Lithium pricing evolution and the role of price reporting agencies

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

The spotlight is on lithium especially. Battery technology has evolved to a point of investor and exchange interest, with mass consumer adoption on the cards, but the way the material is priced is yet to make such a definitive shift.

Yet, while the battery sector seeks to understand the true cost of its lithium-ion battery supply chain, the appetite for third-party impartial pricing is mounting.

The absence of updated Chinese trade data since April has highlighted the risk of relying solely on customs data as a source for market participants’ pricing processes.

As China Customs continues to delay the release of import and export figures for a large number of commodities, participants active in battery minerals, including lithium, must find alternative ways to ensure they have access to reliable data on commodity pricing.

Multi-year lithium supply contracts have traditionally been agreed on a fixed-price basis, increasingly with an option to renegotiate that price at pre-determined intervals considering the swift price moves in recent years.

Renegotiations typically take place yearly or biannually with some companies on a quarterly basis, and while the price itself is fixed for a period, trade statistics often form the basis of price discussions and renegotiations.

Chinese trade data usually arrives monthly from the country’s National Audit Office and can be used to derive an average price for cargoes arriving in/leaving the country.

What that data fails to do is distinguish between material where the price was agreed (based on market fundamentals) perhaps five years ago or more, or where the price was agreed in very recent weeks. The price for the latter cargo is the one that has accounted for the surge in demand for lithium to date.

Trade data also does not distinguish between lithium compounds that have qualified for battery applications, and those that are only suited for more traditional end-uses. This is a distinction that Metal Bulletin considers necessary when collecting spot price data.

IOSCO regulation
Metal Bulletin has aligned all of its pricing practices with the International Organisation of Securities Commissions (IOSCO) standards, to ensure we are providing robust and reliable prices across the commodities spectrum.

The IOSCO association is responsible for the regulation of global securities and futures markets, therefore adherence to the certified pricing principles increases the relative credibility associated with commodity pricing.

Spot pricing in comparison
Metal Bulletin Group has adopted and developed a clear and rigorous price discovery process and methodology to produce assessments that are a consistent and representative indicator of the value of the market to which they relate for the trading period they measure.

Metal Bulletin’s journalistic price assessment methodology is applied across its battery raw material coverage, whereby greater weighting is given to actual concluded transaction data. Bids, offers and assessments are also taken into account.

Therefore Metal Bulletin is able to provide close to real-time pricing insights unlike trade statistics that often lag behind the market and do not distinguish between products.

Metal Bulletin tracks a wide-range of lithium compounds and raw materials such as lithium spodumene, distinguishing between hydroxide and carbonate technical, industrial and battery grades as well as from the material traded in the spot and contract markets.

The complexity of the lithium market means Metal Bulletin has developed clear specifications to capture the value of each product.

With the majority of spot liquidity focused in China, Metal Bulletin feels the region will evolve to become the global proxy for pricing, similar to other markets such as iron ore.

With fundamental pricing dynamics varying throughout South East Asia, Metal Bulletin has developed a range of prices to capture the relative value of lithium hydroxide and carbonate both inside China and delivered to Japan, Korea and China.

Despite China clearly acting as the price driver for the lithium market, a global proxy is yet to emerge and as such Metal Bulletin has positioned itself to provide reliable prices into what is a rapidly evolving market.

Insights from data analysis
At present, the lithium market often settles negotiations through the use of trade statistics and one-to-one negotiations.

The latest Chinese Customs lithium pricing data available in March 2018 stated that the price was at $14.15 per kg, up 6.5% from February.

Metal Bulletin published a similar equivalent price of $14.50 per kg back in August 2017. The market has only gone up since August and in late June 2018, the price was at $17.50 per kg.

Based on that, the time lag in reporting prices by Chinese Customs is about seven months – or eight months if we count the extra month it takes Chinese Customs to publish the data. This is because the Chinese Customs prices include mainly long-term contracts settled long before arriving at Chinese ports.

Chinese Customs data also captures spot transactions but fails to distinguish between prices for technical, industrial and battery-grade products, unlike Metal Bulletin’s spot price assessments.  

The value of real price discovery, such as that undertaken by Metal Bulletin, is in the global lithium team’s  constant collection of pricing data points, with price reporters in China and Europe enabling Metal Bulletin to provide a price that captures market variations on a weekly basis.

Trade statistics are able to provide a trend over a long-time period but give little indication into short-term market movements, and are slow to adjust to or reflect periods of volatility.

There is another, quite pressing reason why lithium market participants will be evaluating alternative pricing mechanisms and diversifying away from fixed-price contracts tied to trade data.

The Chinese customs department has suspended the publication of trade data for key products, with very limited data received since the end of April that relates to March’s imports and exports.

The department has referred to the sale of trade data as “problematic practice,” and is currently “adjusting the solution” to publishing data. Yet the April data is still not available to the market and no publication timetable has been given.

Market maturation
Although it’s still in its relative pricing infancy, the lithium market has shown early indications of developing to a more reference-linked pricing structure.

The complexity associated with the chemical composition of lithium means it will likely, should long-term contracts break down, evolve into an index-linked system where quality of material can be adjusted for and normalized to a widely acknowledged industry specification.

Although index-linked pricing is some way down the road, pressure from the financial community has resulted in a recent shift toward greater market transparency.

Another benefit of spot-linked 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.

In fact, recent interest from major exchanges such as the London Metal Exchange, demonstrates market participants’ appetite for developing a benchmark in the lithium market, where huge capital investment in the industry could be offset.

A cash-settled contract would be on the cards, but that requires a consensus from the physical market as to how they wish to structure their long-term contracts going forward, specifically, which reference price or prices they wish to tie their business to for now.

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 electric vehicle sector, the boom of which has been so dictated and steered by China in recent years.

Metal Bulletin has identified four battery-grade lithium prices as being key to this market. Access them via the free weekly service, Lithium Price Spotlight.