FOCUS: Following the developing international lithium, cobalt markets

Two minor metals have grabbed attention for their value in making batteries for electric vehicles – lithium and cobalt. Metal Bulletin price development manager Jon Mulcahy and battery raw materials team leader Charlotte Radford explore a rapidly evolving market and how market intelligence for the metals is becoming increasingly transparent.

Surging investment across the battery raw materials supply chain, stemming from growing demand for electric vehicles (EVs), including hybrids, has fueled an increasing appetite for transparent market intelligence.

Two of the key components of the batteries commonly used in EVs – lithium and cobalt – are at different stages of market maturity, with greater transparency in cobalt. As an international price reporting agency, Metal Bulletin has recently enhanced its coverage of the battery raw materials supply chain, providing assessments and indices to bring increased clarity to what is a fast evolving and in some cases opaque market.

Lithium investors have been flocking to become involved in this sector as prices have surged in recent years. The story is a familiar one: a demand boom catching the industry off guard; supply taking time to respond through expansions and greenfield development; and prices heading one way in the meantime.

In this case it was the rapid increase in EV production that drove the demand surge for lithium – an important component of lithium-ion batteries. The pace of the demand rush was accelerated by China’s subsidy and incentive policies for EV production initiated in 2015, prompting a genuine scramble for lithium, with producers unable to ramp-up supply in such a short space of time.

More recently, Metal Bulletin’s spot price assessment for battery-grade lithium carbonate (min 99.5% Li2CO3), ex works China, has fallen 30% since December amid the availability of cheaper stocks, weaker consumer demand and a four-month transitional period in China toward the adoption of the new EV subsidies, which started in June 12, causing a deceleration in consumption.

Despite the fall in price, the appetite for market intelligence and price references remains as strong as ever. In the growing lithium sector, Metal Bulletin provides valuable insights into the carbonate and fast-developing hydroxide markets. The end uses of lithium remain diverse, although the battery boom has necessitated a distinction in prices between battery-grade and technical-grade material.

Despite the overwhelming majority of lithium supply being covered by long-term contracts, recent years have seen increasing amounts of spot business, particularly in China, where some smaller producers sell up to 50% of their production in the spot market. It is this business that informs Metal Bulletin’s spot price assessments, with trained market reporters in touch with producers, consumers and traders to collect the data used to set a representative price level.

China is the clear hub for lithium consumption and has emerged, at least for the time being, as the most liquid spot market and as a potential proxy for lithium prices globally.

Yet, as investment in new lithium mining operations increases globally, with the majority of production aimed at feeding growing appetites from China, Japan and South Korea, Metal Bulletin has developed several prices to capture the relative value in the Pacific basin.

If the lithium market is to evolve along similar lines of maturity as markets such as iron ore and alumina, it is likely that market participants will look for a seaborne, international price reference against which to tie their business.

In iron ore, the breakdown of the negotiated benchmark pricing system in 2010 led to the emergence of more reflective pricing tools that provide near ‘real-time’ spot market levels, with the ‘price of the day’ determining the settlement price for term contracts.

Price volatility, driven by rapid supply-demand swings, was a necessary precursor to the breakdown of the previous iron ore market structure, and a predominantly producer-led push has steered industry participants to transition to pricing against an independently calculated index that responded to these fluctuations.

In the alumina market, that shift was again driven by producers, who felt their existing pricing mechanism – long-term contracts fixed as a percentage of the aluminium price – undervalued their material, which at that time was in tight supply.

For lithium, that drive for a shift in structure is more likely to come from the consumer side. Battery manufacturers are not just buying lithium, but also other crucial raw materials, such as cobalt. For cobalt, they will already be familiar, or at least quickly gaining familiarity, with the Metal Bulletin world spot price reference.

Most of the world’s cobalt business is tied to the benchmark cobalt metal price assessment published twice a week by Metal Bulletin. This means that long-term contract prices were able to respond to the over 260% increase in prices in the 18 months between October 2016 and April 2018. Such an increase has been down to intense demand and the buzz associated with EV and battery demand, combined with tight, uncertain supplies – about 60% of the world’s cobalt is mined in the Democratic Republic of Congo.

Most recently, such a structure has meant that contractual prices have adjusted to the fall in market prices to $39 per lb in mid-July from around $44 per lb in late April.

The reach of Metal Bulletin’s cobalt price extends outside of the metal market into salts and intermediates. In preference to metal, the battery sector will look for cobalt sulfate – likely sold with an agreed discount or premium to the Metal Bulletin low-grade cobalt price, or cobalt hydroxide, for which the contract will likely refer to an agreed percentage payable of the benchmark.

Cobalt is similar to other markets – including lithium – in that the majority of business is agreed on long-term contracts, with a comparatively small tonnage bought and sold in the spot market. But cobalt’s still-dynamic spot market, combined with the buzz around new-energy and investor interest, mean that the minor metal has garnered serious exchange interest.

“In general, the more liquid markets are settled against an exchange, and less liquid through [references published by] PRAs,” Matthew Chamberlain, chief executive officer of the London Metal Exchange said at the annual Cobalt Institute conference in May.

The cobalt market is interesting, Chamberlain added, because its traded volumes are right on the edge of what is considered appropriate for an exchange-traded market. The bourse is expected to make an announcement about its new cash-settled cobalt contract later in the summer. The final point for confirmation is the PRA reference price against which the contract will be cash settled.

Spot-linked pricing is still a relatively new development for lithium. That said, one parallel benefit of this type of pricing is that close to “real time” pricing mechanisms provide an opportunity for the implementation of risk management tools through exchange-based contracts and sometimes over-the counter swaps and contracts.

Like cobalt, lithium has not escaped the eye of the exchanges. The London Metal Exchange, for example, has spoken of its intention to provide a full set of hedging tools for battery raw materials. The lithium market will need to mature, and potentially at a fast pace, for that to happen. A cash-settled contract is on the cards, but what that requires is consensus from the physical market as to how its participants wish to structure their long-term contracts going forward, specifically which reference price or prices they wish to tie their business to. In other markets – cobalt, iron ore and alumina, for example – that reference has emerged in the form of an international or seaborne price.

But the spot cif markets remain relatively illiquid for lithium. Under the eager watch of the financial sector, exchanges and lithium juniors, to name a few, that benchmark could emerge as a domestic Chinese price, or at least a price that incorporates Chinese market activity, where the greatest spot liquidity – a necessity for robust price discovery – lies.

While that would be unusual, it is arguably appropriate when talking about a material so crucial to the battery and EV sector, the boom of which has been dictated and steered by China in recent years.

Pricing workflow
Metal Bulletin’s pricing workflow comprises six main steps:

1. Price reporters in 13 international locations provide specialist market knowledge.
2. Market data is collected from numerous approved contributors from across the supply chain.
3. Pricing data is entered into a dedicated database (MInD – Metals Information Database) to ensure a full audit trail.
4. Data is analyzed and, if required, normalized. Outliers are removed.
5. An integrated peer-review system ensures that all data is verified by at least two reporters to ensure quality control and compliance.
6. Data is published for subscribers through Metal Bulletin’s and American Metal Market’s online Price Books and data solutions.

Metal Bulletin’s and American Metal Market’s pricing practices align with core IOSCO Principles.

This article was first published in the July/August issue of Metal Market Magazine, which carries in-depth feature articles, analyses and reviews of metal and steel markets.

Instantly access our key battery-grade lithium prices with Metal Bulletin’s free Lithium Price Spotlight service.

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