Molybdenum metal is not an exchange traded metal. This means that there is no central market, such as the London Metals Exchange (LME), where a buyer or seller of molybdenum can go to buy a contract for the future delivery or sale of molybdenum at a fixed or known price.

The rise of minor metals like molybdenum as an asset class of interest to investors has recently prompted the LME to discuss the possibility of the creation of a molybdenum contract on the LME. But why would the LME want to even begin the laborious and expensive process of establishing a norm or specification for molybdenum, and/or ferromolybdenum, and then getting existing or newly recruited exchange members to dedicate the capital and the metal to guarantee such a contract?

Anthony Lipmann, a recent past chairman, and still a board member of the Minor Metals Trade Association, is himself a second generation minor metals trader, and has recently made some very cogent comments on the general topic of LME contracts for minor metals in an article that appeared in Metal Bulletin, a British publication. The most pertinent question: "Why does the LME want to get involved with minor metals?" Here are some of the main points.

< "The LME has launched the discussion ... in molybdenum (400 million lb in Mo, worth about $14.5 billion).

Most business actually takes place on long-term contracts based on the average of published prices, so errors and inaccuracies tend to be smoothed out over time. As an alternative the LME would like to offer the industry a platform, its knowledge in running markets, its transparency and the capacity to hedge.

But is this just the LME searching to develop its business in a competitive market, or would it truly bring something to the minor metals world? Certainly, hedging, if it were possible, is the LME's best selling point - though it is not that you cannot hedge a minor metal at present.

You cannot sell a minor metal to a neutral third party through a regulated market, and unwind this sale at the chosen time of your physical sale. Nor can a consumer do the reverse, that is, make a forward purchase and then unwind, either completely, because the material is no longer needed or because a contract with the physical supplier has been concluded.

But I have doubts about both the practicability of putting minor metals or ferro-alloys on an exchange, and the possible unintended consequences that may result.

In the molybdenum market, perhaps the most likely target for the LME's attention, out of global demand of 400 million lb, 75-80% is used in the steel industry, while 20-25% is used in other applications such as chemical (catalysts), super-alloys and others. In the steel sector, 50% is traded as MoO3 powder, 30% as ferro-molybdenum, and 20% as MoO3 briquettes.

Which of these diverse products would be suitable for a terminal market, and capable of gathering liquidity and momentum? Supporters of the idea of contract will answer: 'This is what the funds are for - the liquidity they bring would enable the industry to offset risk.' The other side of a hedge need not be anyone involved in the metal trade, just a financial institution or hedge fund with a view.

The danger lies not in the theory - but the practice. Is the LME's incursion into minor metals driven by the belief it truly has a useful service to offer? Or is it responding to the City of London's insatiable urge for another instrument with which to play?

It is not the LME that I fear, but the non-trade participation in the market that it will encourage. The threat lies with the hedge funds, derivatives traders, banks and others who would use minor metals as a vehicle which, once clothed in the legitimacy of the LME, may act as an outlet for the vast sums of vagabond money stalking the globe.

Conservative voices, like those who should have warned about the securitisation of mortgage debt, need to be heard on this issue." >

Anthony's conclusion is that most of the benefits of such contracts would flow to the LME not the buyers and sellers.

I note that since there is no exchange traded contract for molybdenum, or any other minor metal creative financiers, some at the producers and end-users themselves, have now gone ahead with the creation of a virtual hedge for molybdenum, which is at once both more than and also the same as a futures contract.

It provides a 21st century kind of insurance, not only against price volatility and interruption of supply, but also specifies a form for delivery that is tailored to the individual hedge. This is a key difference between the new virtual hedge and the old physical hedge (guaranteed by warehoused material). This difference is also why the LME will not be able to issue this type of virtual hedge competitively; there are simply too many minor metals and they must be made available in too many forms to conform to the present model of the LME. Also, many minor metals are reactive in air and moisture when pure and must be carefully stored against degradation, a huge expense.

Before I tell you about the molybdenum hedge, I need to point out that, of course, just as the virtual hedge is finally becoming a reality, the politicians have raised their empty heads to spit fire at the underlying concept and suggest "regulation" of what the clueless call "speculation."

A couple of days ago the Wall Street Journal published an editorial entitled "Political Speculators." This discusses the confusion over the economic understanding of politicians between speculation (bad) and "price discovery" (what's that?). Of course the politicians believe that if it moves, it must be regulated, because that creates political patronage and revenue opportunities and can thus ensure re-election, the holy grail of all political endeavours.

