How can you manage price volatility in the lithium market?

The lithium market is not only facing high prices, but also seeing pricing practices change as the market evolves. Market participants want to know what impact these changes are having and how they can manage their exposure to volatility in the future.

Watch the full interview or read the summary below, where Fastmarkets’ senior price development manager, Peter Hannah gives his insights into how you can manage price volatility in the lithium market.

How are approaches to pricing changing in the lithium market?

Pricing practices in the lithium market are changing rapidly as this market grows and evolves. We’re seeing lithium go from being quite a small and niche market where prices can be fixed and agreed for long durations to one that is requiring much more dynamic pricing to keep pace with the ever-changing supply and demand picture.

The current price volatility in the market is seeing this transition accelerate with contracts for both existing and new supply increasingly being negotiated to reference spot indices in some fashion.

The spread of value across spot to contract prices in lithium in recent years is a reflection of the market’s immaturity with respect to pricing. It’s not something seen to the same extent in other, more developed, markets.

In time, lithium will likely gravitate towards linking contract price settlements to certain key spot benchmarks. Importantly though, we would still expect considerable variability in contract price realization depending on the negotiation of premiums and discounts to reflect product quality and commercial complexities.

What is the impact of such high current price levels on the industry?

The current high prices are:

1. Incentivizing a supply response from producers, and
2. Starting to squeeze consumer margins.

Unfortunately, this margin pressure is likely to get worse before it gets better, due to the lagging nature of most contract pricing mechanisms. This means the current spot market prices are not yet fully felt along the supply chain.

The supply response seen in the market to date has also been slower than what is likely needed to balance the market in the near term. This is creating a demand constraint given that consumption can’t exceed available supply. It’s also requiring automakers to revisit their intended electric vehicle (EV) production plans and adapt for a more raw material constrained and higher cost environment.

How will market participants be able to manage their exposure to volatility in the future?

A more mature spot index-based pricing mechanism with a transparent price signal, is essential to moderate volatility over the longer term for the lithium market. It would also facilitate the development of derivatives markets for hedging.

Exchanges including the LME, CME and SGX have all launched or announced futures contracts that are cash settled against the Fastmarkets lithium indices.

These will allow market participants who are exposed to these indices through their physical contracts the option to independently lock in future prices, hedging as much or as little exposure as they wish.

The ability to protect margins in this way should make the supply chain more robust and resilient, while also facilitating the stronger growth of the battery industry.

Visit our dedicated battery raw materials page to discover more insights on the factors at play in the industry in 2022 and beyond.