Trading for these contracts will begin on Monday, December 16, 2024, on the CME Globex electronic trading platform and for submission for clearing via CME ClearPort, subject to completion of all relevant review periods with the U.S. Commodity Futures Trading Commission (CFTC).

Read more on the contract on the CME’s website here.

Fastmarkets will continue to publish MB-STE-0422 steel scrap No1 busheling, index, delivered Midwest mill, $/gross ton throughout 2025 to support existing contracts settled against that index.

In response to this change, Fastmarkets proposes to discontinue publication of the following Midwest steel scrap indices effective January 2025:

• MB-STE-0423 steel scrap shredded, index, delivered Midwest mill, $/gross ton
• MB-STE-0424 steel scrap No.1 heavy melt, index, delivered Midwest mill, $/gross ton
• MB-STE-0882 steel scrap No.1 busheling, indicator, delivered Midwest mill, $/gross ton

The consultation period for this proposed delisting will end 30 days from the date of publication of a pricing notice on Friday December 13. An update to that notice will be published on that day. Subject to market feedback, the proposed changes would take place beginning at the start of January 2025.

To read the full pricing notice, click here.

Fastmarkets and CME have published a frequently asked questions (FAQ) document to provide additional clarity on the changes, addressing key questions for market participants.

FAQ: Chicago No1 Busheling Ferrous Scrap (Fastmarkets) futures – CME Group

To provide feedback on this proposal, or if you would like to provide price information by becoming a data submitter to these prices, please contact Sean Barry by email at: pricing@fastmarkets.com. Please add the subject heading “FAO: Sean Barry, re: CME to settle new contracts against Fastmarkets’ Chicago No.1 busheling assessment.”

Please indicate if comments are confidential. Fastmarkets will consider all comments received and will make comments not marked as confidential available upon request. 

To see all Fastmarkets’ pricing methodology and specification documents, go to https://www.fastmarkets.com/about-us/methodology.

The post CME to settle new contracts against Fastmarkets’ Chicago No. 1 busheling assessment appeared first on Fastmarkets.

Used cooking oil (UCO) is an increasingly important feedstock for the production of renewable diesel and sustainable aviation fuel – making it a key component in renewable energy solutions. Government-backed incentives and mandates mean that UCO is in high demand as a feedstock in alternative fuels, given the global shift toward more sustainable and lower-carbon energy sources.

UCO’s price trends can signal the health of the biofuel market, as demand for cleaner energy sources continues to rise.

Production of UCO-based biodiesels has surged in recent years, with more sources collecting and refining waste-based cooking oils. Monitoring UCO prices helps market participants understand supply-demand dynamics and assess competitiveness in the renewable fuels industry among a range of competing feedstocks and allows them to manage risk associated with sudden price movements.

What are futures contracts, how do they work, and why are they important for the market?

Futures contracts are standardized, legally binding financial agreements to buy or sell a specific underlying asset at a predetermined price at a future date. Traded on exchanges, these contracts provide ways to hedge against price volatility, speculate on price trends, and manage risk. Futures markets are platforms for price discovery, risk management, and speculation on a wide range of assets.

What is the new futures contract announced by Fastmarkets and ICE today?

On November 1, the Intercontinental Exchange (ICE) announced the launch of US Gulf Coast Used Cooking Oil (Fastmarkets) Futures contract, which will be underpinned by Fastmarkets
physical US Gulf Coast Used Cooking Oil assessment. This contract is due to launch on December 9th, pending regulatory review. You can find the contract quoted on the ICE Futures listings here.

What is the difference between physically delivered and cash-settled futures contracts?

In physical delivery, the underlying asset is transferred upon contract expiration, whereas in cash settlement, the obligation is settled through cash payments based on price differences. The ICE Fastmarkets UCO futures contract is cash-settled, which is ideal for market participants seeking exposure to UCO price movements without the need for physical delivery.

Why is it the right time to launch a UCO futures contract?

UCO has gained significant attention as a renewable fuel feedstock. The market is evolving with increased volumes and more stakeholders entering the space. The UCO price is highly sensitive to changes in feedstock availability, government legislation and biofuel demand, making this futures contract a timely tool for those seeking effective risk management in the renewable energy market.

Spot trades feed into Fastmarkets’ prices, which are also referenced in physical contracts, ensuring convergence between the futures price and the spot price at expiry.

Who should be interested in the launch?

This contract will be useful for a wide range of participants across the biofuel supply chain, including feedstock suppliers, refiners, traders, financial institutions and biodiesel producers. Each group can contribute to market liquidity, engage in risk management, and facilitate price discovery.

Why should they be interested?

