CME Group in the United States launched a cash-settled
lithium futures contract on May 3. The contract is settled
against Fastmarkets’ assessment of the lithium hydroxide monohydrate, 56.5% LiOH.H2O
min, battery grade, spot price, cif China, Japan &
Here are three key points the webinar audience learnt about
the new lithium futures contract.
Why should the value chain use the lithium futures
Like any other futures contracts in the commodity
market, the lithium futures contract gives participants in the
battery value chain a very standardized instrument to lock
their purchase or sales price, and to minimize their risks amid
price volatility, according to the panelists.
Such hedging mechanisms work as long as the formula price
used by companies in the supply chain has a good correlation
with Fastmarkets’ lithium hydroxide price, Gregor
Spilker, director of metals/energy research and product
development at CME Group, told the audience.
"In China, we have seen a preference for formula prices for
different lithium chemicals or even raw materials," Joyce
Zhang, commodity broker at Freight Investor Services (FIS)
said. In the lithium physical market, she added, there is an
increasing correlation between long-term contract prices and
Fastmarkets’ lithium price assessments.
"[As a producer, if you are] using a formula or floating
pricing element tied to industrial pricing, maybe you want
clarity of price in the next quarter, or the next six months,
so you want to lock your revenue and protect yourself from the
price decrease," she noted.
"Now you can achieve this by selling forward futures against
your production. Lithium negotiation are complex and take time
to execute, or you sit on semi-finished lithium or you have
inventory, [because] the purchaser has not finished testing the
materials," she added. "You can trade on futures to protect
yourself from the weakening of spot prices. You can use it to
lock-in prices for the future as they are today."
Such lithium hedging instruments also help to cut
investors’ and financiers’ exposure
to price risks during the long investment and construction
timeframe of a lithium project, according to the panelists.
"If you are banks or investors in the value chain, you need
to think about getting involved [in such a futures contract] to
protect the investment you have, or at least to hedge [some of
them], or to encourage your target companies to be involved to
protect the cash flow for the project financing to certain
extent," Kevin Smith, managing director of Traxys North America
Smith acknowledged that the lithium supply chain has endured
a degree of volatility in price development over the past few
Fastmarkets’ assessment of the lithium hydroxide monohydrate, 56.5% LiOH.H2O
min, battery grade, spot price, cif China, Japan &
Korea, was $12.50-14.00 per kg on May 27. This was up by
47.22% since mid-February. Prior to a period of stabilization
between mid-September 2020 and mid-February 2021, the price had
dropped by 16.28% compared with the start of 2020.
"We firmly believe that liquidity [will increase and] people
on the value chain will get more involved [in the futures
market] to manage their portfolio and price risks," Smith
How do brokers, exchanges establish forward curve
Brokers provide their clients with forward curve
prices, which are derived from physical deals, firm bids and
offers, panelists told the audience.
"We will talk extensively with market participants to
collect price data which will also be factored into our forward
curve," Martim Facada, a battery raw materials broker with SCB
Group, said, adding that such a curve is produced on daily
"Forward curve is the price you can achieve today for the
future," he said.
CME also publishes settlement prices for forward months,
Spilker told the audience.
"We get submissions from brokers and we get firm trade
data," he said. "The last element we look at is offers and bids
on screen. All those will be taken into account to set up the
CME settlement prices."
The lithium contract on the CME has 12 forward months to
trade, according to Spilker, who also told the audience that,
depending on clients’ interests, CME was able to
extend the forward curve for lithium contract as it did for the
The CME cobalt futures contract currently has a forward
curve until December 2022.
"With the market evolving, with more adoption of formula
price or index-linked pricing, market participants can
definitely learn more about the correlation of the spot price,
the futures forward curve and the index to decide their hedging
strategy and proportion with their physical market exposures,"
Will there be a big trader presence in lithium
physical, futures market?
While lithium is still on the way to becoming fully
commoditized, lithium futures are likely to accelerate this
process with traders becoming increasingly involved in both the
futures and physical markets, according to
"Lithium has a lot of characteristics similar to traditional
commodities," Smith said, although he also pointed out that
currently lithium also faces some factors, such as a short
shelf life, that would prevent traders trading openly, freely
and more liquidly.
Smith told the audience that this was why Traxys had been
more involved in providing structured finance solutions to
producers, consumers and those in the middle of the lithium
value chain. In that context, it intended to manage risks in
combination with companies in the value chain.
He also encouraged the audience to think about lithium
futures and how to use them in risk management.
"We have all seen the forecasts for growth of the electric
vehicle sector, and [we] know how much capital is needed to
build gigafactories, and to track that huge amount of money
there must be a risk management tool, and there must be
liquidity to manage that," Smith said.
"[Lithium futures] is a great development and it will
accelerate the market toward maturity. We hope the market will
evolve and become more mature and liquid. Moving forward, there
will be a more commercialized scenario and a more traditional
trading market for lithium," he added.
"Lithium is chemical," Facada said, "but that
doesn’t mean it is not tradeable."