Lithium market participants seek new ways to price seaborne term contracts amid supply crunch

Lithium market participants across the supply chain are increasingly keen to move away from fixed prices or trade data-linked indices in their long-term contracts for seaborne units and toward a floating pricing mechanism. This comes at a time when the lithium market is estimated to remain at a deficit in 2022, sources said

The Covid-19 pandemic unexpectedly propelled an acceleration in the adoption of electric vehicles (EVs). Major economies across the globe began to look to the electrification of transport as a means of stimulating economic recovery in the pandemic’s aftermath while also cutting the transport sector’s carbon footprint.

Both Europe and the United States have taken determined steps toward developing sustainable mobility with Europe introducing enhanced incentives for EV adoption and the US targeting a 50% zero-emission new vehicle sales goal by 2030. And in China – currently the front-runner in the shift to the electrification of transport – the EV market has continued to expand its market share in the country.

In the first ten months of 2021, EV output and sales in China rose nearly two-fold from the same period last year, and the penetration rate reached 16.4%, data from China Association of Automobile Manufacturers (CAAM) showed.

In the first nine months of 2021, EV sales (including both battery EVs and plug-in hybrid EVs) in the European Union, the European Free Trade Association and the United Kingdom jumped by 105% year on year, Fastmarkets’ battery raw materials research team found, citing data from the European Automobile Manufacturers’ Association.

Although the EV battery supply chain is excited about the increasing optimism surrounding an uptake in EVs, it is also increasingly concerned about the tightening lithium supply.

The sharp price downturn between early 2018 and late 2020 halted a number of upstream lithium projects. Alita Resources’ Bald Hill mine was suspended in August 2019; Albermarle and Mineral Resources put their jointly owned Wodgina mine on care and maintenance in November 2019; and Altura Mining went into administration in October 2020. Likewise, producers’ expansion plans were scaled back, delayed or temporarily put on hold.

As of September 2020, battery-grade spot lithium Seaborne Asia prices for carbonate and lithium hydroxide had dropped by 66.25% and 57.14% respectively since March 2018, Fastmarkets’ historical data showed.

Although the Ngungaju project (formerly Altura’s Pilgangoora project) and the Wodgina project have been restarted, neither project is expected to add significant increases to the lithium supply in the near term, market participants said.

The lithium market is expected to move into a deficit of 26,000 tonnes of lithium carbonate equivalent (LCE) in 2021 and is forecast to remain in a deficit – albeit a narrower one – of 11,000 tonnes of LCE in 2022, forecast data from Fastmarkets’ battery raw materials research team showed. In 2019, the lithium market posted a surplus of 40,000 tonnes of LCE.

Prior to 2021, few market participants expected lithium demand to increase as quickly as it has this year to date. The increase has been underpinned by a strong resurgence of demand for lithium iron phosphate (LFP) batteries in China.

Despite the ongoing debate over the prevailing chemistries of LFP versus nickel-cobalt-manganese (NCM) batteries, lithium remains a key component of EV batteries regardless of the different technologies used.

LFP batteries are produced from lithium carbonate, and NCM batteries feed on either lithium hydroxide or carbonate subject to their share of nickel content.

Against the backdrop of the tightening lithium supply and surging demand, the annual mating season has involved a race among market participants to secure lithium supply while the supply chain also looks at new pricing mechanisms for yearly contracts.

Before 2021, lithium sellers and buyers traditionally negotiated and agreed on a fixed annual – or even a multiannual – price for the units committed in long-term contracts. Alternatively, in some cases both parties agreed to use a trade data-linked index.

But the tightening lithium supply and soaring prices have accelerated the shift from legacy-term contract pricing to a new market-based reference pricing mechanism, which is expected to better reflect lithium spot market dynamics and effective sale prices.

Fastmarkets’ price assessment of the lithium carbonate 99.5% Li2CO3 min, battery grade, spot price, cif China, Japan & Korea was $30-32 per kg on Thursday November 25.

And the lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, spot price, cif China, Japan & Korea was assessed at $29.50-31.50 per kg on Thursday.

The two seaborne prices have increased three-and-a-half-fold and two-fold respectively from the beginning of this year.

This comes at a time when a floating pricing mechanism, which has already been widely adopted by the supply chain of other battery materials such as nickel and cobalt, is also coming to the fore for lithium.

Market participants told Fastmarkets that an increasing number of lithium sellers have proposed to their seaborne customers that they include a floating spot lithium price as assessed and published by an independent third party. Alternatively, they have proposed using a basket of prices published by a number of independent third parties as a pricing reference in long-term contracts. The effective contract price is pegged to the low, mid, or high end of the monthly average of such independent price assessment(s), with or without a premium or a discount subject to market conditions.

An Asia-based trader commented that in a tightening lithium market, producers can take advantage of the resulting upturn in prices to cash in.

Likewise, buyers are not keen to lock in long-term prices for next year at the current high rates. In doing so, they would miss out on future price falls if the market tightness were to ease.

As such, the current volatility and high-price scenario appears to have created the conditions to prompt both sides of the market to look away from fixed-term prices and toward more flexible arrangements.

A refiner source active in both Europe and Asia echoed the trader source’s sentiments, noting that not all buyers are in favor of such a market-linked transparent pricing mechanism. But since they have said they care more about the security of supply and that they value the ongoing relationship with sellers, such a shift in pricing term contracts has been increasingly accepted.

“We are starting to use a third-party independent price in our contracts with both upstream [feedstock] sellers and downstream buyers, and I believe the push for the shift [in the pricing mechanism] came from the [lithium compound] producers once they became [strong] enough to [drive] it,” the refiner source added.

“I am seeing an increasing uptake [of market-based pricing references] in the seaborne Asia market compared with the past,” an Asia-based refiner source said, noting that “the Chinese domestic market was already quite used to negotiating lithium contracts using a third-party reference price.”

Earlier this year, market participants had already noted the trend of more companies on the lithium value chain seeking more exposure to the spot market as opposed to long-term commitments. This reflected their interest in securing business at the latest price, and it has made transparent pricing data more relevant.

To support this trend, Fastmarkets is increasing the pricing frequency of two seaborne Asian lithium prices to daily from weekly, effective December 1, 2021.

While the lithium market is evolving in term-contract pricing, the potential wide adoption of floating pricing mechanisms linked to third-party assessment would offer lithium sellers and buyers more flexibility in hedging the risks by trading on the cash-settled derivatives futures that are also settled against spot prices published by independent pricing reporting agencies.

Both the CME Group and the London Metal Exchange launched cash-settled lithium futures contracts in May and July this year respectively. Both contracts are settled against Fastmarkets’ battery-grade lithium hydroxide price on a cif China, Japan & Korea basis.

Davide Ghilotti, in London, contributed to this article.

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