Clash of the futures exchanges

The CME’s Comex and London Metal Exchange (LME) are squaring up for the industrial revolution that is electrification, according to recent posts by Bloomberg and the Financial Times.
Both exchanges are busy developing and, more importantly, marketing products that cater to industry’s need to hedge exposure to forward prices for key battery ingredients. Whether for car batteries, electronic goods or power grid storage, the key metals are demanded by a common technology: lithium-ion batteries.
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Futures exchanges launch lithium hydroxide contracts

London Metal Exchange
dizain/Adobe Stock

Both exchanges have launched identical lithium hydroxide cash settled contracts based on the Fastmarkets prices for China, Japan and South Korea – the key battery-producing regions.
So far, volumes are light. But with lithium hydroxide prices up some 86% this year, the market is arguably crying out for a hedging mechanism.
Initially, miners were said to be reluctant to support such a product, preferring long-term mine-to-consumer contracts. The same is the case for aluminum.
Eventually, the industry came round.

The LME is reported by the FT to have included industry leaders like Albemarle and Tesla in the design and development of the product to ensure its acceptability.

LME cobalt retrospective

The LME certainly has unhappy memories in this respect.
Its launched a physically delivered cobalt contract way back in 2010. The contract initially gathered supporters, but worries about the ethical credentials of some of the deliverable brands hit uptake. The exchange then had to relaunch a cash-settled contract in 2019, yet uptake remained poor.
On this one, the CME could be said to be eating the LME’s lunch.
Since its December launch, the COMEX cobalt contract has enjoyed a steady rise in uptake, in part due to aggressive marketing.
But, also, it’s probably because the timing is right. The COMEX contract has rallied 57% year to date, according to Bloomberg. Nothing drives hedging demand like price volatility.

Flipping the switch

All battery metals are being lifted by the switch to electric vehicles and renewable power generation. That is driving not just industry demand but, importantly, investor interest to create the liquidity for reliable price discovery.
The irony is, again, both contracts use the same Fastmarkets cobalt index. However, industry interest appears stronger in North America — at least for now.
The other major constituent of lithium-ion batteries, nickel, is a well established product on the LME. That, too, has seen support from the rising EV market but remains still more driven by stainless steel production.
Between the CME and LME, the elements are coming together for the market to effectively hedge the major constituent parts of current lithium-ion batteries.
Whether that results in lower volatility remains to be seen. Much will depend on whether the battery market takes off to the extent its supporters project.
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