Participants will be able to use the UCO futures contract to directly manage their price exposure to used cooking oil, a historically challenging process. As biofuel markets continue to evolve, market participants need to protect against potential price fluctuations. This contract will support price stability and cash flow management. Moreover, it will help deepen liquidity and transparency in the UCO and broader biofuel feedstock markets.

Why is Fastmarkets’ used cooking oil assessment Gulf-based?

The Gulf price benchmark reflects the primary market region for UCO trade. This standardization allows Fastmarkets to capture the broadest data pool. Fastmarkets’ UCO Gulf, spot price assessment accepts all volumes that meet the quality standards required by regional biofuel refineries.

What is the methodology behind Fastmarkets’ UCO spot price assessment?

Fastmarkets’ used cooking oil Gulf spot price is a daily price assessment following the Fastmarkets’ pricing calendar. It adheres to IOSCO principles and undergoes annual IOSCO audits to ensure high standards in price reporting. The assessment process involves expert reporters who collect data on spot trades, bids, offers and cross-check rumoured deals or movements in related commodities. Data are analyzed and reviewed through multiple stages before publication to ensure transparency and accuracy.

A detailed explanation of Fastmarkets’ methodology for UCO and other biofuel assessments can be found here.

Who can I reach out to if I have further questions?

For more details, contact marketdevelopment@fastmarkets.com

The post Used cooking oil (UCO) futures contract: frequently asked questions appeared first on Fastmarkets.

The front month in lumber futures continued to trade at a slight premium to the physical market, but the January contract opened a sizable spread with cash. The roll to January was a prime feature for the week, with volume and open interest in that contract nearing par with November.

Mills in the South continued to push for double-digit price hikes with moderate success. Most Southern Pine prices continued to climb. However, buyer resistance to the highest mill quotes grew more intense as the week progressed. Some buyers throttled back new orders to the most pressing necessities while digesting recent purchases and trying to gauge how much longer the current market run will sustain itself.

Coast dimension sales continued to outpace production, keeping upward pressure on some prices.

Board markets remained on a divergent trend. Producers continued to adjust prices predominantly downward to keep volumes selling into markets still conservative in their approach to buying. Discounts ranged from $5 to triple digits, depending on the need to sell production.

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The post Framing lumber prices surge: supply strains push market to near annual highs appeared first on Fastmarkets.

The CME Group announced the spodumene futures contract, which is settled against Fastmarkets’ spodumene, min 6% Li2O, spot price, cif China assessment, on September 30.

”We are pleased FIS continue to be the pioneer and first broker in the battery metal derivative space – as these markets develop contracts like spodumene will enhance the growth in risk management tools,” John Banaszkiewicz, founder of Freight Investor Services (FIS), said.

“It’s great news to see active participants from day one, and this seems to be only the start. We believe this new contract will provide new opportunities to market participants to handle their price risk exposure over the whole lithium complex (lithium hydroxide, lithium carbonate, spodumene),” Robin Tisserand, head of battery metal at SCB, said.

This new spodumene futures contract adds to an existing group of cash-settled futures contracts launched by CME Group for lithium, including lithium hydroxide and lithium carbonate, which are also settled against Fastmarkets’ spot prices.

Fastmarkets spodumene price assessment

Fastmarkets’ daily assessment of spodumene, min 6% Li2O, spot price, cif China was at $730-760 on Friday October 25, unchanged from a day earlier, but was down by 21.58% from $900-1,000 per tonne on January 3.

Anticipation for the launch of the new futures contract had been growing within the market, with participants generally expressing interest in the new risk management tool.

“It’s definitely an interesting development,” one consumer told Fastmarkets. “It allows us to explore new potential avenues in our approach to lithium.”

“Anything which supports the broader development and maturity of the spodumene market is a positive in our eyes,” a trader said, adding that the emergence of a transparent forward curve for spodumene will be a significant step in the price development of the market.

There have been some reservations regarding the latest launch, with participants noting the complexity of spodumene concentrate as a product, due to variations in grades and impurities.

One broker told Fastmarkets that due to the relative newness of the contract, it would take time for some participants to begin trading it.

“A lot of the reaction we’ve seen towards the contract has been from the physical side of the market, I think the financial side is still evaluating how to approach it,” the broker said.

Fastmarkets amended the minimum accepted lithium content in the specifications for the spot spodumene assessment in September, reducing the minimum lithium oxide grade content to 5.0% from 5.7%, if it can be normalized to be priced on a 6% basis.

The market feedback showed that even though spodumene is still typically priced at the 6% benchmark, the actual grades for spodumene have broadened significantly in recent years, with spodumene regularly produced and traded below 5.7% grade.

Despite some initial caution though, the significant role of spodumene in the production of lithium chemicals means that attention on the market has grown significantly in recent years.

