Battery chain needs lithium carbonate hedging: Lithium Supply and Battery Raw Materials ’23

Market participants in the battery raw materials supply chain will have an increasing need to hedge lithium carbonate to mitigate price risks, and demand for this will soon grow in both Europe and North America

Panelists at the Fastmarkets’ 15th Lithium Supply and Battery Raw Materials 2023 conference spoke about the requirements. The conference was held in Henderson, in the US state of Nevada, on June 20-22.

On July 17, the CME Group will launch a cash-settled lithium carbonate futures contract that will be settled against Fastmarkets’ assessment of lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices, cif China, Japan & Korea.

The new contract “is very much needed in the marketplace,” according to Andreas Munz, who manages battery materials trading at BASF, which is a German chemical manufacturer producing cathode active material (CAM).

“The demand is just coming to Europe and North America,” Munz said. “There is not much consumption there. It’s really happening in Asia, where there is a lot more appetite for taking positions and taking risk. That will change.”

In the past two years, Fastmarkets’ assessment of lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices, cif China, Japan & Korea, rose from a low of $14 per kg in July 2021 to a high of $81 per kg in late November-early December 2022. So far this year, it has dropped to a low of $29 per kg in April, but recovered slightly to $41.50 per kg in the latest assessment on July 3.

Hedging earlier this year, when lithium prices were falling, would have protected buyers and given producers a competitive edge, Traxys lithium trader Martim Facada told delegates at the event.

“Some producers didn’t realize [when prices were falling this year] that this is a tool to capture the margin and offer a lower price to clients,” Facada said. “You can say, ‘I’m hedging, I’ll give you a lower price because that’s where the market is, and I’ll protect you from that volatility’.”

The forward curve – which has been accurate so far at predicting price moves for CME’s lithium hydroxide contract – gives buyers visibility into future market moves, according to Facada.

“Some of the [carbonate] buyers were in a situation [recently] where they wanted that 12- to 24-month visibility, and they didn’t have it because the price was moving every month, or week in some cases, and they were receiving different quotes every month. With this tool, you can easily have that visibility,” he said.

Locking-in prices could be seen as a downside to some producers that cater to investors who expect them to perform well when lithium prices go up, according to Munz. But hedging helps producers to manage storing and processing times, he said.

Hedging also makes collateral of cash flows, Fastmarkets’ director of risk solutions, David Becker, added.

To start hedging, companies must pass a due-diligence process, set up a clearing account via a bank or futures commission merchant (FCM), and access liquidity through a broker or a bank, according to Jake Constable, a commodities broker at SSY. The whole process could take two weeks or a few months, depending on the companies involved, he said.

Update on hedging lithium hydroxide

The new carbonate contract will complement the CME’s existing lithium hydroxide futures contract.

“We launched lithium hydroxide two years ago,” CME director of energy products Gregor Spilker said. “We’re just seeing now, over the past six to nine months, a really significant increase in liquidity. Open interest is above 1,600 tonnes. The volumes traded so far this year exceed last year’s volumes by a factor of four.”

Trading patterns have changed since the inception of the hydroxide contract, with more fixed-price trades locked-in further into the future, in quarterly or half-year strips, according to Constable.

In the physical market, more lithium producers were structuring contracts tied to a floating price based on a price index, which was “unheard of” even two years ago, Munz said.

Lithium hydroxide is a chemical that feeds nickel-rich batteries such as NCMs (nickel cobalt manganese oxide), whereas lithium carbonate is used in LFP (lithium iron phosphate) batteries, according to Facada. Although hydroxide has a shorter shelf life of around 6-12 months, versus carbonate’s shelf life of 1-3 years (if properly stored), shelf life does not affect the ability to hedge either product, he said.

“The price is going to fluctuate, so you can just roll over your position and trade on paper,” he said.

The Singapore Exchange launched a lithium carbonate contract, also linked to Fastmarkets’ price assessment for lithium carbonate, cif China, Japan & Korea, last September.

Enable risk management using futures contracts with the Fastmarkets NewGen risk management tool. Find out more.

You can also read further insights on our dedicated page for lithium analysis.

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