While the initial appetite to hedge exposure to volatile lithium prices came from automakers expanding their electric vehicle (EV) fleets, an appreciation for short-term pricing and risk management tools has since filtered upstream, delegates heard during Fastmarkets’ virtual Lithium Supply & Markets conference on Monday October 26.
“As EV batteries become such a large part of the input cost of producing a car, clearly the need to lock in some of those prices on a forward basis becomes more important especially as EVs are no longer a sideline, experimental or niche product line for major auto manufacturers,” he added.
Global EV sales are expected to increase by 38% year on year in 2021, with a forecast 36% for this year, according to data from Fastmarkets’ battery raw materials team. Lithium production is expected to grow to 430,000 tonnes in 2021, up 21.5% compared with a forecast 354,000 tonnes (lithium carbonate equivalent) in 2020. About 920,000 tonnes of lithium will be required by 2025 to meet forecast demand from the growing EV and energy storage sectors, according to Fastmarkets data.
An early drive for lithium market transparency coming from downstream users was to be expected, Alex Harrison, editorial and pricing director at Fastmarkets, added.
“That’s entirely understandable, not least for the projected growth that they’re seeing [in EV demand], that they have to secure supply and feed, and secondly, because of the way that prices have moved over the past couple of years,” Harrison said.
The lithium hydroxide monohydrate, min 56.5% LiOH.H2O, battery grade, spot price, cif China, Japan & Korea stands at $8.50-9.50 per kg as of Fastmarkets’ October 22 assessment, down 57% from highs of $20-22 per kg at the end of April 2018.
“I think if you’re not thinking that hedging your lithium price was a priority you probably wouldn’t be working in the risk management or procurement business of an auto company, so the push [for transparency and hedging tools] comes from the OEMs [original equipment manufacturers] and the autos,” Harrison said.
But broad support from all sides of the markets is a pre-requisite for launching a futures contract, delegates heard during the conference.
Last week the LME said it could launch its lithium contract as early as the first half of next year, depending on market readiness, to be cash-settled against Fastmarkets’ price assessment for lithium hydroxide monohydrate, min 56.5% LiOH.H2O, battery grade, spot price, cif China, Japan & Korea.
“Often when developing a new market, certain segments will show interest but it’s really important that you’ve got the buy-in and participation from key participants across the value chain: producers, intermediaries, banks, end consumers, etc,” Martin said.
“I think things have moved on in a big way over the past couple of years. We’ve seen so much volatility in the price and there’s a growing recognition that a greater degree of maturity and risk management tools like futures contracts, ultimately are going to be helpful to everyone in growing this market,” Martin added.
Where a futures contract is cash-settled, regular reference to a third party reference price within physical contracts ahead of its launch is another requirement, which also necessitates engagement from both buyers and sellers.
“That interest in pricing has really grown, in part because of the growing consciousness in the lithium industry about the value of short-term pricing. It has manifested itself in greater interest in the methodological aspects of what we’re doing; greater engagement in discussions about specifications and with the price discovery process itself; and greater usage of the prices in physical contracts,” Harrison said.
“While the first movers are the OEMs and the automotive side I think [reference to spot pricing] is becoming more commonplace, accepted and supported across the supply chain,” Harrison added.
“You can see the way in which that interest in price and fixing price risk - how deep and profound [that interest is] across the supply chain just by looking at the LME lithium committee and the range of corporate names on there,” he continued.
Last year, the LME established a lithium committee to represent the views and interests of lithium stakeholders. It includes representatives from Tianqi, Albermarle, Jaguar Land Rover, Lithium Royalty Corp, Tesla, Transamine, Chengdu Chemphys Chemical Industry Co, Pilbara Minerals and BASF.
“We have fantastic backing from banks, producers, car companies, battery manufacturers, so hopefully we can use that backing to make something happen in this market,” Martin said.
“It’s not realistic to expect [companies to] hedge their entire consumption or production any time quickly so there’s going to be a degree of experimentation in the early days, and we expect [volume will be put on] as a means to catalyzing development in this market. It’ll be interesting to see how that takes off,” Martin added.