Spodumene price volatility

Spodumene prices have shown great volatility in history, with the prices rising to an all-time high of $8,000-8,575 per tonne between November 24 to December 8, 2022, according to Fastmarkets’ historical data, following a global electric vehicle market boom.

Spodumene prices remained under general downward pressure following weakness in the downstream lithium salts market over the past year, especially because spodumene prices are increasingly linked to lithium salts prices.

This relationship between the two products has been heavily scrutinized in recent times, largely due to a fundamental shift in the percentage value of spodumene against battery grade lithium hydroxide.

Historically, spodumene had typically represented around 4% of the price of lithium hydroxide.

But during the 2021 price cycle in lithium, prices for battery grade lithium hydroxide increased more than 300% in a year, before eventually peaking in December 2022, with a more than 800% increase over the course of two years. During the peak, and since that time, the percentage value has stood at 7-10% typically.

As a result, a greater commitment to price transparency has grown in the market, with producers now offering auction events as a method of providing additional price transparency.

Fastmarkets uses these auction prices in its price assessments across the lithium suite, normalizing to our specifications where necessary.

Want to know more? Read Fastmarkets’ spodumene FAQs here.

The post CME spodumene futures contract sees trading activity on launch day appeared first on Fastmarkets.

Western S-P-F sales were unspectacular. Buyers covered needs but were unmoved to procure additional supplies despite a string of positive economic news and curtailment announcements. Buyers hunted for perceived deals, but most prices were unchanged from last week’s reported levels.

Lumber futures surged early in the week, but the board gave back on Wednesday. The front month continued to carry a premium to the physical market, affording some traders basis opportunities. Hurricane Helene’s approach through the Gulf of Mexico interrupted an otherwise steady Southern Pine market. Buyers covered mostly immediate needs in early trading and scaled back new orders as the week progressed.

Production in parts of Florida and Georgia was idle by Thursday afternoon as the storm approached, with landfall anticipated late Thursday night or early Friday morning.

A perception that recent curtailments across the South had aligned supplies more closely with demand infused a firmer tone into the market. Mills raised prices steadily, but many declined to push aggressively, opting instead for a more conservative approach to sustain sales. An imminent longshoremen strike that would impact East Coast and Gulf ports was an ongoing distraction.

In the Coast region, recent trends remained in place. Demand for 2×4 ebbed, and discounts cropped up, with the cuts strongest in green Douglas Fir. The price leader in green and dry Coast species remained #2&Btr 2×12, and double-digit increases were posted again.

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The post Softwood lumber demand remains consistent despite uptick in economy appeared first on Fastmarkets.

What is spodumene and how does it fit into the battery raw materials (BRM) value chain?

Spodumene is a key feedstock in the production of lithium salts, which are a crucial component in lithium-ion batteries. Because spodumene is a key feedstock, the price can be viewed as an indicator of the overall health of the lithium market. It directly affects the overall prices of battery-grade lithium hydroxide and lithium carbonate. Increasing demand for electric vehicles (EVs), energy storage systems (ESS), consumer electronics and emerging technologies makes the price of spodumene even more significant.

Production of spodumene has increased significantly in recent years, including the emergence of new regions of production. This trend is set to continue while demand for lithium increases.

Monitoring spodumene prices can provide insight into supply-and-demand imbalances, production trends and market competitiveness.

What are futures contracts, how do they work, and why are they important for the market?

Futures contracts are standardized, legally binding financial agreements to buy or sell a specific underlying asset at a predetermined price at a future date. Futures contracts, which are traded on futures exchanges, provide a way for market participants to hedge against price fluctuations, speculate on price movements and manage risk. Futures markets facilitate the trade of futures contracts, where participants can buy or sell contracts on various assets such as commodities. These markets provide a platform for price discovery, risk management and market speculation.

What is the new futures contract announced by Fastmarkets and CME today?

• The CME Group will launch the Spodumene CIF China (Fastmarkets) futures contract on October 28 2024.
• Fastmarkets Spodumene min 6% Li2O, cif China is the underlying price assessment for the CME futures contract
• Learn more at the CME Media Room

What is the difference between physically delivered and cash-settled futures contracts?

Physical delivery involves the actual transfer of the underlying asset at contract expiration, while cash settlement settles contract obligations through cash payments based on price differentials. The choice between the two depends on contract specifications and market preferences. The CME/Fastmarkets spodumene futures contract is a cash-settled contract.

Why is it the right time to launch a spodumene futures contract?

Liquidity has been growing recently in the spodumene market against a backdrop of notable growth and evolution in the wider lithium market. Although spodumene and lithium salts prices remain correlated, they have been disconnecting from each other more frequently in recent weeks. These developments warrant a separate futures contract for spodumene to allow market participants to better manage their risk and exposure to this critical raw material.

