Metal Bulletin brings indexation to the lithium market

Metal Bulletin’s lithium market reporter, Martim Facada, and price development manager, Jon Mulcahy, explain the indicators that allowed for the transition from an assessment-based pricing mechanism to an index, for the Chinese domestic lithium carbonate market.

Metal Bulletin Group has developed a clear and rigorous price discovery process throughout its history of more than 100 years. This price discovery process has been supported by a robust methodology and procedures that have enabled Metal Bulletin, as a world-leading price reporting agency (PRA), to produce pricing mechanisms that are consistent and representative of the market value.

Aligned to IOSCO principles, Metal Bulletin’s price discovery process today offers price assessments of 4,000 metals and minerals, and has brought increased transparency to the global lithium market.

This is becoming a much less opaque space because of the price contributions and support of more than 65 active suppliers and buyers which are involved with the physical market on a weekly and monthly basis across the global lithium supply chain. Through the contribution of active market participants to our lithium prices, Metal Bulletin is able to provide unparalleled insights into the lithium sector.

Metal Bulletin today publishes 30 different lithium prices, with an extensive global footprint (see picture 1). For information about all our lithium carbonate, hydroxide and spodumene prices, consult our Battery Raw Materials Market Tracker by clicking here.

After a successful market consultation, Metal Bulletin launched its first index for battery-grade lithium carbonate, ex-works China, on August 2, 2018, setting the group’s cornerstone in the global indexation of lithium.

Metal Bulletin’s index has been developed specifically for lithium pricing. Similar tried and tested models have been successfully implemented across other commodities markets, including iron ore and alumina.

The index-based pricing mechanism is a tonnage-weighted calculation and is therefore intrinsically linked to physical market transactions. The index has also been strategically designed to provide reliable pricing levels even during periods of lower liquidity, through the use of bids, offers and assessments.

The road to lithium indexation
The Chinese domestic battery-grade lithium carbonate market price has often led the global price trend, serving as a proxy for the lithium market. Consequently, with this price being considered the driver for the global market, market participants consistently monitor this market.

The use of the battery-grade lithium carbonate price (min 99.5% Li2CO3) as a proxy for the lithium market became evident at the start of the lithium boom at the end of 2015, when prices in China initiated a trend that would eventually see them increase three-fold in less than a year to an average price of $26.60 per kg in March 2016, compared with $8.90 per kg in October 2015 (see graph 1), according to Metal Bulletin’s historical pricing data*.

This rapid increase in prices was triggered by the undersupplied situation of the market. In late 2016, almost one year after the spot prices for battery-grade lithium carbonate shot upward, contract prices for lithium followed suit, when suppliers and consumers renewed their contract prices for 2017. A similar case happened at the end of 2017 amid the 2018 contract negotiations (see graph 1).

Because of the proximity between suppliers and consumers of lithium compounds in China, and because the East Asian country accounts for more than half of the world’s battery production (62GWh from a total of 116GWh in 2018, according to Bloomberg New Energy Finance), and because it is the single largest consumer of lithium compounds in the world, China has a quite unique and liquid spot market for battery-grade lithium carbonate, in which the downstream industry typically negotiates prices on a weekly or monthly basis.

The Chinese domestic spot market price for battery-grade lithium carbonate played a major role in negotiations on contract and spot prices across the rest of the world at the end of 2016 and 2017, and it is likely to remain the global benchmark because the vast majority of lithium compounds produced in the world are consumed in China.

Metal Bulletin pricing procedures
The increase in the liquidity of spot transactions in China year-on-year, since the start of the battery boom at the end of 2015, has led Metal Bulletin to monitor the Chinese domestic spot market more carefully, after this was identified as the only lithium market in which liquidity currently warrants the use of an index-based methodology.

Metal Bulletin’s battery-grade lithium carbonate Chinese domestic trade logs demonstrate the extent of the pricing data that Metal Bulletin is capturing exclusively for this spot market.

Metal Bulletin is committed to transparent pricing and therefore publishes trade logs to generate confidence in the extent of the information collected from market participants and which is used to feed into our prices. All the trades, bids and offers reported to Metal Bulletin throughout the week are published in a confidential manner, with details concealed.

As an example, see the trade log below from Thursday August 2:

Thursday August 23
Price assessed at 85,000-95,000 yuan per tonne
30 tonnes sold at 95,000 yuan
10 tonnes sold between 93,000-94,000 yuan
5 tonnes sold at 85,000 yuan
Offer at 90,000 yuan
Prices indicated between 94,000-100,000 yuan
Prices indicated between 90,000-95,000 yuan
Prices indicated between 85,000-90,000 yuan
Prices indicated between 85,000-90,000 yuan
Prices indicated for lots of 5 tonnes between 88,000-89,000 yuan
Prices indicated between 80,000-85,000 yuan

The capture of price inputs from almost 20 companies each week in this specific Chinese domestic spot battery-grade lithium carbonate price assessment (min 99.5% Li2CO3) offers a wide sample of price inputs from all sides of the market. This enables Metal Bulletin to assess this market in a transparent, robust and unbiased way, reflecting the price level at which business is being done in China.

Behind each one of the price inputs collected by the Metal Bulletin global lithium team, there is a detailed conversation with the different price contributors to cross-check all price inputs reported.

These price inputs will be cross-checked by the global lithium team and also by two additional senior price reporters, who will challenge the price inputs collected in order to confirm that the prices published will be representative of the market value, giving the same weight to producers, consumers and other distributors.

All price contributors must be approved in the internal software and database used across the Metal Bulletin Group, called MiND, a software which is externally auditable. In addition, the approved price contributors typically have a long relationship with Metal Bulletin. And in any case of suspicious prices, the lithium team is equipped to treat as an outlier the price input given, by taking into account the lithium methodology.

One of Metal Bulletin’s most widely used prices in the battery sector is the low-grade cobalt price, where the same process is applied.

Metal Bulletin low-grade cobalt is widely acknowledged as the definitive industry benchmark price. It has been developed by Metal Bulletin over the past 40 years, and is published twice each week as a price range, in the same way as the current battery-grade lithium carbonate price (min 99.5% Li2CO3), ex-works China, which is published by Metal Bulletin once each week.

Lithium indexation

Growing demand for a more sophisticated pricing mechanism has come from some sectors, such as financial institutions. This demand, along with the increase in data contributors among suppliers and buyers in China, Japan and South Korea, has led Metal Bulletin to launch a lithium index that is calculated directly from the current Metal Bulletin Chinese domestic spot battery-grade lithium carbonate price assessment. This has been done to provide an additional pricing tool for decision-making.

The index-based pricing mechanism will use an objective mathematical calculation, providing a single point based on a tonnage-weighted methodology, to reduce subjectivity. This tonnage-weighted calculation will therefore be linked intrinsically to the physical market transactions captured by the global lithium team on a weekly basis.

The new lithium index will equip buyers and suppliers with a hedging mechanism that will help them to manage their risk throughout periods of high price volatility, providing them with a single price point where actual transactions carry full weight, as reflected by the reported volume (see graph 2).

Showcasing the price trend over the past 10 months, during which the market has been moving down, this new lithium index will provide support for internal decision-making and stock management for the diverse community of active consumers and producers, when hedging risk related to their pricing.

Since October 2017, the battery-grade lithium carbonate spot price in China had fallen by about 47% to 90,000-95,000 ($13,154-13,886) yuan per tonne on August 16, 2018, from 180,000-170,000 yuan per tonne on November 3, 2017.

The use of such a mechanism, internally or in contract negotiations, will help producers and consumers to reach a good price that benefits both parties, protecting the two sides of the market against the volatile and unpredictable price trends that have been seen in the lithium market since the end of 2015.

Through our work to serve the lithium market by improving price transparency and market information, Metal Bulletin will continue to innovate within this space and offer to the different market participants the price transparency they need to help them guide their businesses.

Read the latest lithium price spotlight here.

*Lithium pricing historic data is available upon request.