Analysis – LME slows rival trade as battery metals trade gains momentum By Reuters
Written by Eric Onstad
LONDON (Reuters) – The London Metal Exchange is lagging behind in the race to trade metals used in EV batteries such as lithium and cobalt as other exchanges gain momentum, moving from annual fixed-price contracts to futures. .
The LME is the world's oldest and leading market for industrial metals such as aluminium, but its complex futures structure and aggressive marketing means its future for battery metals has been overlooked.
The 147-year-old exchange may miss out on a major growth spot in the coming years as miners and EV makers raise the fence unless it can lure traders into their contracts with the necessary energy conversions.
Among Western exchanges, US CME Group (NASDAQ: ) topped the LME in lithium and cobalt volumes.
CME lithium hydroxide contract volumes rose 759% during the first eight months of the year compared to the same period in 2023 while the LME contract failed to trade this year.
In China, the Guangzhou Futures Exchange has seen strong growth in its lithium carbonate futures since launching in July 2023, but there are barriers to foreign participation.
“The LME doesn't get the market buying that the CME has,” said Jack Nathan, head of battery instruments at broker Tullett Prebon.
“But people aren't married to a particular deal or exchange. People just want the most accurate hedge and the most efficient execution site.”
THIS IS THE PROBLEM
Part of the LME's liquidity shortage may be due to the complexity of the LME's setup, according to LME Chief Executive Matthew Chamberlain.
The CME and most futures exchanges have one expiration day for monthly contracts, but on the LME each day can be traded so that physical users can combine their deals with instruments.
“We know that the clarity of the LME market structure can hurt you when you're trying to build liquidity,” Chamberlain told Reuters, when asked about increasing volumes of LME battery metals.
“I think that will undoubtedly be helped by a broader set of market participants and a more standardized market structure.”
Earlier this month, the LME unveiled a set of proposed measures to improve electronic trading and liquidity.
CME's high volumes are also due to its aggressive marketing campaigns to attract consumers and users to battery products, industry sources said.
To help boost activity, in May the LME announced tariff waivers for cobalt and lithium.
LITHIUM FOLLOWING IRON ORE
Until a few years ago, most lithium supplies were negotiated through annual fixed-price contracts, like iron ore decades ago.
After major producer BHP led the interest in 2010 to dismantle the 40-year-old iron ore system of setting prices once a year, the futures market in the iron ore material increased to large volumes.
Lithium has similar potential — albeit in a smaller market — once volatility subsides and major companies are free to use futures markets, analysts say.
“It's been a tumultuous 36 months,” said Daniel Fletcher-Manuel, director of pricing and data at Benchmark Mineral Intelligence.
Lithium prices are up 500% in the 12 months to May 2022 as carmakers rush to get help amid fears of shortages.
But increased production from new mines and weaker-than-expected EV sales created a supply glut and prices have since crashed, giving up all their gains.
“There is still a lot of uncertainty caused by price uncertainty, which makes opportunists hesitant to enter the battery metals space, but that will change,” said Fletcher-Manuel.
Benchmark expects lithium hedging to more than triple to 1 million metric tons per year by 2030, using conventional assumptions.
Hedging is expected to slow this year and next, as miners and EV makers are expected to hedge on average around 10% of global supply by 2026, rising to 40% by 2035, Fletcher-Manuel added.
COBALT
The LME is also behind cobalt, a smaller market than lithium. The CME has seen 20 times more volume in cobalt metal futures so far this year than the LME.
The LME's cobalt volume, while small, has risen at least this year, which the LME's Chamberlain believes is partly due to the exchange's responsible sourcing guidelines.
The LME also saw some commodity deliveries based on its physically based cobalt contract, attracting further oversupply in the market.
More cobalt products are expected to apply to be listed on the LME, which could help buy capital, an industry source with direct knowledge said.
