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In the metals business, we are accustomed to a particular form of price discovery that has largely stood the test of time, even through technological change and development. Despite occasional mutterings, nobody involved in the business would seriously dispute that an open form of discovery results – over the long term – in a price is generally an adequate reflection of supply and demand in the market.
But what happens when a newcomer appears, which doesn’t particularly lend itself to commodity pricing? Price discovery requires a level of spot trade and activity, as well as a clear specification on which to base a price assessment. I’m thinking here of the metal of the moment, lithium. Trying to establish a benchmark pricing for it is not proving so straightforward. There are a couple of factors – at least – at work here. First, there are a variety of different forms of the metal, which interest different industries – glass and ceramics, batteries, pharmaceuticals and so on – many of which are far more like a chemical product than a simple refined metal. Second, there is the structure of the market, with very little trader involvement. Effectively, what we have is a chemical product being sold directly by its producer to the consumer; price is largely a long-term commitment, not something which reacts constantly to changing market conditions.
Well, so it is, and so it may stay; there is no imperative that says lithium necessarily has to be priced in a way that suits commodity traders. But if we take a look at the evolution of the copper concentrate market, as an example, we may see how it could evolve.
Copper concentrate is not a homogenous product; each mine’s production will have a different group of trace elements, some of which will be payable and some of which will incur penalty charges. Years ago, the trade was a straightforward business between mines and smelters, where very long-term contracts were established with prices referenced broadly to the London Metal Exchange copper price. The premium/discount to that price remained largely shrouded in the mists.
However, as the market began to fragment – more mines and more smelters, needing to be able to deal with each other – merchants began to get more and more involved. The seaborne “trade” in copper concentrate was born. For it to grow, though, the traders who were facilitating the liquidity in the market needed (as both buyers and sellers) some kind of standard against which they could reference their prices. So the treatment and refining charge (TC/RC) numbers became largely a public figure, with, now, a number of regional benchmarks against which cargoes can be priced. At the same time, the pricing period – traditionally often in multiples of years – is dropping, as buyers and sellers are more able to fine tune their requirements against a public benchmark. And just to emphasize that the benchmarks are real, they are also used by courts and arbitrators where disputes have to be settled.
We see robust spot reference pricing, such as Metal Bulletin’s benchmark TC/RC index, which normalizes for copper content, brand and counterparty type on a fortnightly basis in a way that accounts for the complexity of the different specifications of the world’s mined copper production.
I would attribute a large part of the opening up of the copper market to the influence of traders getting involved. With the growing importance of batteries and the part that lithium plays in them, traders are keen to become involved in this market. For them to do so, a more transparent price will be almost essential. Transparent price versus liquidity: bit of a chicken and egg question, really…
All lithium carbonate and hydroxide prices are available in Industrial Minerals’ Battery Price Report.