Spot trades feed into Fastmarkets’ prices, which are also being utilized in physical contracts. This guarantees futures convergence to the spot price at expiry.

How are lithium futures contracts performing?

• Lithium volumes and open interest are both at record levels as of September 26, 2024
• The CME Group lists lithium hydroxide and lithium carbonate futures as well as lithium hydroxide options
• Lithium hydroxide September volumes: 10,541 lots; open interest: 32,679 lots
• Lithium carbonate futures open interest: 1,197 lots
• Lithium hydroxide options: 529 lots
• Most of the liquidity is in the lithium hydroxide futures but interest has increased recently in the lithium carbonate futures contract

Who should be interested in the launch?

This contract will be important for market participants across the entire lithium supply chain. This includes producers, refiners, traders, banks, brokers and battery manufacturers. Each of these groups plays a distinct role in market liquidity, risk management and price discovery.

Why should they be interested?

Market participants will be able to utilize the futures contract to manage their spodumene risk by making a like-for-like hedge on a futures exchange, which has not historically been possible. In volatile markets, market participants must ensure they are protected against potentially adverse price fluctuations by implementing risk-management strategies. This contract will give participants the ability to hedge their risk and prioritize stable cashflows. The new launch will help to build liquidity and transparency in both the spodumene and wider lithium markets.

Some market participants will take advantage of trading the spread between the lithium hydroxide and spodumene futures contracts, adding further liquidity to other contracts in the BRM suite listed on the CME. A futures market should attract finance because it will increase transparency across the forward curve and allow the financing party to better calculate and price the risk associated with financing projects.

Why is Fastmarkets’ spodumene assessment based on 6% Li2O?

Spodumene is typically priced at the 6% benchmark, and that is where Fastmarkets observes the most liquidity. The industry uses and reports this on a standardized basis, frequently citing Fastmarkets’ assessments in contracts and official company reports. Fastmarkets spodumene min 6% Li2O, spot price, CIF China ($/tonne, daily) assessment accepts min 5.0% Li2O and max 6.1% Li2O if it can be normalized to 6%.

What is the methodology behind Fastmarkets’ spodumene spot price assessment?

Fastmarkets’ spodumene min 6% Li2O, spot price, cif China is a daily price assessment published at 13:00 UK time, following Fastmarkets’ UK pricing calendar. The price assessment follows IOSCO principles and is subject to annual IOSCO audits, ensuring the highest standards in price reporting. The price is assessed by a team of expert reporters around the world. They survey active market participants, collecting spot deals, bids and offers and deals heard in the market or, in the absence of active data, indications of the tradable level. Once the data is collected, the reporter assesses the price and submits a rationale for that assessment, outlining all the data collected that session and explaining why the price has been set at that level. The price then goes through two additional stages of review by senior members of the team before publication.

A full explanation of the Fastmarkets lithium methodology can be found here.

What other BRM futures contracts do Fastmarkets have?

Fastmarkets continues to lead the way in BRM – it is the only PRA globally to set the foundation for futures and options markets in the battery raw materials supply chain. Fastmarkets has a suite of lithium futures and options listed on three major global exchanges. Lithium hydroxide futures are listed on the CME, the London Metal Exchange (LME) and on the Singapore Exchange (SGX); lithium carbonate futures are traded on the CME and SGX; and lithium hydroxide options are listed on the CME. View all futures contracts here.

Who can I reach out to if I have further questions?

Contact marketdevelopment@fastmarkets.com

The post Spodumene futures: frequently asked questions appeared first on Fastmarkets.

Corporate debt investors, who provide funding to companies through bonds or other forms of credit, typically prioritize the stability and predictability of their investments. One crucial element that impacts the risk profile of corporate debt, especially in industries heavily dependent on commodities, is exposure to changes in commodity prices.

Consequently, the connection between corporate debt investors and commodity producers is significantly influenced by the necessity of safeguarding against these price risks.

How volatile commodity prices influence debt repayment

Commodity prices can experience substantial fluctuations due to several factors, such as alterations in supply and demand dynamics, geopolitical conflicts and broader economic trends.

Price variations can significantly influence revenue, profitability and overall financial stability for companies producing metals, forestry or agricultural goods. This volatility poses risks for the producers themselves and extends to investors who hold their corporate debt.

In times of declining commodity prices, businesses may encounter reduced cash flows, leading to challenges in meeting debt obligations, paying interests, or refinancing existing loans. This scenario is particularly problematic for debt investors since a company’s ability to repay its debts is often directly tied to its revenue, which commodity prices can significantly impact.

