge large quantities
* Unlikely to go the way of plastics
By Pratima Desai
LONDON, Feb 17 (Reuters) - London's cobalt and molybdenum futures contracts are grappling with low volumes as their first anniversary approaches, but prospects for their eventual success are high as they bring transparency to opaque markets.
The London Metal Exchange's minor metals futures made their debut on Feb. 22 last year. Expectations are they will fare better than the plastics contracts, which the LME launched in 2005 and scrapped last year for failing to attract enough trading activity.
Lack of liquidity and the wide difference between the bid and offer are still issues, however.
"There are a lot of people sitting on the sidelines waiting for the contracts to pick up liquidity," said Catherine Virga, director of research at U.S.-based CPM Group. "Volumes are quite low, and open interest is quite low."
The industry has been pricing cobalt and molybdenum using Metal Bulletin or other trade publications for many years.
"LME prices might not be as responsive because of lack of volume, but overall they probably are fairly reflective of what is going on in the market," Virga said.
Cobalt, which is used to make batteries for hybrid cars and superalloys for aero engines, is a by-product of nickel and copper. Molybdenum is a by-product of copper and is valued for its anti-corrosive properties in stainless steel.
Cobalt futures trading volumes in January totalled 674 lots or 674 tonnes, and for molybdenum the equivalent numbers were 46 lots or 276 tonnes.
That compares with 192,358 lots or 961,790 tonnes for tin, the smallest of the exchange's base metal contracts.
"I hope the liquidity in the new contracts is going to develop," said Deborah Stott, purchasing director UK and Europe at Firth Rixson, which forges metals for aerospace, automotive and power generation industries.
"We have been using the cobalt contract, but we have not been able to use it to hedge large quantities in the long term," she said, speaking at an event organised by Metal-Pages.
WIDE SPREADS
The difference between the bid and offer on the three-month cobalt future is about $2,000 a tonne, and for molybdenum there is no bid, only an offer.
"We've enquired about molybdenum, but we haven't traded. If we tried to trade we could move the market, there is no volume," a molybdenum consumer said. "But we don't think it's going the way of plastics. It needs time, we'll give it time."
The general feeling in the trading community is that cobalt stands a greater chance of success.
"I am really pleased with cobalt," Martin Abbott, the LME's chief executive said at the Metal-Pages event. "I am not unhappy with moly, but nonetheless the numbers tell us that there are different dynamics going on compared with the cobalt (contract)."
There has been a certain correlation between the LME cobalt and molybdenum prices and published prices.
"LME prices represent actual transactions," Abbott said. "You can buy and sell using LME prices. It is not about criticising the published prices; it is about bringing more flexibility to what you can do with prices," Abbott said.
The cobalt and molybdenum cash contracts were launched last May. Currently there are no bids or offers for the cash contracts.
"We are not planning any changes to the contracts. Liquidity begets liquidity, and with greater liquidity come smaller spreads ... Member involvement for both metals has so far been very encouraging, " said Chris Evans, head of business development at the LME.
"Industrial users looking to hedge large tonnages might struggle in the early days of a new contract to capture the liquidity they need. They should consider hedging smaller tonnages to be more sure of finding a counterparty."
(Additional reporting by Sylvia Antonioli; editing by Jane Baird)