CME ExCom and London Metal Exchange (LME) are gearing up for the industrial revolution of electrification, according to a recent Bloomberg posts and the Financial Time.

Both exchanges are busy developing and, more importantly, marketing products that meet the needs of the industry to hedge the futures price exposure of key battery ingredients. Whether for car batteries, electronics or grid storage, key metals are demanded by a common technology: lithium-ion batteries.

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Futures exchanges launch lithium hydroxide contracts

The two exchanges launched identical lithium hydroxide contracts settled in cash based on Fastmarkets prices for China, Japan and South Korea, the main battery-producing regions.

So far, the volumes are light. But with lithium hydroxide prices up some 86% this year, the market is arguably calling for a hedging mechanism.

Initially, the miners would have been reluctant to support such a product, preferring long-term contracts between the mine and the consumer. The same is true for aluminum.

Eventually the industry recovered.

The LME is reported by the FT to have included industry leaders such as Albemarle and You’re here in the design and development of the product to ensure its acceptability.

LME cobalt retrospective

The LME certainly has bad memories in this regard.

Son launched a physically delivered cobalt contract in 2010. The contract initially gathered supporters, but is concerned about the ethical credentials of some of the deliverable brands that have been adopted. The exchange then had to relaunch a cash-settled contract in 2019, but uptake remained low.

On this one, you could say the CME eats the LME lunch.

Since its launch in December, COMEX’s cobalt contract has seen a steady increase in its use, in part due to aggressive marketing.

But, also, it’s probably because the time has come. The COMEX contract has risen 57% since the start of the year, according to Bloomberg. Nothing stimulates the demand for hedging like price volatility.

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All metals in batteries are lifted by the switch to electric vehicles and renewable energy production. This not only stimulates industry demand but, more importantly, investor interest in creating the liquidity necessary for reliable price discovery.

The irony is, again, that both contracts use the same Fastmarkets cobalt index. However, industry interest appears to be 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. This too has been supported by the rising market for electric vehicles, but remains even more motivated by the production of stainless steel.

Between CME and LME, the pieces come together for the market to effectively cover the main building blocks of current lithium-ion batteries.

Whether this translates into lower volatility remains to be seen. Everything will depend on the growth of the battery market to the extent that its supporters project.

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