FOCUS: Narrowing gap between spot, contract lithium prices underlines supply tightness, price evolution

The gap between lithium spot and contract prices has narrowed significantly in 2021 as a result of tight availability along the lithium supply chain and price evolution, market sources said.

For example, Fastmarkets’ monthly assessment of the lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, contract price cif China, Japan & Korea was $12.50-13.50 per kg on May 26, an increase of $1 per kg (8.3%) from $11.50-12.50 per kg a month earlier. The assessment for the equivalent lithium carbonate contract price stood at $11.50-13.50 per kg on May 26, up by $0.50 per kg (4.2%) from $11-13 per kg in the prior month.

The differential the Asian seaborne lithium hydroxide monthly average spot price holds against the contract price was at a premium of $0.19 per kg in May, compared with a discount of $1.25 per kg in December 2020, according to Fastmarkets’ calculations.

Similarly, the differential between the Asian seaborne lithium carbonate monthly average spot price and the equivalent contract price was at a premium of $0.38 per kg in May, flipping from a discount of $1.25 per kg in December last year.

This trend has also been seen in the European and US market.

Fastmarkets’ assessment for the lithium carbonate 99.5% Li2CO3 min, battery grade, contract price ddp Europe and US was $13.50-14.50 per kg on May 26, up by $1.20-1.70 per kg (11.6%) from $11.80-13.30 per kg a month earlier. The assessment for the equivalent lithium hydroxide contract price stood at $15-16 per kg on May 26, up by $1.70-2 per kg (13.6%) month on month.

The latest assessment for the lithium hydroxide contract price in Europe and the United States stands at a discount of $0.87 per kg to the monthly average of the equivalent spot price, narrowing from the discount of $1 per kg it held in December 2020. The gap between the lithium carbonate contract price and monthly average spot price in May was a premium of $0.99 per kg, compared with a premium of $0.75 per kg last December.

Supply tightness
Lithium supply has encountered tremendous challenges so far in 2021 amid upstream tightness and robust downstream demand.

Demand for lithium is expected to reach 391,000 tonnes of lithium carbonate equivalent (LCE) in 2021, compared with 309,000 tonnes and 294,000 tonnes in 2020 and 2019 respectively, according to Fastmarkets’ battery raw materials research team.

At the same time, upstream tightness has emerged after Altura Mining’s lithium project in Western Australia was put on care and maintenance in 2020. Altura started production at the project in 2018 and reached commercial output in early 2019 with nameplate capacity of 220,000 tonnes per year of lithium spodumene concentrate.

Lockdown measures around the world amid the Covid-19 pandemic also exacerbated logistics disruptions, resulting in delays in shipments of lithium globally.

This had led to growing expectations among some market participants for contract prices to surge once negotiations for third-quarter lithium supply kick off.

“It can be much more than several tens of percent increase in comparison with the price in the second quarter,” a distributor said.

Frequent, transparent pricing lags between contract and spot prices
Before 2018, when suppliers and consumers signed annual or multi-year long-term contracts, they mostly use a fixed price for the whole period of commitment. This was favored by producers who wanted to secure funding for expansion plans, while consumers, who were afraid the price rally between late 2017 and early 2018 would persist, also preferred this type of contract.

Fastmarkets’ assessments for lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea and lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, spot prices cif China, Japan and South Korea peaked at $19-21 and $20-22 per kg respectively in March-April 2018, marking the highest levels since Fastmarkets started tracking these markets in July 2017.

“Previous procurement contracts we had with suppliers were six-month or yearly contracts but based on a non-transparent pricing…[The contract prices reflected] how the producers thought the market might behave over the next 12 months,” a distributor active in Europe said.

The situation changed when consumers, who had to content with high contractual prices amid a sharp plunge in lithium prices in 2019, attempted to negotiate quarterly or semi-annual prices for their long-term contracts.

Seaborne Asian prices for battery-grade lithium carbonate and lithium hydroxide dropped by about 129% and 95% by the end of 2019 from April in the same year, according to Fastmarkets’ historical pricing data.

Whereas, the fragmented nature of the lithium supply chain and complexity of the specialty chemical have challenged in the past the adoption of a market-based price reference across the industry, market participants have claimed there was mounting demand for transparency in the pricing mechanism, which has been especially driven by original equipment manufacturers.

Meanwhile, an increasingly number of companies on the supply chain have sought more exposure to the spot market, hoping to secure business at the latest price. This has made transparent pricing data more relevant.

Moving into 2021, more suppliers are also in favor of more frequent negotiated contractual prices or link the contracts to a spot market-based price reference in a rebounding market, therefore, the gaps between spot and contract prices are expected to remain at a narrow spread, according to market participants.

Producers would like to take advantage of the rally and mirror it in their long-term contracts, a trader noted.

At the same time, some lithium buyers are requesting more quarterly and monthly supply contracts, which track the spot market, sources told Fastmarkets.

“We are seeing a mixture at the moment from our clients, some still prefer a supply agreement based on a fixed-price while some others want a formula-based price for their contracts,” an upstream source active in seaborne Asia said.

“In the domestic Chinese market there is a bigger tendency to reference in the supply contracts a market-based pricing mechanism referring an external price reporting agency… this is slowly changing in the rest of the seaborne Asia market as well compared with just a few years ago,” the same source added.

“Our current purchasing contract with producers is quarterly and based on tracking the spot market averages,” the first distributor said.

“Both ends of the market are moving towards a more transparent pricing mechanism in supply agreements,” he concluded.

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