Details on the practicalities of that partnership, and the input we are seeking from those active in the lithium market, are below.

Which price is being used?
There is no clear-cut or definitive physical benchmark or reference price in the lithium market. So while the LME has said it will launch a futures contract, the basis for settlement has not been decided on other than it being a Fastmarkets-assessed price.

We already assess prices for several lithium products, including for battery-grade compounds traded in the battery-manufacturing hub of China, Japan and Korea, and for spodumene - the raw material. It’s possible that one of these price assessments - or a variation of it - will form the basis of the price ultimately used for settlement in the LME contract. But it is also likely that the specifications of those prices will be refined between now and the time that the LME introduces its contract. This is because the battery market, its raw material inputs, production processes and the way key players do business are still evolving.

The approach to lithium differs from that in a market such as cobalt, for example. In the latter’s case, there is a long history of a PRA price (specifically, Fastmarkets’ standard-grade cobalt price) being written into physical contracts not just for metal but for other products along the supply chain, with premiums, discounts and payables.

What is the timescale for launch of the LME contract?
Typically, we expect that markets will have a definitive physical benchmark - that is, a PRA-assessed price that is regularly written into contracts - before it evolves to the point of an actively traded, cash-settled exchange contract. In iron ore, for example, PRAs started to publish in 2008 daily indices based on spot transactions.

Price volatility meant that contracts with Chinese steel mills gradually broke down between 2008 and 2010 in favour of more flexible pricing mechanisms tied to spot indices, cementing the importance of third-party pricing in the iron ore market. Iron ore futures first emerged in 2009 on the Singapore Exchange; trading volumes have since grown considerably.

This is one example but there is nothing to say that process won’t be longer or shorter in lithium; it is for the market to evolve and that evolution will determine which price is the best natural fit as a physical, and therefore financial benchmark and reference.

How does the partnership with the LME work in practice?
Fastmarkets will continue to assess prices and, in consultation with the market, to develop and refine the specifications for those prices. Our price reporting team is engaging with those active in the buying and selling of lithium to determine the specifications for a price assessment that can best capture the dynamics of the lithium market; it follows that that price would be a suitable candidate for cash settlement on an LME contract when the time is right.

The LME at the same time is carrying out its own market engagement to develop the specifications the lithium futures contract as well as the prerequisites and conditions for a functioning contract, including the timing of the launch.

We may share the feedback we gather with each other and will use that information to inform future industry consultations on price development. The LME is focused on launching a successful lithium contract while Fastmarkets is focused on developing a price assessment that facilitates global lithium trade; gathering and sharing market feedback where relevant is essential for those separate but complementary aims.

Is all price assessment data therefore shared with the LME?
No. Data that we collect for our price assessments is collected and stored confidentially; we continue to work as an independent PRA in that regard. Data is collected by Fastmarkets price reporters and stored on our propriety database, access to which is restricted to designated members of Fastmarkets’ editorial, price development and compliance teams.

We expect the lithium market to evolve; the LME futures contract will ultimately be one application of the benchmark price that emerges as part of that evolution. In that process of maturation, it is likely that the price will be used in other ways as well. It could be written into physical contracts for the buying and selling of a product; used for accounting and inventory valuation purposes; or to benchmark internal sales performance, for example.

What are the next steps?
We know that companies have started to write our prices into their contracts. We will continue to discuss our price discovery processes as the structure of the lithium market changes.

We are gathering feedback on the utility of the lithium prices we publish at present to gauge any necessary developments to specifications that will better enable us to capture moves in the evolving battery-grade lithium market.

We invite active market participants both to contribute data to our prices and to provide feedback on them. Beyond that, and to ensure feedback is gathered from the widest possible pool, the initial feedback will be used to inform a public consultation where material changes to specifications or new price assessments are proposed.

Click here to register for weekly lithium price alerts via our lithium price spotlight.

To discuss our lithium prices or the partnership with the LME in more detail, please email pricing@fastmarkets.com or contact our editorial and research teams:

Editorial:
Martim Facada: martim.facada@fastmarkets.com
Carrie Shi: carrie.shi@fastmarkets.com

Research:
Will Adams: will.adams@fastmarkets.com
Vicky Zhao: vicky.zhao@fastmarkets.com

See also: