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Unrepresentative LME lithium prices hamper attempts to modernise industry

November 5, 2019

Guest article from Benchmark Mineral Intelligence.

We’ve covered the issue of needing to set an accurate price for lithium contracts in the past, when we’re looking at the subject of investing in future lithium projects, this is critical. Here the team from Benchmark comment on the current pricing arrangement at the LME.

As lithium’s leading Price Reporting Agency (PRA) and advisory service, it is Benchmark Mineral Intelligence’s role to guide the industry on the world’s prevailing lithium prices and also the reasons behind any changes.

Our role has been particularly crucial as stakeholders across the supply chain have sought to introduce price references and formal benchmarks into contracts, the first step in modernising the way lithium is traded.

The London Metal Exchange (LME) has been publishing and promoting lithium carbonate and hydroxide prices and articles from commodity news service, Fastmarkets, for a number of months now.

The promotion is a prelude to launching a cash settled contract for lithium next year.

It is not the policy of Benchmark Minerals to pass comment on other publishing companies’ output. However, it is our role as independent and impartial analysts to discuss lithium developments as and when it is relevant to the market we serve.

As we have received many industry questions and confusion over the first series of prices published by the LME and Fastmarkets alliance, Benchmark Minerals can offer the following comment.

Lithium prices down, LME-Fastmarkets no change

For the past seven publishing cycles between 19 September 2019 and 31 October 2019, the LME and Fastmarkets lithium carbonate, CIF China, Japan and Korea 99.5% Li2CO3 Battery Grade price has not moved from $10/kg.

This is over a period when many lithium contracts experienced a quarterly price shift and the majority of suppliers were put under significant pressure to lower prices in response to a slowdown in the Chinese market and feedstock costs.

During the same period, the equivalent Benchmark Minerals’ Lithium Carbonate CIF Asia price has experienced the following decreases:

  • August 2019 Assessment to September 2019 Assessment (mid-points): decrease of 1.13% from $11.0/kg to $10.875/kg
  • September 2019 Assessment to October 2019 Assessment: decrease of 5.7% from $10.875/kg to $10.25/kg
  • Cumulative decreases over the time period under question for Benchmark Minerals Lithium Carbonate CIF Asia price: 6.83% decrease versus 0% or no change for LME and Fastmarkets equivalent price

Benchmark Minerals’ other five lithium carbonate grades assessed in October 2019 ranged from a high of $10.25/kg to a low of $7.025/kg (mid-points).

Another reference we publish outlining the price trend is The Benchmark Lithium Carbonate Price Index, an index weighted by traded volumes, which fell 4.5% in September 2019 and another 1.4% in October 2019.

Weekly price cycles risk market manipulation

At Benchmark Minerals, we made a deliberate decision to publish our lithium prices on a monthly basis and not weekly like LME and Fastmarkets.

What the LME – Fastmarkets lithium price is attempting to do by providing a free data point is induce the formation of an accepted market price; although this does not guarantee accuracy or a representation of the range of lithium prices – in fact its one of the higher price points of the industry.

By putting out a weekly price point under the LME brand, it is hoped that this will add credibility and legitimise a price the industry can gather around to form a spot market.

This is not the way lithium’s buyers or sellers operate.

As a lithium-first organisation, Benchmark Minerals understand that the low level of liquidity in today’s market means data points received over the space of a week will fail to demonstrate a prevailing market trend.

We were also concerned that any lithium prices that operated on a weekly cycle is at a significant increased risk of market manipulation, leaving only 5 days to collect the data, assess its validity and publish the prices.

It risks becoming a rush to gather data points rather than a methodical, measured process to uncover accurate price data that we employ at Benchmark Minerals.

With monthly lithium price cycles reflecting the trading patterns of today’s lithium market, our analysts can collect far more data points, have time to analyse their validity and set a range of prevailing market prices that the lithium industry trusts.

It may sound like a cautious approach – considering Benchmark Minerals have the largest and most experienced team of any Price Reporting Agency in the space – however it was the right one considering how the industry has adopted our prices today in contracts (see below).

Analytical over journalistic approach

This analytical and non-journalistic approach was the right internal governance decision at Benchmark Minerals and one that aligned with our IOSCO regulated lithium prices.