The demand for hedging mechanisms

Debt investors typically avoid risks and seek returns with lower volatility. Hence, they frequently encourage these companies to hedge their exposure to commodity price fluctuations when investing in commodity producers. Commodity hedging involves taking positions in derivatives or other financial instruments to minimize potential losses from adverse price movements.

By hedging, commodity producers can secure prices for their products well in advance, stabilizing cash flows and creating a more predictable revenue stream. This, in turn, enhances their ability to meet debt obligations. For debt investors, the knowledge that the companies they invest in actively manage their commodity price risks instills greater confidence in the issuer’s ability to maintain financial stability.

Creditworthiness

Credit rating agencies commonly evaluate companies’ risk profiles based on their operational and market risks, including exposure to commodity prices. Companies that hedge their positions may exhibit higher credit ratings due to improved risk management practices, resulting in potentially lower borrowing costs and increased interest from corporate debt investors.

Earnings stability

Hedging strategies like futures contracts, options, and swaps allow producers to mitigate the adverse impacts of price declines while enabling them to benefit from price increases to a certain extent. This situation leads to more consistent earnings, which is advantageous for investors seeking predictable returns.

How commodity producers hedge price risk

Commodity producers use various hedging strategies to manage their exposure effectively.

One method involves entering into futures contracts that enable producers to sell a specified amount of a commodity at a predetermined price, ensuring a guaranteed minimum revenue regardless of market fluctuations.

Options grant producers the right, but not the obligation, to buy or sell a commodity at a specific price within a particular timeframe. This strategy allows producers to capitalize on favorable price increases while safeguarding against downside risks.

Commodity swaps allow producers to exchange variable commodity cash flows for fixed ones, smoothing income and reducing exposure to price variations. By combining these instruments, producers can create a comprehensive risk management strategy tailored to their business needs and prevailing market conditions.

The investor’s perspective

The implications of producers’ hedging decisions are significant for corporate debt investors. Investors may carefully evaluate companies’ hedging strategies before making investment choices. A company with a robust hedging policy may be perceived as a stable, lower-risk investment rather than a speculative one.

Investors must continuously monitor the credit risk associated with their investments. Companies with well-structured hedging programs are often seen as having a lower risk profile, potentially affecting yield spreads. Tighter spreads may indicate lower perceived risk, allowing companies to reduce borrowing costs.

Debt investors typically prefer companies with predictable performance metrics. Industries highly exposed to commodity price fluctuations carry inherent risks, but companies committed to hedging can reduce the unpredictability linked to earnings reports.

The impact on debt markets

Hedging benefits individual corporations and has broader implications for the debt markets. Emphasis on hedging promotes the development of credit risk models to evaluate corporate debt investments’ viability. Effective hedging practices across industries can enhance overall market stability, boosting investor confidence in the credit markets.

The bottom line

Corporate debt investors are vested in ensuring that commodity producers hedge their exposure to commodity price fluctuations. The unpredictable nature of commodity prices poses significant risks for producers and the investors funding their operations through debt. Corporate debt investors can mitigate the risks associated with their investments by encouraging commodity hedging and aiding producers in implementing effective hedging strategies. When a company relies heavily on debt, price fluctuations that generate volatility can elevate borrowing rates.

The post Why commodity price risk managment matters to debt investors appeared first on Fastmarkets.

The 1,000-lots mark was reached for the first time on Monday August 12 following daily trading activity of 120 lots. August has been the busiest month since launch, with a total of 720 lots traded.

The trades on Monday were spread across the six contracts dated for the second half of 2025 at a price of $7.50 per lb.

Stemming from the market wanting to directly hedge physical hydroxide volumes, the contracts that reach out to June 2026 have attracted interest from a wide range of market participants.

“We’ve noticed an increase in liquidity on the cobalt hydroxide futures contract listed on CME recently for several reasons. Despite the market being at current lows, participants are happy to lock in their forward trades. It makes sense for the players to start averaging up or down their books,” said Robin Tisserand, head of battery metals at SCB Group.

“Taking in account that cobalt hydroxide is the feedstock for cobalt metal, and the spread between the two at around $5+ [per lb], we have seen significant interest in the market to look at derisking their whole supply chain from the input to the output,” Tisserand added.

Anna Chadwick, head of battery metals at Freight Investor Services, said: “It’s great to see open interest breach the 1,000 [lots] mark, with several new counterparties looking to utilize the contract as a hedging mechanism. This burst of liquidity is a signal of an increasing willingness of the market to diversify their hedging tools in the battery metals space.”

Fastmarkets’ cobalt hydroxide, min 30% Co, inferred, China was calculated at $6.25 per lb on Wednesday, down from $6.38 per lb on August 1.