Please read the WSJ editorial for yourselves, but let me say that demand for new oil burning utilities, plastics and chemicals, and personal and public vehicles fuelled by petroleum distillates, has simply gone hyperbolic in China, India and Indonesia, and the Philippines will soon follow suit. Since China and India hardly produce any oil, I believe that their growing demand has put devastating pressure on international oil contracts.

As contracts in the Middle East, Africa and South America expire, Chinese and Indian buyers are offering more and more money, exactly as free market theory predicts, to get the next contracts in place of the current buyers (us). The new oil prices that we have now flashing across the bottom screen of our business entertainment television shows is simply, I believe, what buyers must offer in order to keep their supplies - in other words, the buyers are discovering the price of oil in a world dominated by Asian demand itself underwritten by enormous sovereign wealth backing both private and public companies.

We have entered into an era of market fundamental asymmetry; the rate of increase of supply of natural resources cannot keep up with the rate of increase of demand.

So, how does a very smart end user of molybdenum, ThyssenKrupp Metallurgie [LSE:THK], who are still capable of modernizing not only their mills but their thinking, make a long-term deal to ensure its supply of ferromolybdenum so that it can keep making high strength, low corrosion, low creep steel for oil field tubular goods, cooling systems for coal, oil, gas and nuclear fired power plants, vehicle exhaust manifolds and Panzerwagens?

Moly Mines [TSX:MOL; ASX:MOL] announced on Wednesday a 10-year offtake agreement with German company ThyssenKrupp Metallurgie for all molybdenum production from the Spinifex Ridge project. Construction is under way at Spinifex Ridge, located in Western Australia's Pilbara region, scheduled for completion in the second half of 2009. The mine could have a life of up to 30 years.

Investors and purchasing agent's take note: This transaction was nothing less than the creation of a 21st century hedge against non-availability of future supply and to insure the end user that it will obtain the material at less than market at the time of delivery and in exactly the form it needs for direct use.

I perhaps should have called this article "How molybdenum has been hedged," because I want to elaborate for you the straightforward financial and product management techniques by which an end-user of molybdenum set up a hedge with a junior about-to-be-if-it-is-funded producer of molybdenum so that the end-user could guarantee his supply of molybdenum in the future as well as lock in a price that will always be below market. This transaction should be a model for all end-users and all junior molybdenum miners on how to finance the development of a mine.

The first 21st century virtual hedge contract for molybdenum, the outline of which has been publicly disclosed, is as follows:

1. ThyssenKrupp will take delivery of and purchase 100% of the molybdenum product from Moly Mines' Spinifex Ridge as oxide and ferro-molybdenum, after it has been processed by Moly's strategic partner, the Chilean metallurgical group Molymet;

2. Pricing will be determined according to market prices and conditions at the time of sale, currently at $33.50/lb;

3. Moly Mines' Spinifex Ridge project is in Western Australia's Pilbara region and construction is scheduled for completion in the second half of 2009;

4. ThyssenKrupp has also agreed to participate in the equity financing component for the Spinifex Ridge project, subject to final board approvals.

So, in summary, an off-take agreement has been concluded that allows the end-user to obtain at a time certain for a market determined price a specific form of a metal in consideration of the end-user either collateralizing loans from a third party financing institution to be converted into purchased equity in the producer or to purchase such equity directly and, in either case, finance the development of the mine.

Now, if only we could get our politicians to allow our North American junior exploration companies to seek out end users and intermediate processors and fabricators to put together such virtual hedges to provide the equity to advance them to production either with a major mining company from which they purchase services or on their own.

But of course the creation of such virtual hedges involves speculation on the part of the parties, and may require international agreements, some of which are not subject to regulation by U.S. agencies, and the removal of the mine's production from the market subject to the needs of the end-user-investor may well run afoul of the Robinson-Patman act guaranteeing the same price be offered to all customers.

Congress, having created a regulatory maze that it does not itself understand, wants to expand the confusion rather than reduce it. Note well that here a German company has made a long-term contract with an Australian producer, involving the right to purchase equity in the producer in exchange for initial financing guarantees, and also has locked in a Chilean smelter, refiner, in the deal. This is the kind of global business arrangement that Americans must learn how to do and be allowed to do if they are to insure that they can obtain supplies of minor metals over the long term.