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CME Group in the United States launched a cash-settled lithium futures contract on May 3. The contract is settled against Fastmarkets’ assessment of the lithium hydroxide monohydrate, 56.5% LiOH.H2O min, battery grade, spot price, cif China, Japan & Korea.
Here are three key points the webinar audience learnt about the new lithium futures contract.
Why should the value chain use the lithium futures contract? Like any other futures contracts in the commodity market, the lithium futures contract gives participants in the battery value chain a very standardized instrument to lock their purchase or sales price, and to minimize their risks amid price volatility, according to the panelists.
Such hedging mechanisms work as long as the formula price used by companies in the supply chain has a good correlation with Fastmarkets’ lithium hydroxide price, Gregor Spilker, director of metals/energy research and product development at CME Group, told the audience.
“In China, we have seen a preference for formula prices for different lithium chemicals or even raw materials,” Joyce Zhang, commodity broker at Freight Investor Services (FIS), said. In the lithium physical market, she added, there is an increasing correlation between long-term contract prices and Fastmarkets’ lithium price assessments.
“[As a producer, if you are] using a formula or floating pricing element tied to industrial pricing, maybe you want clarity of price in the next quarter or the next six months so you want to lock your revenue and protect yourself from the price decrease,” she noted.
“Now you can achieve this by selling forward futures against your production. Lithium negotiation are complex and take time to execute, or you sit on semi-finished lithium or you have inventory [because] the purchaser has not finished testing the materials,” she added. “You can trade on futures to protect yourself from the weakening of spot prices. You can use it to lock in prices for the future as they are today.”
Such lithium hedging instruments also help to cut investors’ and financiers’ exposure to price risks during the long investment and construction timetable of a lithium project, according to the panelists.
“If you are banks or investors in the value chain, you need to think about getting involved [in such a futures contract] to protect the investment you have, or at least to hedge [some of them], or to encourage your target companies to be involved to protect the cash flow for the project financing to certain extent,” Kevin Smith, managing director of Traxys North America LLC, said.
Smith acknowledged that the lithium supply chain has endured a degree of volatility in price development over the past few months.
Fastmarkets’ assessment of the lithium hydroxide monohydrate, 56.5% LiOH.H2O min, battery grade, spot price, cif China, Japan & Korea was $12.50-14.00 per kg on May 27. This was up by 47.22% since mid-February. Prior to a period of stabilization between mid-September 2020 and mid-February 2021, the price had dropped by 16.28% since the start of 2020.
“We firmly believe that liquidity [will increase and] people on the value chain will get more involved [in the futures market] to manage their portfolio and price risks,” Smith added.
How do brokers, exchanges establish forward curve prices? Brokers provide their clients with forward curve prices, which are derived from physical deals, firm bids and offers, panelists told the audience.
“We factor in the physical sales that we facilitate, and that also include bids and offers that we receive in our negotiations,” Martim Facada, a battery raw materials broker with SCB Group, said, adding that such a curve is produced on a daily basis.
“Forward curve is the price you can achieve today for the future,” he said.
CME also publishes settlement prices for forward months, Spilker told the audience.
“We get submissions from brokers and we get firm trade data,” he said. “The last element we look at is offers and bids on screen. All those will be taken into account to set up the CME settlement prices.”
The lithium contract on the CME has 12 forward months to trade, according to Spilker, who also told the audience that, depending on clients’ interests, CME was able to extend the forward curve for lithium contract as it did for the cobalt contract.
The CME cobalt futures contract currently has a forward curve until December 2022.
“With the market evolving, with more adoption of formula price or index-linked pricing, market participants can definitely learn more about the correlation of the spot price, the futures forward curve and the index to decide their hedging strategy and proportion with their physical market exposures,” Zhang said.
Will there be a big trader presence in lithium physical, futures market? While lithium is still on the way to becoming fully commoditized, lithium futures are likely to accelerate this process with traders becoming increasingly involved in both the futures and physical markets, according to panelists.
“Lithium has a lot of characteristics similar to traditional commodities,” Smith said, although he also pointed out that currently lithium also faces some factors, such as a short shelf life, that would prevent traders trading openly, freely and more liquidly.
Smith told the audience that this was why Traxys had been more involved in providing structured finance solutions to producers, consumers and those in the middle of the lithium value chain. In that context, it intended to manage risks in combination with companies in the value chain.
He also encouraged the audience to think about lithium futures and how to use them in risk management.
“We have all seen the forecasts for growth of the electric vehicle sector, and [we] know how much capital is needed to build gigafactories, and to track that huge amount of money there must be a risk management tool, and there must be liquidity to manage that,” Smith said.
“[Lithium futures] is a great development and it will accelerate the market toward maturity. We hope the market will evolve and become more mature and liquid. Moving forward, there will be a more commercialized scenario and a more traditional trading market for lithium,” he added.
“Lithium is chemical,” Facada said, “but that doesn’t mean it is not tradeable.”
[A quote was erroneously attributed to SCB Group’s Facada in the 15th paragraph when this report was originally published. This has been corrected.]