(Bloomberg) -- The operator of Chicago’s futures exchange will roll out new contracts for a type of lithium material, as trading liquidity grows for battery metals amid heightened demand and massive market volatility.
CME Group Co. will launch the cash-settled futures for spodumene, a lithium-bearing hard-rock, on Oct. 28 pending a regulatory review, according to a statement Monday. The contracts, which will use Fastmarkets spodumene prices as underlying assessments, will be the world’s first for the mined raw ingredient that’s playing a crucial role in the electric vehicles revolution.
Ballooning consumption of batteries in EVs and energy storage 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 created growing complexity as the industry rapidly develops, with calls for greater price transparency for different products.
“We have seen a large increase in spot activity as the spodumene miners ramped up production and more product was available to trade on a spot basis,” said Przemek Koralewski, global head of market development at Fastmarkets. Spodumene and lithium chemicals prices have been disconnecting more frequently recently, warranting a separate futures contract for spodumene to “allow market participants to accurately manage their risk and exposure,” he added.
The new contracts from CME come as trading of its lithium hydroxide futures picked up in recent months, with open interest hitting record after record. According to the statement, it surpassed 30,000 contracts for the first time this year and now extends through 2026.
The global transition toward a greener future looks set to lead to rising demand for battery metals in the longer term. But lithium prices have slumped over the last couple of years on oversupply, leading to an array of stalled projects, scrapped deals and production cuts. One measure of spot prices — for lithium carbonate in China — is down more than 85% from its levels at the peak of a boom in 2022.
“When margins are under pressure across the lithium value chain, hedging and other risk management tools become especially important,” Grant Donald, chief commercial officer at Liontown Resources Ltd., an Australian spodumene miner, said in an interview. “At the moment, if you want to want to hedge you’ve got to do it on a chemical basis.”
Buyers, sellers and investors have been flocking to the futures market to hedge their exposure, setting the stage for a potentially seismic shift in the way the industry manages its price risks. It’s also allowed financial players to seek arbitrage opportunities as a Chinese local exchange for lithium carbonate gained traction.
The spodumene contracts “will allow producers to hedge price risks associated with their physical product — converters, especially those that aren’t integrated — to manage their conversion margins,” Fastmarkets’ Koralewski said. “Speculators will have a tool to take a view on the spodumene and lithium spread.”
Long-term contracts have historically been linked to the downstream chemicals market rather than the mined raw material, spodumene, that’s become a staple source only in the past decade. The price relationship between the two has been breaking down as the supply chain matures.
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