The daily cobalt hydroxide inferred price is calculated as the low-end price of the cobalt standard grade, in-whs Rotterdam price multiplied by the prevailing midpoint of the Fastmarkets’ cobalt hydroxide payable indicator, min 30% Co, cif China.

“It is encouraging to see the cobalt hydroxide open interest grow. Ultimately, the CME cobalt metal contract remains the preferred hedging tool for the majority of market participants and a return of liquidity to that contract would be welcomed by consumers and traders alike,” said Michael Greenfield, battery metals broker at GFI group.

Cobalt metal prices have declined to eight-year lows following an increase in supply that has put pressure on the market during a seasonally quiet period of the year.

Global cobalt supply has surged this year following a ramp-up by the largest producer, CMOC, who reported a 178% year-on-year increase in production at 54,024 tonnes for the first six months of 2024.

According to the latest analysis by Fastmarkets’ research team, the market balance will be oversupplied by 23,000 tonnes in 2024, with this narrowing to 15,000 tonnes next year.

Cobalt hydroxide prices were unchanged this week following an unrelated trade dispute that resulted in the temporary closure of the border between Zambia and the Democratic Republic of Congo.

Fastmarkets daily price assessment for cobalt hydroxide, 30% Co min, cif China was at $6.30-6.50 per lb on Wednesday, unchanged from the previous session.

Our cobalt prices are market-reflective, unbiased, IOSCO-compliant and widely used across the energy commodity markets. Track cobalt commodity prices daily with Fastmarkets. Find out more.

The post CME cobalt hydroxide futures reach 1,000 lots of open interest appeared first on Fastmarkets.

Lithium futures, first launched on major global exchanges in 2021, have shown a pattern of growth akin to early iron ore futures markets. Initially, the market saw significant volatility, with spot prices fluctuating drastically.

Despite this, traded volumes and open interest in lithium futures have gradually increased, peaking in mid-2024, indicating growing market adoption and liquidity. A key challenge for the lithium market is achieving a level of liquidity observed in mature commodity markets.

However, for a very young market there are signs that lithium futures are on the right path to becoming a liquid futures market. Increasing participation, a more developed forward structure and multiple types of contracts available are all positive signs of a maturing market.

Introduction

The global race to net zero has boosted demand for many traditional commodities and given rise to new markets. From environmental commodities through alternative fuels to metals and minerals, we are witnessing a change that commodity markets have not seen in decades.  With this shift in the physical markets comes a raft of challenges and opportunities for financial commodity markets.

A key theme of the energy transition is the exponential growth of the battery supply chain supporting the electrification of the industry, predominantly in the electric vehicle and energy storage system space.

The lithium futures market is one of the newest markets that have emerged because of the booming battery supply chain.

In this paper I examine the performance of lithium futures since their launch in relation to markets that have certain similarities, as well as commodity futures that can help us assess the possible trajectory lithium futures may take in the coming years.

The birth of lithium futures

Lithium futures that are available for trading on exchanges outside of China are cash-settled.  This means there is no physical exchange of the underlying product upon expiration. Instead, the financial profit or loss from an expiring position is calculated as the difference between the traded price of the futures and the monthly average of all spot price assessments published in the spot month by Fastmarkets, a leading commodity price reporting agency.

Fastmarkets’ prices are used in physical contracts guaranteeing futures convergence to the spot price at expiry.

Today, cash-settled lithium derivatives encompass a suite of lithium futures and options listed on three major global exchanges.  Lithium hydroxide futures are listed on the CME, the London Metal Exchange (LME) and on the Singapore Exchange (SGX); lithium carbonate futures are traded on the CME and SGX; and additionally, lithium hydroxide options are listed on the CME.

Lithium hydroxide was first to launch on the CME on Monday, May 3, 2021, followed by LME on Monday, July 19, 2021, and SGX on Monday, September 26, 2022.

A short history of the lithium futures market

The launch of lithium futures came at a time when volatility in the spot market was picking up. The spot market popped from prices in the $10’s/kg to $85/kg in just about 18 months after the launch and dropped back down to mid-$10’s over the next 12 months.

Initially, this may have been a reason to cautiously enter the market, but it was also a trigger that futures must be used to manage price volatility.  Beginning in mid-2023 we started to see a gradual increase in traded volumes and open interest both of which peaked in June 2024.

Together with the growing open interest, the US Commodity Futures Trading Commission’s (CFTC’s) Commitment of Traders report show that the number of traders with positions above the reportable level have also been gradually increasing over the past four quarters and currently that number stands at 45 traders.

It is worth noting that another cash-settled CME futures contract, the steel (hot-rolled coil) HRC contract, did not attract as much diversification in the first four consecutive quarters it consistently appeared in the Commitment of Traders report in 2013-2014.  

