Pricing concerns divide lithium and cobalt markets

Having no benchmark price for lithium is causing issues for investment in the sector, but the London Metal Exchange (LME)’s plan to set a reference price for the white metal hasn’t appeased everyone.

Last month, LME announced it was teaming up with Fastmarkets to promote the industry’s transition to transparent and representative global pricing, which it said will pave the way for the launch of a lithium futures contract.

The move is expected to provide lithium investors, customers, analysts and executives with a full sense of the global market and develop risk-management tools for the industry.

“The fact that there isn’t a benchmark price means that some of the banks haven’t been keen to get involved because they can’t hedge their price risk,” Fastmarkets analyst William Adams told reporters.

However, some lithium producers are not impressed by the plan, believing the metal is not a true commodity requiring a benchmark.

The issue shadows similar concerns raised a few years ago relating to using the LME as a pricing reference for cobalt.

LME lithium contract

Despite the electric vehicle (EV) revolution sparking rapid development and growing demand for lithium, it differs from other EV-related metals such as copper by having no current traded price.

Producers currently negotiate contracts with buyers under confidential deals, with growth in the sector also clouded by oversupply concerns and mixed views on the best way to track industry pricing.

“In recent years there has been unprecedented price volatility in the lithium market, driven particularly by explosive electric vehicle battery demand,” LME head of market development Robin Martin said.

“The LME has been approached by a number of industry players, including producers, end users and several leading automotive firms, to develop effective lithium price-risk management tools,” he said.

LME said it chose Fastmarkets as its pricing partner due to the already widespread use of the latter’s lithium prices.

“Due to its chemical nature, lithium is not suitable for a physically-delivered contract, and hence the LME, together with its advisory group, believe that partnership with a price reporting agency represents the best route to a tradeable contract,” the exchange stated.

“This global strategic partnership will develop a definitive roadmap aimed at providing a pricing mechanism for lithium that can be utilised throughout the supply chain,” Fastmarkets stated.

LME said it and Fastmarkets will spend the coming months jointly promoting the lithium industry’s transition towards reference pricing.

The Fastmarkets lithium prices are expected to be made freely available through LME’s website.

Lithium producers reject plan

However, the world’s largest lithium producer, New York-listed Albemarle Corp (NYSE: ALB), is not convinced of the idea.

Ablemarle head of corporate strategy and investor relations David Ryan told attendees at the Fastmarkets Lithium Supply and Markets Conference in Chile last month that the company would not be contributing its pricing data to the index “at this point”.

“An exchange contract tends to support a commodity market, and that’s not what we believe this (lithium market) is,” Mr Ryan said.

Other established producers have said they believe lithium is a specialty chemicals market that should be priced on a contract-by-contract basis.

“The challenge of the index is to try to have very good representation of the market, which I really feel is not possible today because of how the lithium industry works,” SQM vice president of lithium and iodine Pablo Altimiras, who spoke alongside Mr Ryan on a panel at the conference, said.

Another panel member representing rival producer Tianqi Lithium Corp agreed that lithium is not a true commodity.

According to Reuters, the LME said it respected the right of companies to operate however best suits their needs.

“The LME continues to work with a supportive group of industry participants to develop solutions for the lithium industry and will launch a contract when those participants are ready to use it,” LME spokesperson Bianca Blake said.

New cash-settled cobalt contract

Fastmarkets already provides the global benchmark for the cobalt market, another key raw material used in EV batteries.

The LME launched a physically-settled LME cobalt contract in 2010 but in 2014, market participants were still debating over whether to base cobalt contract prices on the LME, with critics arguing that the industry was too small to justify an effective terminal exchange contract.

Trading volumes and stocks have since grown, boosted by the EV and battery industry boom.

This rise in demand for battery metals has also resulted in a growing appetite for a cash-settled contract, which LME consequently launched in March 2019.

This new contract complements LME’s existing physically-settled offering and is settled against the Fastmarkets MB Standard Grade index.

The main differences between the two contracts are the settlement structure, price and prompt date structure.

“Cash settlement is a method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual physical underlying asset but instead transfers the associated cash position,” LME stated.

It explained that cash settlement was a more convenient method of transacting futures and options contracts for sellers who don’t want to take actual possession of the underlying cash commodity.

“Cash settlement is also preferred by financial investors who bring additional liquidity reducing the bid-offer spread, thus lowering the cost of trading,” it said.