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Lithium miners shake up trading to tackle wild price swings

20th May 2024

By: Bloomberg

  

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The world’s lithium miners — facing an unprecedented demand surge and wild price swings — are shaking up the way the commodity is bought and sold.

As lithium emerges as a linchpin of the global energy transition, the industry is in the grip of a slow-motion revolution that earlier upended commodities like iron-ore: a push for more transparent and industry-wide pricing.

Albemarle, the No. 1 lithium supplier, has held a series of auctions since March where potential buyers compete for cargoes via bids. These sales are a significant step for lithium, which until relatively recently was largely sold at prices fixed in long-term contracts.

For now, there’s a patchwork of spot price references — and nascent futures markets — but little consistency on how to value each unit of lithium as it flows along a supply chain from mines to electric vehicles.

“The auctioning of lithium does two things,” said Przemek Koralewski, global head of market development at price reporting agency Fastmarkets. “It allows miners to get the price of the day and it means that the contracts on which most material is sold is truly reflective of market dynamics.”

Ballooning demand from batteries and electric vehicles has transformed lithium from a niche metal into a closely-watched commodity pulling investment in the tens of billions of dollars. But it’s also triggered massive volatility and growing complexity.

Iron ore miners faced a similar quandary in the first decade of the 21st century as Chinese consumption of the steelmaking ingredient exploded. Then, BHP Group led a controversial charge to bury the decades-old regime of annually negotiated benchmarks in favor of floating prices that underpin the market today.

It’s “not unlike how the iron-ore market evolved,” said Chris Berry, president at consultancy House Mountain Partners. “These auctions and the increasing liquidity in lithium futures are a good sign.”

The idea is that more regular, open spot pricing by bids and offers allows market participants to respond more quickly to changes in supply and demand, thereby clearing the market more efficiently in boom times as well as bad.

For spodumene — a lithium-bearing raw material — regular spot prices in China put out by researchers have been used as one reference but haven’t been satisfactory, Standard Lithium CEO Robert Mintak said.

These can “drive the market crazy and confuse investors, confuse developers, and confuse off-take negotiation,” Mintak said. Albemarle’s auctions help to show how close the China price is to reality, he said.

EARLY DAYS

Albemarle’s four auctions April and March — plus a further three due this month — are not the first in the industry. Australian producer Pilbara Minerals started a digital platform for auctions from 2021, and Mineral Resources Ltd. is also planning one. Meanwhile, futures trading has also taken off in China from last year.

Albemarle plans more bidding events ahead, expanding from sales of spodumene concentrate and lithium carbonate to lithium hydroxide.

“Lithium is early in its life cycle,” Albemarle said in emailed comments. “Frequent, high-quality data points are key to supporting transparent, reliable, and robust price indices.” The firm plans to hold auctions at least every two weeks, it said.

Lithium prices are coming out of a boom-to-bust period that left in its wake an array of stalled projects, scrapped deals and production cuts. One measures of prices — for lithium carbonate in China — is about 80% below its levels at the peak of a boom in 2022. The market is still grappling with inflated inventories from that period.

There’s also growing divergences between different products as the supply chain matures. Long-term contracts have historically been linked to the downstream chemicals market rather than the mined raw material, spodumene, that has become a staple source only in the past decade. And the price relationship between the two is breaking down.

“We are becoming more in control of our own pricing, which was initially driven off of lithium chemicals,” Ana Cabral, CEO of miner Sigma Lithium, said in an interview. “Ultimately the risk-reward system has to be aligned with the pricing mechanism. The ones who produce the concentrate — the pre-chemical — take all the risk.”

Lithium producers are navigating not just explosive growth in demand, but geopolitical and regulatory shifts that could lead to bifurcations across different geographies. The West is trying to rely less on supply chains that run through China, and there’s a growing focus on the varying carbon footprint of different sources.

“It is important for miners to demonstrate the value of their products when the dynamics of lithium feedstock and chemicals diverge,” said Susan Zou, Shanghai-based analyst at Rystad Energy.

Edited by Bloomberg

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