The dramatic shift in the dynamics of the lithium market
over the past four years has changed business practices and
increased demand for price transparency.
Fueled by anticipated growth in the global battery market and
the consequent price swings and supply responses in China, the
epicenter of the lithium market, this volatility has at
different times disadvantaged one side of the market or the
Buyers and sellers have historically chosen to lock in fixed
prices on long-term contracts, which "has risks for buyer and
seller", Daniel Jimenez, partner at mining consultancy
iLimarkets and former vice president of sales at Chilean
lithium producer SQM, told Fastmarkets.
Now though, companies are seeking greater exposure to the spot
market, concerned that they will miss out when a price swing
works in their favor if they are locked into long-term
fixed-price contracts. Many have therefore been changing the
way that they conduct business across the supply chain.
(Governments, interested in ensuring maximal returns on their
natural resources of lithium, also incidentally support more
transparent and market-based pricing, as this interview
Below, Fastmarkets outlines what is driving these changes in
behavior and what it means for lithium sales and
Wild price swings
The lithium industry paid scant attention to the insubstantial
spot market before the dramatic spikes of 2015. There was
little reason to do so given the tiny proportion of business
done on spot - lithium was largely traded on long-term
contracts at a price agreed between the buyer and the seller in
a steady market.
More recently, however, the rapid growth in lithium demand and
the production of lithium compounds in China have fundamentally
altered the market’s dynamics and turned the focus
of the market onto independently assessed benchmark
China dominates lithium’s upstream and downstream
- it is home to more than half the world’s
production of lithium ion batteries and 61% of global lithium
Fastmarkets’ lithium prices have swung
dramatically in the past four years. The carbonate 99.5%
Li2CO3 min, battery grade, spot price exw domestic China
almost quadrupled to $27 per kg in June 2016 from $7.70 per kg
in June 2015.
The price then fell by more than half to 70,000-77,000 yuan
($10,175-11,193) per tonne on June 20, 2019 from
165,000-175,000 yuan per tonne on December 21, 2017 (see graph
(Fastmarkets changed the currency and unit in this price from
dollars per kg to yuan per tonne in November 2017 to better
capture the market in China.)
captured similar behavior in the price of battery grade lithium
hydroxide monohydrate compounds.
The major swings in lithium prices were largely driven by
marginal output from new producers coming online in response to
higher prices caused by growing demand, mostly from the battery
sector, Fastmarkets senior analyst Vicky Zhao said.
This took the lithium market from undersupply in 2015-2017 to
oversupply in 2018. Fastmarkets’ research team
estimated global demand in 2017 as high as 237,000 tonnes of
lithium carbonate equivalent (LCE), exceeding total global
supply of as much as 228,000 tonnes.
Fastmarkets pegged demand of LCE at 262,000 tonnes in 2018 but
by then supply had swollen to 290,000 tonnes, predominantly
because of the increase in lithium units produced by converters
in China. These typically have higher operating costs than
lithium chemical producers in Chile or Argentina - the other
main lithium-producing nations.
In 2019, Fastmarkets expects supply of lithium to be as high as
355,000 tonnes of LCE, outstripping demand of 300,000 tonnes
and causing the global surplus to grow.
This marginal production at the higher end of the cost curve is
the first to come under pressure when prices fall.
While high-cost producers may sell material close to or below
production costs to generate cashflow for short periods, this
is unsustainable in the long term, Zhao said: producers at the
high end of the cost curve may have to halt output.
Earlier this year North American Lithium suspended its lithium
spodumene production because of lower prices demanded by
spodumene converters in China.
Lithium spodumene is used in the production of lithium
carbonate and hydroxide in China. Lower prices for these
compounds in China have pressured spodumene prices lower over
the past year, causing some defaults on contracts at the end of
The lithium spodumene
5-6% LiO2 min, cif China price fell by 34% to $585-650 per
tonne on June 26 from $900-970 per tonne on June 27 last
Changes to strategy
The response of prices to both demand outstripping supply
initially and now, conversely, to supply temporarily
outstripping demand, has changed how many participants buy or
sell in this volatile market.
In the absence of a price benchmark that would enable them to
manage price risk efficiently, some lithium producers have over
the past three years shortened the length of their contracts.
