Producers, consumers of lithium differ over 2019 contract prices

Lower lithium prices than a year ago have led to differing price expectations between producers and consumers of lithium compounds in their negotiations for 2019 supply contracts.

In light of lower spot prices in China, lithium consumers are seeking to lock in lower contract prices for 2019 by referencing the Chinese spot market price in their deals. But lithium producers are trying to keep prices unchanged year on year due to expectations of strong demand for lithium compounds over the coming years.

“Lower Chinese prices are being used by consumers to obtain lower prices for next year,” a lithium producer told Fastmarkets. “It is undoubtable that Chinese prices affect the rest of the world prices… we will [therefore] start next year with softer prices than the ones achieved in 2018.”

“The Chinese domestic spot price has an important influence on rest-of-the-world prices,” an Asian lithium distributor said. “Despite the expected huge increase in demand for lithium compounds for 2019, global contract prices are going down and that is mainly because consumers with business partners in China are aware of the lower prices in China.”

Chinese spot prices have fallen further than US and European contract prices from this time last year.

Fastmarkets assessed the battery grade lithium carbonate min 99.5% (Li2CO3) contract price on a cif China, Japan and Korea basis at $13-16 per kg on Wednesday November 28, down by 21.62% from $17-20 per kg on November 29 last year*.

The battery grade lithium hydroxide min 56.5% (LiOH.H2O) contract price cif China, Japan and Korea was $16-18 per kg on November 28, down by 15% from $18-22 per kg on November 29, 2017.

The European and US battery grade lithium carbonate min 99.5% (Li2CO3) contract price on a ddp basis was $13-16 per kg on November 28, a drop of 19.44% from $17-19 per kg on November 29 last year.

In the same comparison, the battery grade lithium hydroxide min 56.5% (LiOH.H2O) contract price at $16-18 per kg ddp Europe and US was down by 8% from $17-20 per kg.

While some market participants cited lower spot prices in China and a supply glut as the main reasons that contract prices should fall, lithium suppliers are adamant that China has a limited influence on prices in the rest of the world.

“Until now, the market dynamics observed in China have not spread to the rest of the market, except India perhaps [for lithium hydroxide],” a second lithium producer told Fastmarkets.

“Japanese and Korean cathode manufacturers have strict qualification procedures so we only see a reduced number of Chinese producers supplying those markets and still at reduced quantities,” the producer added. “This will probably change in the medium term only, not in the coming months.”

Slow spot consumption and excess supply have pushed down the battery-grade lithium carbonate spot price in China by 55.14% to 74,000-83,000 ($10,638-11,932) yuan per tonne as of November 29 from 180,000-170,000 yuan per tonne on November 30 last year.

The battery grade lithium hydroxide spot price in China has fallen by 24.65% to 105,000-115,000 yuan per tonne from 142,000-150,000 yuan per tonne over the same period.

Since the demand shock at the end of 2015, lithium contract prices had trended higher toward the level of spot prices in China (see graph below) until the fourth quarter of this year.

But contract prices have softened recently, falling month on month throughout the fourth quarter of 2018. This highlights China’s influence on prices elsewhere and especially in contracts signed with companies that have direct relationships with Chinese battery makers.

While market participants believe the Chinese spot market has become overheated, lower spot prices there and excess supply have progressively pushed down contract prices elsewhere – they are following the trend a year later.

Contract prices across the globe should soften slowly and catch up with spot market trend, reflecting growth both in Chinese production and consumption of lithium compounds. This makes the Chinese spot market a decent indicator of the direction in Chinese contract prices.

Lithium producers and consumers have since 2015 increasingly signed quarterly, half-year or annual contracts that use the trend in the Chinese spot price and market fundamentals as reference points to determine the lithium price for those contracts.

Volumes are typically locked in but the formulae can include floor and ceiling prices subject to spot market movements; or fixed prices throughout the term of the contract. Before the price spike in 2015, contracts were typically for more than one year at a fixed price.

Still, some larger producers and consumers – with contracts of at least 300 tonnes per year – have retained the longer-term approach by locking volumes for between one and three years.

Another growing trend – mainly in Asia but increasingly in Europe and the US – has been a willingness to mix thing up, buying both on spot and on contracts.

“We could save up to $8 per kg if today we buy material in the spot market in China compared to our current contract prices,” the Chinese cathode maker said. “We have increased the amount of material purchased on a spot basis and this could be an increasing trend if prices in China remain low.”