How markets are looking at lithium and what the facts are telling us06.08.2021by Philippe Orphanides
Lithium has many properties destined for a wide range of applications. It is the lightest metal on Earth and has great electrochemical potential. Its energy density is twice as high as the closest alternative, an ideal candidate for energy storage.
Trailing on the electric car making
Indeed, this component has become unavoidable in the production of batteries for electric vehicles and faces growing demand.
The strong growth in the production of batteries by major players in the sector, such as LG Chem, Panasonic (in association with the car manufacturer Tesla), BYD or Foxconn is expected to fuel market growth in electric vehicles. The growth in electric car production would drive lithium demand from 50,000 to 200,000 tonnes of lithium carbonate equivalent (LCE) per year.
Markets are on the ball
In June this year, the London Metal Exchange (LME) started offering futures contracts (a futures contract is an agreement to buy or sell a particular commodity asset at a predetermined price and time in the future) on this white metal. One further sign of growing importance of this component that is essential to electric vehicle batteries.
With the rise of clean cars, the demand for lithium has jumped since 2020.
And in particular the demand for lithium hydroxide, of better quality, which is used to manufacture batteries offering the longest autonomy.
The prices for this metal increased by a staggering 86% in China – the largest electric vehicle producer – since the beginning of the year. And the needs grow sevenfold by 2030 according to Benchmark Mineral Intelligence, one of the main analysts in this area
More transparency on prices
With the creation of a futures contract on this metal, the LME has contributed to making it a conventional commodity. The lithium market, however, is still quite opaque.
Contracts are negotiated via over-the-counter agreements between manufacturers, mainly established in China, Japan and South Korea, and producers, with the four leaders being Albemarle (United States) SQM (Chile), FMC (United States) and Talison (Australia) controlling about 85% of the global lithium production.
These commercial contracts relate to long periods, annual or semi-annual. The Chicago Mercantile Exchange (CME) had already opened up the way in early May, by launching its own lithium futures contracts.
The LME was working for three years on the project, and throwing itself in the competition is something that should contribute to greater transparency on prices and a formalisation of the commodity’s trading.
“There is no benchmark price in contracts, not one price you can google. The CME and LME are trying to create a benchmark traded price, very much like what happened in the oil market in the 70s.” explains Financial Times metals and mining correspondent Henry Sanderson.
So far, the reference prices on which contracts were based were provided by specialized companies, such as Benchmark Mineral Intelligence, S&P Global Platts or Fastmarkets. But with listed futures contracts, it will be easier for businesses to anticipate the evolution of prices, and to hedge against possible price increases, those of lithium being very volatile. Such contracts could also attract investors wishing to strengthen their exposure to this sector in full growth and in turn allow the development of new production projects.
A future bet?
Lithium is currently the only metal to experience a dynamic market, with demand prospects and favourable prices. Growth in lithium production will involve the emergence of new players, probably mostly installed in stock-rich Argentina and using more innovation to produce battery-quality lithium and in a more environmental-friendly way. Whether carmakers use this contract to hedge against price risk or investors trust this commodity remain an open to question.
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