A surge in hedging activity by the lithium industry and traders after the recent price slump has benefited CME Group which saw volumes on its lithium contract soar last year.
Growing demand for lithium from the electric vehicle (EV)sector means increasing exposure to price volatility of the material used in the batteries that power these vehicles.
The CME’s lithium hydroxide contract is cash-settled, therefore easy to use as hedgers do not need to worry about taking delivery of unsuitable grades.
Volumes for CME lithium, launched in 2021, climbed to 20,307 metric tons in 2023 from 468 tons in 2022. Open interest, the number of outstanding contracts held by the market, soared 34 times to 14,522 tons in 2023.
Banks including Goldman Sachs and Macquarie are active users of CME lithium due to clients wanting to hedge price risk, according to sources familiar with the matter.
Goldman Sachs and Macquarie declined to comment.
“Small shifts in lithium supply and demand balance can have a significant impact on prices, creating risks that need to be managed,” said Jin Hennig, CME global head of metals.
Lithium prices have come under pressure over the past year due to electric vehicles sales lagging expectations as global economic growth slowed.
Prices for lithium in the world’s top consumer and producer China are down 85% from records in November 2022 when supplies started to ramp up and demand slowed.
Benchmark Mineral Intelligence (BMI) expects large lithium surpluses from 2024 to 2027 before a deficit of nearly 400,000 tons of lithium carbonate equivalent appears in 2030.
“Lithium hedging strategies are becoming increasingly important to traders and automaker procurement teams, given the (price) volatility … over the last few years,” said Daisy Jennings-Gray at BMI.
Helping the CME’s contract gain traction is the Guangzhou Futures Exchange’s (GFEX) physically-settled lithium carbonate futures launched in July, which boosted arbitrage trading.
Arbitrage trading refers to traders buying and selling similar contracts to benefit from price differences.
GFEX’s contract is for Chinese firms only, but overseas firms can trade it via local brokers or through a China-registered entities.
“We see enormous potential for liquidity growth in exchange-traded lithium contracts underpinned by consumer desire to hedge price risks and producer demand to finance supply growth,” Citi said in a November note.
