When the oil market was liberalized in the 1970s, a group of commodity traders, led by Marc Rich, made huge sums of money by connecting buyers and sellers and surfing the web on the price movement of this commodity. Half a century later, some of Rich’s “descendants” are hoping for a similar life change with lithium.
As a key ingredient in most electric vehicle batteries, lithium is becoming one of the world’s most important commodities. Prices have surged to unprecedented levels as demand forecasts continue to rise, forcing automakers to scramble to secure future supply.
The price of lithium has skyrocketed between 2020-2022. Graphics: Bloomberg.
So far, however, lithium has barely been tradable. Prices are fixed in long-term private contracts between a small number of suppliers and their customers. Now, soaring demand is changing the way lithium is bought and sold.
Many supply trades have become significantly shorter – with floating prices relative to the spot market – while exchanges from Chicago to Singapore are testing new futures contracts.
This attracts the attention of traders. Companies like Trafigura Group and Glencore Plc make money trading commodities like copper, crude oil, and coal around the world. Now, they are starting to enter the lithium market.
Traders say they can help the market expand and mature, while minimizing risks to the supply chain. Some companies like Trafigura or Traxys SA are also investing in new sources of production.
“The activity of traders in the lithium market will make the market more transparent and efficient over time” said Martim Facada, a lithium trader at Traxys. “It’s like oil in the ’70s when governments sold it to consumers but then merchants started providing services. That helps to grow and develop the market faster. Lithium is starting to enter that process.”
The lithium market size is still quite small but growing very fast.
Of course, comparing lithium to petroleum 50 years ago is not entirely accurate. The lithium market is very small compared to oil. Annual world oil production is worth more than $3 trillion at current prices, compared with $30 billion for lithium.
One of the concerns in the lithium market is that there is an excessive supply shortage, creating the risk that prices will soar, or the metal will become so inaccessible that automakers have stopped buying it.
Commodity traders have a long history of price squeezes and shocks in commodity markets, and the role that lithium plays in the global effort to go carbon neutral could draw criticism.
Despite the industry’s importance, traders said they are being cautious and focused on easing supply shortages. “If a trader wants to get in, they need to take a sensible approach. The current price of lithium has hit a level that can destroy demand – if the participants want to push the price higher, I don’t see how the market can sustain itself,” said Socrates Economou, head of the department. Trafigura’s nickel and cobalt business said.
Investment in lithium in general and raw materials in particular is very low compared to the total investment in the electric vehicle market.
Trafigura estimates demand will reach 800,000 tonnes of lithium carbonate this year – far ahead of supply of 140,000 tonnes and this demand will grow by 200,000-250,000 tonnes annually through 2025.
While the world needs more and more lithium, investment in new supply has not kept pace with the growing demand.
Traders enter the lithium market when it is undergoing a drastic change. For many years, the main customers of lithium manufacturers were mainly manufacturers in such fields as pharmaceuticals and industrial lubricants. Now that automakers have become the biggest buyers, miners have switched to a shorter-term pricing model that better reflects the mismatch between supply and demand.
Tesla CEO Elon Musk has said that the price of lithium for delivery has become “crazy expensive” and, after years of urging manufacturers to supply more, he has personally engaged in investing in mining lithium mining.
Lent Masters, CEO of Albemarle, the world’s largest producer of lithium, said it will take some time before lithium “matures” to become a more tradable commodity market. With the spot market evolving, the next major milestone will be the development of liquid futures contracts.
“We think that eventually there will be a tool where you can hedge the price of lithium or speculate financially in the market,” he said in an interview. “That’s a good thing but it’s going to take a while – not now.”
Source: CafeF
Source: Vietnam Insider