November 9, 2018 / 10:24 AM / 7 days ago

Commentary: Lithium price tensions highlight need for an LME contract

LONDON (Reuters) - What’s the price of lithium, the “hot metal” at the heart of the electric vehicle (EV) revolution?

A view of part of an industrial plant for potassium chloride, a product that is extracted from brine under a program developed by Bolivia to produce lithium, Potosi, Bolivia, October 7, 2018. REUTERS/David Mercado

The spot price in China has collapsed over the course of 2018 as the market absorbs a wave of supply, much of it from the new hard-rock mines that have come on stream in Australia.

Outside of China, however, the picture is very different with the price of lithium in bigger-volume contracts consolidating an upwards trend that has been running since 2015.

The divergence shows how pricing lithium is still very much work in progress.

It also explains why the London Metal Exchange (LME) is looking to enter the fray with what would be the first exchange-traded lithium contract.

SPOT PRICE COLLAPSE

The spot lithium carbonate market has collapsed from an average $26.18 per kilogram in December 2017 to $11.23 in October, according to Fastmarkets MB.

The spot price is purely a domestic Chinese one, reflecting an assessment of the price of lithium carbonate ex-works in China.

China sits at the heart of the lithium market thanks to its aggressive build-out of both electric vehicle and battery-manufacturing capacity.

It is also where short-term supply and demand drivers have been playing out to negative price effect.

Not only has Chinese domestic lithium brine production been running strong, the country is also the destination for the direct shipping ore coming from new Australian producers such as Galaxy Resources (GXY.AX), Altura Mining (AJM.AX) and Pilbara Minerals (PLS.AX).

This spodumene ore has to undergo significant processing before it is usable for making lithium-ion batteries, creating a log-jam of raw material in the domestic market.

The new supply stream has also coincided with significant changes to China’s battery landscape occasioned by new EV subsidies with battery plants accordingly destocking and retooling.

The net result of extra supply and demand disruption is a collapsing spot Chinese price.

“AN EARLY CORRECTION”

Does this mean that the spectacular price rally of 2015-2017 is now over?

The short-term answer is yes, but lithium’s underlying bull credentials remain intact.

Which is what the price of lithium carbonate in longer-term contracts is showing.

Fastmarkets MB’s assessment of this segment of the global lithium market has eased slightly over the last couple of months but at $16.00 per kilogram in October it is still up year-on-year and, critically, is now trading at a premium to the spot Chinese price.

“The market outside of China still remains relatively tight,” according to analysts at Benchmark Mineral Intelligence. (“China’s lithium price decline is not the full picture”, Aug. 20, 2018)

“Despite expansions in South America finally beginning to bear fruit, the incremental new volumes reaching the market are not going to create the huge oversupply problem some institutions have warned of.”

Benchmark Minerals’ view is that the falling spot price “is an early correction to the lithium carbonate market in China that will go through several phases of growth over the next decade”.

Sliding spot prices will impact contract prices in the rest of the world, just as they influenced longer-term pricing on the way up.

The massive spot price premium at the start of 2016 saw buyers and sellers adjust their contracts to allow for annual or in some cases quarterly price reviews.

With spot prices now below contract prices, buyers will naturally hold off signing longer-term contracts in favour of spot material with inevitable downward pressure on 2019 negotiations.

However, contract prices are by their very nature cushioned from spot market gyrations and as they failed to match the spot price spike of 2015-2016, they are now unlikely fully to track it on the downside.

PRICING CONFUSION

These structural tensions in the lithium price are reminiscent of those in the iron ore market at the turn of the decade.

The outcome in iron ore was a collective shift away from annual or longer-term contracts towards spot market pricing, which in turn fed what is now a huge futures trading arena.

In truth, lithium pricing is much more complex than that of iron ore because of the differences between battery and non-battery material flows and continuously evolving battery chemistry composition.

Fastmarkets MB, for example, actually publishes more than 30 lithium price assessments, covering the full production process spectrum, from spodumene ore through lithium carbonate to lithium hydroxide.

Indeed, so complex is the market that there are those who argue that lithium is not a commodity market in the traditional sense, mitigating against any single pricing reference point.

Yet, there is still obviously a payable content in any form of lithium product, albeit one that in the current market structure remains highly opaque.

And everyone, barring the handful of top producers that has historically dominated the market, wants more transparency.

LME CONTRACT

Which is what the London Metal Exchange is hoping to offer with a lithium contract to be launched some time towards the end of 2019.

Indeed, the LME has inserted itself into the heart of the lithium pricing debate, setting up an electric vehicle metals advisory group to explore not only a contract for lithium but potential contracts for other key battery inputs such as nickel sulphate, graphite and manganese.

The Exchange has short-listed three price reporting agencies to provide a lithium price index that could be referenced in a cash-settled contract: Fastmarkets MB, Benchmark Minerals and Argus Media.

Presentations from all three are available on the LME website. (here)

And all three highlight one all-important truth about the lithium market, which is that demand will continue growing exponentially as the EV revolution gathers momentum.

The current sell-off in the spot price is no more than a bump in the road, to quote Benchmark Minerals, as “each part of the battery supply chain - from lithium mine to chemical plant to cathode and battery manufacturing - builds out.”

There will be plenty more “bumps in the road” as lithium transitions from speciality chemical product to mainstream automotive material.

What the entire supply chain needs is a better road map for navigating those bumps.

The LME is right now the front-runner to provide one.

The opinions expressed here are those of the author, a columnist for Reuters. 

Editing by Elaine Hardcastle

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