Lithium traders face challenges and opportunities amid market volatility

Traders have built up their presence in the lithium market in recent years; they see an opportunity in lower prices – after record highs set in 2022 – while the lithium industry aims to take advantage of an expected growth in demand spurred by the global energy transition

But traders can have difficulty carrying stock and might face greater risks than other market participants, Fastmarkets learned.

Historically, lithium salts are mostly purchased by end users who sign long-term fixed contracts directly with producers. But more traders were attracted to the market when prices soared in 2021 and 2022.

“For instance, spot spodumene prices climbed to $8,000 per tonne from $395 [per tonne] at the end of 2020. When there was a real shortage, buyers were willing to take anything with lithium in it. On the way down, users can be much more selective, which can be an issue for traders looking to restock,” Will Adams, head of battery raw materials research at Fastmarkets, said.

But in many ways, lithium is still considered an emerging market, and one which is no stranger to volatility and price cycles.

Prices for lithium hydroxide and lithium carbonate on a CIF China, Japan, and South Korea (CJK) basis fell by more than 80% throughout 2023 and into 2024 after reaching record highs in 2022.

Fastmarkets assessed lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea at $12.50-14.00 per kg on Friday February 9, down by 84.13% since January 3, 2023.

And Fastmarkets assessed lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea at $14.00-14.50 per kg on Friday, down by 81.96% since January 3, 2023. 

This significant decline in prices has affected participants across the supply chain. There have been production halts at spodumene producers in Australiastrategic reviews of operations and staff cuts and cost-cutting measures in many companies amid squeezed margins.

The recent market downturn also resulted in one trading house, Trafigura, parting ways with the head of their lithium book.

Traders exposed to risk

Traders can sometimes face even greater risks than other market participants, depending on their positioning.

Lithium is a difficult market to operate in, particularly when compared with other, more mature battery raw material markets. Lithium chemicals need to be stored under specific conditions and often have a relatively short shelf life – as low as six months.

Besides storage issues, users of battery-grade lithium hydroxide – and, to a lesser extent, lithium carbonate – are quite particular about the specifications of the material they are buying; therefore, they can become more selective of what they want to buy at time of surplus. That can be an issue for a “distressed” seller looking to destock, according to Adams.

This means that carrying stock can be difficult.

“If you’re carrying stock, it’s a terrible time to be in the market,” one trader told Fastmarkets.

“I think the volatility of the last 12 months does illustrate the importance of exit liquidity,” a consumer told Fastmarkets.

“Traders who aim to be market makers by having readily available spot tonnes at warehouse must have suffered badly over the last year if they’ve had to write down more than 80% of the value of some of their stock,” the consumer said.

In other markets, such as nickel or cobalt, producers and traders can opt to withhold material from the market and stockpile during times of price weakness and oversupply. Due to the nature of lithium chemicals, this is not possible for many lithium traders, highlighting the need for hedging and risk management tools within the lithium market.

“The impact is mitigated if you hedged or if you are back-to-back on your physical sale,” a second trader said. “But if you have stock without hedge, some companies will take losses.”

Risk management tools

The role of risk management tools in the lithium industry are expected to increase significantly soon, while participants look to guard against further significant fluctuations in prices.

Multiple futures contracts have been launched for lithium products, including cash settled contracts on the Chicago Mercantile Exchange and Singapore Exchange, as well as physically delivered contracts on the Guangzhou Exchange.

Open interest has grown significantly on some of these contracts in recent months, while participants look for hedging opportunities to optimize price exposure.

Opportunities emerge

The significant price slump in lithium has undoubtedly created a difficult market situation for many traders to operate in, but opportunities are also emerging.

“Current market conditions actually represent an opportunity for those looking to enter or grow,” the first trader said. “Lower prices mean a lower barrier for entry into the market, and sellers are often more receptive to negotiations.”

Despite the decline in prices, traders reportedly continue to take fresh deliveries of materials.

One such instance was Glencore, which announced on February 5 that it received a 22,000 tonne cargo of spodumene from Brazilian producer Sigma Lithium.

Though this additional shipment is part of a broader agreement between the two companies, the payable associated with the agreement has declined from 9% of the Fastmarkets lithium hydroxide CIF CJK to 7.5%.

Spodumene offers several advantages for traders in the lithium market because it does not have the same shelf-life issues as other lithium chemical products.

Importance of traders

Though some in the market believe that traders have added a further layer of complexity to the lithium market dynamics, many also note the positive elements traders add.

One such advantage is improved liquidity.

“Having traders in the market over the long term will help liquidity, even if at times it increases volatility, but as liquidity increases in the exchange contracts, that price volatility will be easier to hedge,” William Adams, Fastmarkets head of battery raw material research, said.

Traders also increasingly play an important role in providing financing for the industry, particularly to newer lithium producers.

“I think it’s important to think about… the financing and capital that [traders] can bring to the market, [which] is important for long-term growth,” the first trader said.

Indeed, many participants said that falling lithium prices have the potential for disincentivizing investors from making additional investment in upstream projects.

“The long-term lithium story is still there; demand for the material will continue to increase, and traders will help contribute to meeting that demand,” the first trader added.

Keep up to date with the latest lithium prices, data and forecasts on our dedicated lithium price page.

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