London Metal Exchange Falls Behind in Battery Metals Trading

By Eric Onstad

LONDON (Reuters) – The London Metal Exchange (LME) is lagging in the competitive trading of metals essential for electric vehicle (EV) batteries, such as lithium and cobalt. Other exchanges are capitalizing on the shift from annual fixed-price contracts to futures hedging.

While the LME is the oldest and historically dominant market for industrial metals like copper and aluminum, its complex futures structure and limited marketing efforts have led to a lack of interest in its battery metals futures.

The exchange risks losing out on substantial growth as miners and EV manufacturers increase their hedging unless they can attract traders to their contracts for materials vital to the energy transition. The U.S. CME Group has outpaced the LME in lithium and cobalt trading volumes.

CME’s lithium hydroxide contract volumes grew by 759% in the first eight months of 2023, whereas the LME’s contract has not traded at all this year. Similarly, the Guangzhou Futures Exchange in China has shown significant growth in lithium carbonate futures since its July launch, although foreign participation faces challenges.

Jack Nathan, head of battery metals at Tullett Prebon, noted, “The LME is not getting the market buy-in that the CME has.” He added that traders are primarily focused on finding the most accurate and efficient hedging opportunities without strong ties to specific contracts or exchanges.

LME’s Complexity Challenges Liquidity

The LME’s complex setup contributes to its liquidity issues, according to LME CEO Matthew Chamberlain. Unlike the CME’s single expiry date for monthly contracts, the LME allows daily trading, enabling physical users to customize their deals to suit metal deliveries. Chamberlain acknowledged that this specificity can hinder liquidity growth.

To enhance trading activity, the LME introduced proposals earlier this month aimed at increasing electronic trading and liquidity.

The CME’s higher volumes have also been attributed to its more aggressive marketing campaigns. To stimulate the market, the LME announced fee waivers for cobalt and lithium in May.

Future of Lithium and Cobalt Trading

Historically, lithium was primarily traded through fixed-price annual contracts, similar to iron ore’s past pricing strategies. Following a shift initiated by BHP in 2010, the iron ore futures market has surged. Lithium’s market could similarly grow as price volatility stabilizes and major companies become more accustomed to utilizing futures markets, analysts argue.

It’s been a turbulent three years for lithium prices, which surged by 500% until May 2022 amid supply worries, only to crash due to increased output and weak EV sales.

Daniel Fletcher-Manuel from Benchmark Mineral Intelligence indicates that while current hedging activities are expected to be slow, they anticipate a substantial increase by 2030. He estimates that lithium hedging could exceed 1 million metric tons annually with conservative expectations.

In cobalt, the LME is also trailing, with the CME reporting 20 times the volume of cobalt metal futures compared to the LME this year. However, the LME’s cobalt volumes have increased modestly due to responsible sourcing guidelines. Some cobalt brands are expected to seek listing on the LME, which could improve liquidity.