LME WEEK 2018: Lithium hedging has potential but market immaturity poses challenge - EV panel

The need for investment in new lithium projects creates a need for risk management tools, but the market’s immaturity creates challenges, according to panelists at an LME focus session during this year’s annual LME Week.

Increasing demand for lithium compounds arising out of the electric vehicle and battery boom has created an appetite to bring new projects on stream, but there are risks associated.

“Mineral resources are actually plentiful [but] it is an industrial chemical game not a mining game. The risks associated are greater,” Kiran Morzaria of Cadence Minerals said during the panel held on Thursday October 11.

“Investors want to finance [lithium projects], but they need to hedge their exposure and hence they need a risk management tool,” LME Clear’s Adrian Farnham said.

Battery raw materials, including lithium, are a key focus area for the LME. The exchange is reviewing, in collaboration with the lithium industry, proposals from price reporting agencies, of which Fastmarkets is one, with a view to cash settling a lithium futures contract against a third-party reference price.

The contract is planned for launch in the second half of 2019.

A hedging tool has the potential to appeal to banks who see potential in lithium but acknowledge the complexities of the market away from more commoditized materials that are perceived to be fungible, panelists added.

“There is potential to reach [lithium] demand but you will see delays, projects will overrun. I see constraints and more risks. The risk is to junior projects that require a large amount of capital…Banks hopefully can hedge their position,” Morzaria said.

But the immaturity of the lithium market also means there is no clear reference price against which the market concludes the majority of its long-term business. In the cobalt market for example, supply contracts are typically settled against Fastmarkets’ benchmark price assessment for low-grade cobalt.

Likewise markets such as iron ore, where there is an established futures market, there exists a clear, independently assessed, physical market benchmark, and robust spot trade.

“You need to have an index, something we can call the price, but the definitions don’t exist [in lithium],” Morzaria said.

“The issue with lithium is that it’s such a new commodity on the market, without a track record like copper, for example. We don’t know how high it can go or how low it can go,” Maximilien Deudon of Transamine said.

Fastmarkets has identified the ex-works China market as the most liquid spot market for battery-grade lithium at present. The 99.5% Li2O3 battery-grade lithium carbonate index was calculated at 74,206 yuan ($10,729.80) per tonne on Thursday October 11, down from a high of 176,375 yuan per tonne on November 2, 2017.

Learn more about Fastmarkets’ lithium pricing methodology and read the latest lithium price spotlight here.

All lithium carbonate, hydroxide and spodumene prices are available in our Battery Raw Materials Market Tracker. Get a sample of the report here.

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