Cobalt derivatives’ popularity solidifies new aspect of cobalt trading, Traxys CEO says
Financially settled contracts for metals have grown in popularity over the last 12 months, and this likely played a role in a change of ownership at Traxys
The purchase of Traxys by global market maker Optiver, CoLift and an investor group will provide “new solutions to secure supply and optimize price exposure in our key markets,” Traxys chief executive officer Mark Kristoff told Fastmarkets in an interview.
The deal, announced on February 6, is an important milestone for the battery metals market. Traxys’ management will increase its stake in the company once the deal is concluded, likely in May.
Given the growing interest in battery metal derivatives such as cobalt metal, which hit record volumes earlier this year, Traxys’ decision to form a strategic relationship with liquidity provider Optiver enhances its position within the derivatives market for the metals it trades.
“As many of these products [that Traxys trades] are not exchange traded, there is market demand for solutions to better manage price risk,” Kristoff said.
Derivatives offer one way to optimize price exposure; the method of risk management is crucial to for market participants to avoid being on the wrong side of trading volatility. This volatility was evidenced by the widely reported London Metal Exchange nickel saga, in which futures price soared above $100,000 per tonne before trading was suspended in March 2022.
Being active in both the physical and financially settled sides of battery metals enables trading firms to be better equipped to meet the needs of the market.
“We see large OEMs [original equipment manufacturers] come to us to hedge their long-term procurement forecasts on cobalt [financially-settled] contracts,” one trader said. “We can then marry that up with our own physical long-term sales to ensure we are hedged too for the long-term.”
“Having that knowledge [of futures trading] is very useful; we can buy and sell cobalt metal futures when the spot market goes quiet, like it is now, and still return a margin,” they added.
The rise and fall of cobalt metal prices in 2022 highlighted the effectiveness of having sound derivatives trading knowledge. The standard grade cobalt metal price ended the year down 51% from highs in early May, seven months prior.
For physical metal traders, the arrival of liquid hedging options means that having expertise in it is crucial for doing business in that space. The advent of liquidity on battery metals futures contracts has provided an alternative “insurance plan” for physical trading.
“Anyone that didn’t put any futures contracts in their trading plan would’ve found it very difficult to not wipe out all of their profits during the second half of last year; for us its vital to have in [our trading plan],” a second trader said.
The cobalt metal derivatives market is still feeling the effects of the record volumes and open interest that traded on January 17 and 18 – to the extent that the futures market remains in contango, a situation whereby the futures price of the commodity is higher than the spot price, almost a month later.
“It’s likely the contango will carry on for a while in this low-priced spot environment. The sentiment usually takes a couple weeks to work its way into the spot market,” a third trader said.
With current monthly-dated futures contracts for cobalt metal reaching out to December 2027 and for lithium hydroxide to February 2025, traders have said they have a wealth of possibilities for hedging opportunities.
“The OEM interest reaches up to around two to three years out from today, but five years is available too; expectations of price levels five years from now is difficult though, which is why there is no liquidity that far out yet,” the third trader added.
Lithium hydroxide financially settled futures contracts also had record open interest back in January, with liquidity slowly beginning to follow in the footsteps of the more established cobalt contracts.
“While lithium [commodity] prices are still relatively high at present, our [CIF China, Japan & Korea] lithium carbonate prices are some 12% down from the highs seen last year, and there is much debate as to whether prices are set to continue falling as the supply response unfolds, or whether this pullback is just temporary,” Will Adams, head of base metal and battery research at Fastmarkets, said. “Given the uncertainty, those looking to manage their price risk, at least, do have a means to hedge via the futures markets, and with opinion mixed about where prices are heading, liquidity in the futures contracts should benefit.”
Fastmarkets assessed cobalt standard grade, in-whs Rotterdam at $15.70-17.00 per lb on Tuesday February 14, unchanged from the previous day.
Fastmarkets assessed lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea at $74-77 per kilogram on Tuesday February 14, down by $1.00 per kg from $75-78 per kilogram a day prior.
Exchange traded funds
The strategic partnership between Traxys and Optiver could pave the way for a battery metal exchange-traded fund (ETF).
“Traxys is able to source and supply raw materials to support an ETF, if that becomes a reality in the future,” Kristoff told Fastmarkets.
Notably a physically-backed electric vehicle metals exchange-traded commodity (ETC) product was launched by the Global Palladium Fund in February 2022. The ETC included copper, cobalt, nickel, palladium and platinum and sparked conversations throughout the market about a battery metal ETF.
ETFs can be physically backed with material or be based on a set of futures contracts for each specific material in the ETF basket. Both cobalt and lithium futures contracts feature in commodity indexes and battery metal ETFs.
“I think the Optiver deal makes a lot of sense; if you’re after exposure to physical [materials], then why not buy a physical shop and use that?” a broker said.
“There are a few [participants] trying to structure these [ETFs], mostly based in the US, but each having varying degrees of success,” they added.
When asked if more physical-backed battery ETFs could become available, one trader said, “I think more and more interest in ETFs will appear the lower the market goes — though material isn’t readily available now on a spot basis, so the volume would need to be slowly accumulated.”
If you want more information about cobalt futures contracts or hedging your battery raw material risk, contact our risk solutions team.
Why are risk management tools important?
- Hedge exposure to future price volatility
- Protect profit margins
- Increase certainty of cost budgeting and cash flows
- Improve procurement, planning and inventory requirements
- Secure financing for new projects or developments
- Mitigate counterparty risk