A capital markets specialist based in emerging lithium superpower Argentina says the London Metal Exchange's efforts to establish a lithium contract, while fraught with peril, is definitely worth doing, and is also attracting significant interest in Australia which currently dominates global production.
The LME, which sets the global price for nickel, aluminum and copper, announced in late 2017 that it was considering launching new futures contracts covering one, some or all of the electric battery materials lithium, cobalt, nickel, graphite and manganese; though nickel, copper, cobalt and aluminum are already established on the LME.
On Sept. 4 S&P Global Platts reported LME product development head Oscar Wehtje as saying the exchange was looking at launching a nickel sulfate premium contract after cash-settled lithium and cobalt contracts are hopefully in place in 2019.
It is understood meetings have already been underway with existing index groups and Washington, D.C.-headquartered international financial consultancy DCDB Group's Buenos Aires-based Managing Partner Emily Hersh told S&P Global Market Intelligence that more would likely occur during LME Week in London during October.
While the opaque nature of such technology metals has long been a concern for investors and transparency is likely to be a major driver of the LME's current efforts, Hersh said the relatively small size of the lithium market is an equally important consideration, as is its highly concentrated nature with Albemarle Corp., Sociedad Quimica y Minera de Chile SA, Jiangxi Ganfeng Lithium Co. Ltd., and Tianqi Lithium Corp. comprising 80% of market supply in 2017.
As S&P Global Market Intelligence recently updated the market, the 2017 ramp-up of hard-rock operations at Wodgina, Mount Marion and Mt Cattlin helped ensure Australia was the largest producer with over half of global output, with Western Australia's Greenbushes mine the single-biggest producer that year.
In a Sept. 2 article published on LinkedIn which garnered significant attention among Australian metals analysts, Hersh spelled out seven key considerations the LME needed to get its head around to create a lithium contract.
It said that while the lithium market's annual value only passed US$1 billion in 2015 and tripled to around US$3 billion in 2017, "it still has quite a ways to go in order to reach a significant size when compared to other industries," while the physical volume did not triple from 2015 to 2017, and much of the recent growth in market value was driven by higher prices.
Yet she also said the physical volume of the lithium market is expected to quadruple from 2017 to 2025, driven by growth in the battery industry, which means that "regardless of the details, the market is going to have to change radically."
While Hersh's article also pointed out the lack of communication between mining and commodities people and those from a chemicals background which accounts for "a great deal of the oversupply confusion," she told S&P Global Market Intelligence that the LME's efforts to establish transparent pricing or better market access to foster understanding of how pricing works will help the lithium market grow.
Shaun Cartwright, managing director of boutique financial services group Viriathus Australia which is managing the IPOs of Argentina-focused lithium hopeful Centaur Resources and Canada-focused cobalt junior International Cobalt Resources Ltd, told S&P Global Market Intelligence that "now is the right time" to create a lithium contract.
"The demand for lithium isn’t going to decrease, as many bears would have you believe," he said. "The demand for lithium will increase as the demand for clean energy increases. Lithium will be needed in larger quantities as batteries for the home, electric vehicles, et cetera become more popular. The processing cost for lithium will decrease as new processing technologies improve."
Yet Hersh believes that while "taking a step towards finding a way to have a lithium contract is an effort that may fail, but it's an effort worth doing," she said in an interview.
"Trying something new is fraught with being the first, as you may not get it right the first time. That said, there are clear and avoidable challenges to this undertaking that the LME should be cognizant of from day one," she added.
Yet she believes bench marking lithium hydroxide prices off carbonate prices would be an error, though she has heard LME officials say they want to have separate contracts. Warehousing, however, creates a whole new level of complexity.
"Leaving aside the fact that lithium chemicals are not interchangeable, lithium carbonate is not interchangeable but it is more storable, whereas hydroxide is neither interchangeable nor storable," she said.
S&P Global Platts and S&P Global Market Intelligence are both owned by S&P Global Inc.