The total number of traders with positions above the reportable level hovered around the 25-level mark. Lithium futures reached a lower level of concentration over the same time horizon.  We can view this as a sign of increasing adoption and a market that is taking a positive trajectory in terms of its utility to the industry.

Iron ore 2.0?

We often compare the evolution of the lithium market to that of the iron ore market in the early 2010’s. This is largely because the iron ore market made a shift towards spot-based, index-linked pricing mechanisms similarly to what we are seeing in the lithium supply chain today.  

Another similarity was the emergence of a futures market in 2010 on the Singapore Exchange, creating a reinforcement loop between the physical and financial market supporting the growth of the spot market together with trusted risk management tools. Iron ore futures are also cash-settled, yet another parallel with the lithium market.

Simultaneously to the emergence of a futures market in Singapore, the Dalian Commodity Exchange launched a domestic Chinese future. The booming Chinese futures market created a spillover effect and instead of competing for volumes it supported liquidity on the SGX.  

Yet again, another parallel can be drawn.  A physically delivered lithium carbonate futures was launched by the Guangzhou Futures Exchange and almost overnight volumes exploded, contributing to an increase in liquidity on the CME Group’s COMEX exchange.

One of the challenges and comments that are often raised is the limited liquidity in lithium markets. Indeed, a liquid futures market is critical to support the forecasted demand growth. Banks need to be able to price risk to finance projects, consumers need to lock in commodity prices to price their end products securing profit margins, producers need to manage volatility to attract financing at the right cost of capital.

However, deep liquidity in futures markets is not something that is switched on and off like a light switch. It requires time, effort and an entire ecosystem to work together to grow these markets. Both on the physical and financial side. This means, exchanges, banks, brokers, producers, consumers, traders and the price reporting agency need to work in an almost concerted effort to build up liquidity.

To assess the current state of the market and gain insights into what may lay ahead, we can compare the lithium market to existing contracts that have common characteristics. Unlike the base metals derivatives, which are physically-settled, and have been trading for decades in many cases, the steelmaking supply chain derivatives launched more recently and the contracts are cash-settled. Therefore, I believe they are a better comparison.

Comparing the liquidity to that of today’s base metals markets such as aluminium and copper, or iron ore market will uncover lower liquidity compared to the more mature markets. But is it right to compare markets that have existed for over 14 years and in the case of base metals, more than 40 years, to a market that is only in its fourth year?  I argue that we will gain more insights when making comparisons at the same point of maturity.

When assessing the derivatives market size and maturity, a measure that can be useful is the ratio between the derivatives volumes and physical market size.  Even though the lithium futures market is only in its third full year of trading, we can estimate that this ratio will reach 0.13x the physical market, excluding Chinese domestic consumption, as we are comparing the seaborne market which the Fastmarkets assessment is reflective of.

Taking iron ore futures at the same point of maturity may reveal some clues as to how lithium futures are performing and what the possible trajectory may look like in the next few years.

That ratio was on similar levels as can be seen on the chart, and arguably lithium is taking a steeper path. Provided lithium futures continue to track with a similar dynamic as iron ore did in its first five years, we could see derivatives volumes reach 0.33x and 0.71x the physical market in 2025 and 2026 respectively.

Zooming out, today iron ore futures are trading at 3.5x the physical market and if this is any indication of the potential for lithium, we are just at the very beginning of this exciting market evolving to a mature futures market.

The forward curve

Trust in the futures market is often associated with the forward curve. Mature markets have forward curves that are, by and large, accepted as the market value of future expirations at current market conditions. At times the forward curve can take on a shape that market participants will not view as efficient.  

This was the case with lithium, especially in Q1 2024.  At the end of March 2024, there was a very steep contango in the market and consumers were finding it hard to justify buying forward at close to 40% premium over spot month for the March 2025 expiry.  

As the market continued to grow and mature in Q2 2024 the steep contango flattened and currently we are seeing a much flatter curve. Open interest in the deferred months has also increased, which can be an indication that the shape of the curve is viewed as providing opportunities for consumers to hedge.  This  is another positive sign as the market continues to develop.

What comes next?

The lithium derivatives market has all the necessary ingredients to continue its path to becoming a mature, liquid market.  Demand growth, financing needs, bank participation, financial counterparties, broker engagement, consumer hedging are all necessary for the market to expand. What is needed is greater producer participation. More recently there are signs that producers are beginning to embrace the futures markets with leaders like Ganfeng Lithium indicating that they will be setting up a hedging desk. Naturally, this is another positive sign of a maturing market.

These are early days, and there are still many unanswered questions. Are all the tools available? Will new contracts emerge? Will the market structure resemble that of base metals with a single point of liquidity, like LME aluminium or copper, or will it be closer to the markets where pricing for different products in the value chain have independent futures markets, like the steelmaking chain, or energy and some agricultural markets?

