Market volatility drives changes to QPs in spodumene contracts | 2024 preview

Underlying terms for contracts of spodumene are evolving for 2024 and beyond to address market volatility, Fastmarkets understands

Spodumene, and the lithium market more broadly, has experienced significant price volatility in the past year, with significant price declines.

Fastmarkets assessed the spodumene min 6% Li20, spot price, cif China at $800-900 per tonne on Wednesday January 24, down from $800-950 per tonne on January 19 and down by nearly 89% year on year.

As a result, participants, particularly consumers, are looking to restructure the basis for long-term contracts to guard against volatility in the future.

The area that has had the most prominent change has been the quotational periods (QPs) for contracts.

Historically, the market has operated a backward-looking basis, using “month minus” (M-) QP for contracts, meaning that the price settlement was based on a previous month’s average.

But, amid significant volatility in lithium prices in 2023, consumers are pressuring to have this QP basis changed to a forward basis (M+) to guard against volatility and shifts in lithium chemical prices, for which spodumene is used as a feedstock.

This means that the contract is settled by the average of a future monthly price, rather than a previous month.

“It’s a logical move from a converter perspective as it reduces exposure to price risk,” one chemical producer source told Fastmarkets.

“It is likely that these [forward] QPs will become the norm going forward,” the source added.

Lithium hydroxide prices on a spot basis declined over 80% in 2023, with the Fastmarkets’ lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea falling from $83-84 per kg on January 3, 2023, to $14.50-16.50 per kg on December 29, the final pricing session of 2023.

Lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea similarly declined from $78-80 per kg on January 3, 2023, to $14.50-16.00 per kg on December 29.

The declines have continued into 2024, with bearish sentiment persisting in the market and demand weak in the run up to Lunar New Year on February 10.

Fastmarkets more recently assessed the lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea at $14-15 per kg on January 23.

The lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea was assessed at $13.50-14.80 per kg on the same day.

Greater ties to chemicals

The price trajectory of spodumene prices correlates to prices of lithium hydroxide and carbonate in the physical market, where there is more regular liquidity, and in recent months, use of formula pricing has increased significantly in the market, supporting the move to forward QPs.

Data points collected for Fastmarkets’ lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea have increased nearly to 20% in 2023 compared with the year before.

Those data points include deals, deal heards, bids, offers and market participant indications.

While exact formulas vary from contract to contract, many of them include elements directly pegging the valuation of spodumene to the prices of lithium hydroxide and carbonate in the physical market.

This is in some ways similar to a payables pricing method, which are common in other battery raw material markets such as cobalt and nickel.

In cobalt, due to oversupply, market discourse throughout the past year has revolved around a focus on using more intermediates prices for materials such as cobalt hydroxide and cobalt sulfate.

A formula that includes Fastmarkets’ spot lithium hydroxide and carbonate prices on a CIF China, Japan and Korea basis also allows market participants to hedge the chemical price component on exchanges such as the Chicago Mercantile Exchange (CME).

Open interest for the CME lithium hydroxide contract was at 18,079 lots on January 23, up from 14,558 at the beginning of the year.

While lithium market participants are contemplating price mechanisms such as payables, interest in a robust outright spot spodumene price to anchor longer-term contracts remains.

Fastmarkets increased the frequency for its spodumene min 6% Li2O, spot price, cif China to twice a week from a fortnightly basis to reflect the increase in interest in the price and also so it can better reflect daily chemicals prices.

“It’s important to remember that lithium is still an immature market in a lot of ways,” an international trader said.

“The market is still trying to find a pricing mechanism that everyone is comfortable with,” the trader added.

Debates over timing

One of the key hurdles for the switch in the underlying QPs of spodumene contracts is the timing in which the QP is based, for instance M+1 or M+2.

Participants in the physical market noted that the preference for many Chinese customers was for an M+2 basis for contracts.

But the willingness for the adoption of these QPs appears to be largely based on geographical lines at present.

“Producers in South America are much more amenable to M+2 [QPs] given the time that it takes material to ship from the region to China,” a second trader noted.

Meanwhile, Australian producers, who make up the majority of spodumene production globally, are less willing to accept such terms.

This is largely due to the shorter timeframes for shipping material from country to country. An M+2 QP could see a situation where material arrives at the consumer before the price is determined, increasing risks for both parties.

Global ocean freight firm Maersk estimates that typical ocean freight times between Australia and China are around 25-35 days, depending on destinations and time of year.

This compares with estimates of closer to 30-50 days for shipping from Brazil.

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

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