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Launch of lithium futures could entice new investors, experts say

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The lithium market has long struggled with a lack of pricing transparency, but two new futures contracts could help reduce price volatility associated with lithium products, including the chemical lithium carbonate. Lithium carbonate can be recovered from salt flats such as the Olaroz salt flat in Argentina, pictured above.
Source: Ricardo Ceppi/Getty Images News via Getty Images

The London Metal Exchange started a new cash-settled futures contract for lithium hydroxide July 19 to bolster transparency and lower risk along battery metal supply chains. The attempt to standardize lithium prices signals the maturation of the specialty commodity in global markets amid escalating demand for the battery metal key to manufacturing electric vehicle batteries, according to industry experts.

The LME partnered with the pricing agency Fastmarkets to launch the battery-grade lithium futures contract called the LME lithium hydroxide CIF. As the world scrambles to lower carbon emissions in transportation sectors through electrification, the exchange said the new contract would "support the growth of the circular and low-carbon economies."

"The launch of the lithium hydroxide cash-settled futures contract represents a significant milestone not only for the LME but also for the global lithium industry," Ron Mitchell, sales director of Tianqi Lithium Corp.'s international business group, said in a statement.

Mitchell serves as the chairman of the LME's lithium committee, a group of industry representatives providing recommendations to the metal trading agency. A representative from each of about one dozen companies situated throughout the lithium supply chain sat on the committee, including lithium producers Albemarle Corp. and Pilbara Minerals Ltd., as well as automakers Tesla Inc. and Toyota Tsusho Corp.

"The contract offers the industry an important price risk management tool and comes at a critical time to support the future electrification goals of many nations," Mitchell said.

In early May, U.S.-based derivatives marketplace CME Group Inc. also launched a new futures contract for the chemical lithium hydroxide based on Fastmarkets' assessment.

The lithium market has long struggled with a lack of pricing transparency, independent lithium analyst Chris Berry noted. The new futures contracts from both exchanges could open up the battery metals sector to new investors.

"The fact that the lithium market is an opaque market has, quite frankly, kept a lot of generalist investors out of the sector," Berry said. "Right now, unless you are a lithium producer or consumer, like a battery manufacturer, you're never really going to know what the true price is."

"The market is going to have trouble attracting a breadth of investors unless you have more pricing transparency," Berry added. "I'm hopeful that these futures contracts are the first step in that right direction."

A specialty market

While lithium had been a non-exchange traded specialty product, other companies stepped up to establish greater transparency for lithium-ion batteries, electric vehicles and energy storage supply chains. For example, U.K.-based price reporting agency Benchmark Minerals has been independently evaluating several lithium grades to set prices since 2014.

"Normally, a futures market is used to hedge against trading and price movement in the market, although a cash-settled contract orientates these toward the financial community rather than the battery industry," Benchmark Minerals analyst George Miller said. "Any lithium exchange needs to be tied to an established market price as a foundation."

"We hope that both futures markets provide more transparency to the lithium industry, although there will likely be many exchanges looking to set up similar contracts, which could, in reality, create more confusion," Miller added.

LME's new pricing tool could also face other challenges, Miller said. Applying a futures contract to the lithium market could be tricky because the market is relatively small and specialized with minimal standardization across its products.

Depending on where and how it's extracted and processed, "lithium can have variable impurity profiles and in turn product quality," Miller said. "A futures contract often doesn't have the flexibility to reflect this. In the battery supply chain, what is really more important than anything is product consistency through time."

The LME launched new contracts for several materials July 19. In addition to lithium hydroxide, the exchange also started cash-settled futures for steel scrap and aluminum scrap. The new contracts will be handled in U.S. dollars per tonne and traded monthly out to 15 months.