Commodity traders see big opportunities in lithium market

It is getting the traders’ attention. Companies such as Trafigura and Glencor that make money moving commodities from copper to crude and coal around the world, are starting to wade into the lithium market. Traders say they can help the market broaden and mature, and reduce risks for other players in the supply chain. Some, such as Trafigura and Carlyle-backed Traxys, are also investing in new production sources.

“The activity of traders in the lithium market should make this a more transparent and efficient market over time,” said Martim Facada, a lithium trader at Traxys. “It’s like oil in the 1970s when governments would sell to consumers, but then traders started providing services and that helped growing and developing the market faster. Lithium’s starting to go through that process.”

The comparison with oil 50 years ago is not a perfect one. The lithium market is tiny compared with more established and liquid commodity markets. Annual world oil production is worth more than $3-trillion at current prices, versus $30bn for lithium. The metal is also refined into specialised chemicals that some experts argue are much less fungible. 

One of the concerns in the lithium market is that the extreme supply shortages create a risk that prices rise so high, or metal becomes so difficult to access, that carmakers have to stop buying.

Commodity traders have a long history of squeezes and shocks in commodity markets, and the high stakes in lithium — crucial to the success of the world’s decarbonisation efforts — could leave them open to criticism. But despite the industry’s swashbuckling reputation, the traders insist they are treading carefully and are focused on helping to alleviate shortages, not make them worse. 

“If a trader is to get involved, it needs to be done with an entirely different approach,” said Socrates Economou, Trafigura’s head of nickel and cobalt trading, who also oversees lithium. “You already have a price that can lead to demand destruction — if you’re going to have market participants driving the price higher, I don’t see how this market can sustain itself.”

Trafigura estimates demand will hit 800,000 tonnes of lithium carbonate equivalent this year — overshooting supply by 140,000 tonnes — and sees demand rising by a further 200,000 tonnes to 250,000 tonnes annually through 2025.

While the world needs more and more lithium, investment in new supply has not kept pace with rising demand. Trafigura’s focus so far has been on tying up deals with early-stage mining and refining projects. Traxys, another early mover into the industry, is taking a similar approach, scouring the globe for new sources of supply and helping to nudge them into production. The aim is to make money increasing the overall flow to carmakers, said Facada.

Other traders are also looking at lithium. Glencore, which is the largest producer of another key battery metal, cobalt, has invested in recycling start-up Li-Cycle and is thinking about starting to trade lithium produced by the company, as well as third-party material. 

Traders IXM, Transamine and Mercuria Energy have all set up lithium trading books in recent years, while Japan’s Mitsui & Company has long been active in the sector.

The traders are stepping into the lithium market at a time of dramatic transformation. For years, the main customers for lithium producers were largely niche manufacturers in sectors like pharmaceuticals and industrial lubricants.

Now, as carmakers have taken over as the biggest buyers, miners have been shifting towards a shorter-term pricing model that better reflects the mismatch between demand and supply. It is a trend that has drawn comparison to a seismic overhaul in the iron ore market as producers shifted to spot pricing in the 2000s, but it is placing a strain on consumers and producers alike.

Tesla CEO Elon Musk has said that spot prices have become “crazy expensive”, and after years of urging producers to supply more, he is stepping up efforts to refine it himself. Meanwhile, investors are putting pressure on top miners such as Albemarle to shift their contracts over spot pricing more aggressively, potentially adding to the strain on their customers as the buying frenzy continues.

It will probably take some time before lithium matures to become more of a tradable commodity market, said Kent Masters, CEO of Albemarle, the world’s largest lithium producer. With the spot market growing, the next key milestone for the industry will be the development of liquid futures contracts.

“We do think ultimately there will be an instrument out there where you can hedge lithium prices or speculate on the market financially,” he said. “It’s a good thing once it matures. But it’s going to take some time — it’s not today.” 

In addition to helping make markets more efficient, traders say they can also manage risks for carmakers and battery producers that are starting to look at mining projects and investments in a way that would have been unthinkable for many just a few years ago, as supply fears begin to rise. That will take them into riskier jurisdictions than they are used to operating in, and leave them exposed to cost blowouts and wild price swings that are common to the mining industry.

“One of the roles we play is to connect different levels of supply chain to provide some level of price protection,” said Trafigura head lithium trader Claire Blanchelande. “In addition to banks getting involved, carmakers are also getting comfortable because of our involvement.” 

Bloomberg News. For more articles like this please visit Bloomberg.com