Titanium Prices

titanium-pricesTitanium is not a publicly traded material which can at first be strange considering its widespread usage globally and it is possible to compare it in terms of a replacement to steel which is traded. The reasons why this is the case is that the manufacturing process (Kroll Process) accounts for the majority of titanium costs and that process is used to make a variety of alloys. There are three issues specification, liquidity and collateral).

But lets start with what an exchange future is…
A future is the obligation to buy an asset at a fixed price in a future month (i.e. $93 Dec-13 WTI is the right to buy WTI for $93 in Dec-13. When Dec-13 rolls around you pay $93 and some other person gives you WTI. There is also the possibility for financial settlement where no physical product actually changes hands. In this situations you pay $93 and the other person pays whatever the published settle price is in Dec-13. A published settle price is from an agency that observes market transactions for that day to determine the value of the asset at that time. Possibly the exchange itself).

Specification

The make-up (alloy content) seems to vary a lot. An exchange publishes a specification for a product. Participants expect the delivered product to equal or exceed that specification. The LME gets around this by only being able to deliver metal on the exchange stored in a bonded warehouse. I.e. the spec has been verified (and this also offers security for the exchange). In the crude markets this isn’t the case.

Liquidity

An exchange needs to be liquid. All an exchange is doing it matching up one market participant with another and assuming the credit risk (we’ll look how the exchange deals with this next). When people want to go to the exchange they expect to be able to trade at market levels immediately. If they can’t do that no one will visit your exchange. It would be a bit like going to the supermarket for bread but it only has it once a quarter. You’d find a different way to get bread. You’d probably find a windmill or a baker or something. And that is what the Titanium end users will do, they will seek a product instead of the exchange.

Collateral

When an exchange matches two counterparties the exchange itself assumes the credit risk. It deals with this through ‘margin calls’. When I buy a future it has zero value e.g. I buy Dec 13 @ $93 because that is what it’s worth – what I owe the counterparty and what they owe me are of equal value at this point. If Dec-13 futures raise in value by $1 (maybe due to supply concerns) the counterparty now owes my $1 more than I own them. The counterparty would now be required to post margin of $1. Now if either we or they go bust the exchange is fully covered for it’s assets and liabilities. These margin calls are made daily. Now that is a very simple view. The actual mechanics of managing an exchanges credit exposure are a lot more complicated, but that gives you a flavour. Also, as mentioned the LME takes security through it’s bonded warehouses but I’m not sure of the specifics of that. Additionally to all of that, there is also the financial regulation aspect, which in Europe & the US is harsh. In China that is different.