In China, short-term contracts are increasingly the norm.
"Affected by the frequent fluctuation of lithium prices since
last year, most cathode producers in China choose to negotiate
with lithium producers each month or even each week when they
need to purchase material due to the fear of further price
changes," Liu Yiding, the general manager of Sichuan Fuhua New
Energy, told Fastmarkets.
"Some cathode makers agree on a reasonable price fluctuation
range when they [sign long-term contracts]," he added. "The
current lithium market fluctuates a lot and concluded prices
are in a wide range. There are some transaction prices lower
than spot prices but, when bargaining with suppliers, we will
refer to spot prices."
Consumers of lithium compounds have also responded by managing
with lower stock levels. When lithium was in short supply
between the end of 2015 and the start of 2018, many locked in
as much material as they could to avoid high prices.
But since the start of 2018 when the market swung to
oversupply, lithium consumers have operated with lower stocks,
opting to buy more on a spot basis in a downward-trending
Developments such as this have ensured that market participants
are also looking for more transparent pricing mechanisms.
Producers and consumers sometimes refer to weighted averages
calculated using trade statistics when negotiating prices,
especially during periods of high volatility, in an attempt to
settle at a fair and independent level.
But this is not always the case. One side could be put at a
disadvantage by trade statistics because they ignore aspects
such as the quality of material that have an impact on the
final price of lithium compounds.
Although trade statistics are still considered by some
during negotiations, iLimarkets’
Jimenez argues that other options are more favorable.
"The most common pricing practice among lithium players is
trade statistics, which in my opinion are the worst index
because of serious contamination of data: mix of grades, off
spec product, rebates (not accounted for in trade stats),
transfer pricing etc. Therefore, a reliable spot price index
will the closest to perfect and would certainly enable
long-term and fair relationships," he said.
Instead, other producers and consumers are seeking more
exposure to the spot market, hoping to secure business at the
latest price, making transparent pricing data more
(It is worth noting that while trade statistics do capture spot
transactions, by their nature they also lag the market, thus
reducing their utility.)
Increasingly, the price agreed in a term contract includes a
floating element with a floor and a ceiling. The price rises or
falls in line with changes discovered by a price reporting
agency (PRA) such as Fastmarkets.
Referencing a third-party price helps smooth contract
negotiations for the supply of lithium, sources said. If a
buyer and seller cannot agree on a price, they will typically
use a weighted average of a specific index or trade
This has led to the marginal tonnage sold in the spot market,
the basis of PRA prices such as those published by Fastmarkets,
gaining in relevance and support.
China’s influence in spot pricing to grow
Some lithium producers remain uncomfortable with the concept of
settling contracts basis an independent, market-based price,
preferring long-term fixed prices.
But regardless of this, lithium companies must increasingly pay
attention to the Chinese spot market to understand market
dynamics, particularly while that market grows in size and in
Spot and short-term sales also look set to gain in relevance
given their increasing share of total global sales, according
Zhao expects global lithium production to reach 355,000 tonnes
this year, including 240,000 tonnes from China.
"In 2019, more material will be traded on the spot market due
to the downward trend of lithium prices and the supply surplus,
especially in China, owing to weaker price
expectations and weaker demand due to the decrease in new
energy vehicle subsidies in China," she said.
Of course, producers acknowledge the significance of pricing in
"China is currently the largest and fastest-growing lithium
market. We are convinced that China will be leading the demand
growth over the coming years so we need to be present," Felipe
Smith, commercial vice president Asia Pacific at SQM, told
In addition, Chinese producers are likely to look to book more
sales overseas, particularly in the wider Asian region, when
the arbitrage allows, because of the domestic surplus and the
small premium still available in nearby export markets, Zhao
"The growth in the market in China, combined with the seaborne
material traded on a cif China, Japan and Korea basis will
therefore provide a global benchmark that is both responsive to
the domestic trends in China as well as the market for material
from international suppliers," Zhao said.
In the lithium market, price volatility in China and beyond,
driven by the fundamentals of demand and supply, has generated
the spot-traded volumes that feed PRA’s benchmarks
at the same time as it has driven the recognition of their
practical application and value.