While there is a case to be made for both paths, the recent drive from spodumene producers, the raw material used to produce lithium chemicals, to price spodumene independently of lithium is picking up pace. Many producers, especially in Western Australia, are openly vocal about the need for a more liquid and transparent spot pricing mechanism.  

This trend lends itself to the establishment of spodumene futures. I believe it is a matter of time before we see these launch on commodity exchanges attracting new participants that will be able to minimize basis risk and use tools that are more aligned with the physical products they trade.

Lithium markets are without a doubt very young markets and it is easy to say that they are illiquid compared to base metals markets or other commodity markets. However, by analyzing how far this market has gone in its short existence we can see that the growth trajectory is taking a steeper path than markets like iron ore did in the same point of their maturity. This is reassuring for the prospects of one of the most exciting commodity futures launched in recent years.

Enable risk management using the Fastmarkets lithium and cobalt futures contracts. Speak to us today.

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• Protect against potential adverse price fluctuations when a derivative market does not exist.
• Customize your risk management strategy using self-insurance.
• Create a commodity hedging process that prioritizes stable cash flows.

Procurement managers and commodity producers are often exposed to price fluctuations, which can significantly impact their profitability and financial stability.

To hedge against adverse commodity price movements, market participants often turn to financial instruments such as futures, swaps, and options.

In some instances, a derivative market might not be available yet.

However, a potential solution exists.

Commodity market participants can opt for self-insurance strategies by setting aside self-insurance premiums equal to the value of a cap or floor. While caps and floors are often embedded in physical contracts, they are frequently a source of complexity in negotiations on how to price an underlying physical contract.

What is a cap and floor?

A cap in commodity trading refers to a price limit placed on a transaction or contract. It represents the maximum price at which the commodity can be bought or sold. Conversely, a floor represents the minimum price at which a commodity can be bought or sold. It acts as a price floor to protect against price declines and ensure a minimum return on investment.

Together, caps and floors provide traders with a range of possible prices for a commodity transaction, creating a level of certainty and protection against extreme price movements.

What is commodity price self-insurance?

Self-insurance is an alternative to physical market caps and floors or using derivatives to mitigate exposure to higher or lower prices. Self-insurance in the commodities market involves the establishment of a fund to cover potential losses resulting from price fluctuations. Companies exposed to commodity price fluctuations can calculate the premium cost for purchasing call or put options and allocate an equivalent amount to their self-insurance fund. This fund serves as a buffer to offset losses that may arise if prices fall below or rise above a certain level.

How self-insurance works

By setting aside self-insurance premiums, companies’ exposure to commodity prices can create a financial cushion that can help mitigate the impact of adverse price movements on their bottom line. Instead of relying solely on financial instruments that might not exist, companies exposed to commodity prices can take control of their commodity price risk management strategy and build internal reserves to protect against unforeseen events. The accounting method to buffer losses can be customized based on company practices.

The benefits of self-insurance

One key advantage of using self-insurance premiums to create a fund for price risk mitigation is the flexibility it offers. Unlike traditional insurance or hedging arrangements, self-insurance allows market participants to tailor their risk management approach to specific market conditions and operational requirements. This customized approach can create a competitive advantage and financial resilience in volatile commodity markets, especially if a derivative market is unavailable.

Another benefit of self-insurance is the potential cost savings that companies can achieve in the long run. Companies exposed to commodity prices can reduce their overall risk management expenses by avoiding premium payments to external insurance providers or financial institutions and retaining more control over their financial resources. Additionally, self-insurance premiums can generate investment income for producers if not immediately used to cover losses, further enhancing their financial position.

Managing commodity price self-insurance

However, it is essential for commodity producers to prudently manage their self-insurance fund and regularly assess its adequacy in light of evolving market conditions. Producers and procurement managers should conduct thorough risk assessments, monitor price trends, and adjust their self-insurance premiums to ensure they have sufficient resources to withstand adverse price movements.

What are the risks?

A self-insurance premium strategy is not without risks. The strategy incorporates forecasted volatility to estimate the appropriate reserve needed for commodity hedging. While it is an alternative to financial instruments and

The bottom line

In conclusion, self-insurance premiums offer commodity-exposed businesses a flexible and cost-effective way to create a fund to offset losses due to adverse price movements instead of a derivatives market. By leveraging self-insurance strategies when no derivative market currently exists, commodity procurement and producers can enhance their risk management capabilities and strengthen their financial resilience during volatile market periods. Embracing self-insurance as part of a comprehensive risk management strategy can help market participants navigate price fluctuations and safeguard their profitability.

Have questions? Contact our Fastmarkets risk solutions team today.

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