As a result of LME’s coverage of lithium, the industry is correct to question whether the LME and Fastmarkets published lithium prices are reflective of the market.

Not only does the LME and Fastmarkets ‘no-change’ price not reflect the downward price trend the lithium industry is experiencing at the moment, but, most crucially, it fails to show what is actually happening on the ground in lithium today.

While new trading mechanisms are indeed needed for lithium as it reaches new scale, this development sheds further doubt on whether a traditional commodity exchange is the correct way for lithium to evolve.

What is the real lithium price?

All publishing companies are in search for two things: credibility and price data.

And all publishing companies want to be the answer to the question: what is the real lithium price?

For example, if the LME and Fastmarkets alliance says the lithium carbonate price is $10/kg, but more volume in the market is trading at the lower priced grade – take Benchmark Minerals EXW China price at $7.025/kg, for example – then will traders want to place multi-million dollar bets on two prices that are 30% apart?

Further evidence of this point is seen in the October 2019 price spread of six lithium carbonate grades (mid-point) from Benchmark Minerals (US$/tonne) in the below chart.

Our single price data points for each grade are actually the mid of a high and low range which is set each month by Benchmark Minerals lithium team and derived from many data points collected from the industry over the course of one calendar month.

This methodology takes into account the wide variance of lithium prices even for one grade of lithium carbonate, yet offers the prevailing global price range for that product. Should consumers want a single price for each grade, then the mid-point is the logical conclusion and what we list on our database.

All of the lithium price data is made available all of the time to our subscribers.

This lithium price complexity underscores the specialty nature of lithium versus classic commodity markets that both the LME and Fastmarkets are founded upon.

Subscribe or trial Benchmark Minerals Lithium Price Assessments today 

The need to be representative

Publishing lithium prices that do not represent the market adds confusion to a industry in need of significant investment to expand to 2.2m tonnes LCE by 2030, according to Benchmark Minerals Q3 2019 Lithium Forecast.

Ironically, an effort to push the industry towards one lithium price, may actually be what takes it further away from a spot market, a first crucial step before the introduction of financial derivatives.

Benchmark Minerals’ lithium prices are written into contracts and used to aid negotiations. This industry acceptance provides a reliable way to manage the risk that price volatility over the past four years has created.

We not only produce our lithium price assessments each month but also advise the major actors across the supply chain on how these prices can be used in number of ways within contracts.

Such a leading price data and advisory role is only possible because of the lithium experience we have from the advisory and forecasting space, and with hires both sides of the lithium industry negotiating table: Tesla, SQM and Albemarle.

As a result of our global position, last week we were invited to brief The White House and The Pentagon on the subject of lithium and the EV supply chain.

We continue advise not only on lithium prices, but also end-to-end lithium ion battery and EV supply chain policy, technical, and commercial development incorporating senior leaders from the world’s largest governments, Auto OEMs, mining companies, and financial institutions.

The West Wing: Benchmark Minerals Team briefs The White House & The Pentagon; (Left-Right: Vivas Kumar, Principal Consultant; Simon Moores, Managing Director; Ty Dinwoodie, Advisor)

How to use benchmark minerals’ lithium prices in contracts

There are a number of mechanisms that the lithium industry is adopting with the aid of Benchmark Minerals that can help reduce lithium prices volatility, the primary goal of most major participants on each side of the negotiating table.

The most common are:

Contract Reference Price – using a specific lithium grade for a specific lithium price movement measures in a percentage

Formal Contract Benchmarks – directly tied to a specific lithium price measured in dollars per tonne

Basket Prices – the grouping of multiple price data sources such as Benchmark Minerals and trade statistics

Linked Adjusted – ties to the average price movements in Benchmark Minerals’ lithium indices

  • Learn more about these lithium price mechanisms here.
  • Contact Benchmark Minerals for advice on your lithium contract here

Learn more about our lithium prices and analysis:

Contact the Benchmark Minerals Lithium Team today:

Source: Benchmark Minerals Intelligence.

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MiningIR hosts a variety of articles from a range of sources. Our content, while interesting, should not be considered as formal financial advice. Always seek professional guidance and consult a range of sources before investing.
James Hyland, MiningIR