This yr’s robust development builds on the sturdy liquidity of 2023, which was pushed by the profitable price-differential commerce between the lithium carbonate contract on China’s Guangzhou Futures Change and the CME’s lithium hydroxide contract. Each lithium hydroxide and carbonate are chemical types of the battery metallic used for electrical automobiles.
“Liquidity brings in liquidity,” mentioned Jack Nathan, head of battery supplies at dealer Tullett Prebon. Monetary gamers comparable to funds “at all times search for liquid markets to implement methods,” he mentioned.
There was additionally an enormous enhance in whole open curiosity within the CME’s different lithium contract — a carbonate contract launched in July 2023. Nonetheless, that market stays small in contrast with the hydroxide contract.
The rise in open curiosity in CME’s two lithium contracts has additionally allowed monetary gamers to search for arbitrage alternatives between the 2, in line with Leon Hoffmann, a dealer at SCB Environmental Markets in Switzerland.
The sturdy development in liquidity in CME’s two lithium contracts comes because the Chicago-based bourse has been pushing to tackle the London Metallic Change in battery metals because the latter wades by means of the fallout of the nickel disaster in 2022 and western sanctions on Russian metals. In cobalt, one other key battery metallic, whereas whole open curiosity and quantity have slowed this yr, CME’s cash-settled cobalt metallic contract has grown sharply since its inception in December 2020. In the meantime exercise within the LME’s longstanding bodily contract has floor to a halt.
To make sure, liquidity within the two lithium contracts on the Chicago-based bourse nonetheless pales in opposition to derivatives contracts in additional mature markets comparable to copper. And buying and selling quantity in CME lithium has seen a latest dip.
July whole buying and selling quantity stood at 8,458 contracts, a decline of 1.8% from June, in line with CME. Nonetheless, within the first seven months of the yr, whole buying and selling quantity was 46,337 contracts, greater than double the quantity in all of 2023, in line with the change. As of Aug. 9, whole quantity stood at 1,876 contracts for the month.
World lithium costs have been caught in a chronic stoop due to slower-than-expected EV demand and a provide glut. The weak spot in costs was extra pronounced in prime shopper China final yr, which led to the Guangzhou carbonate contract buying and selling at an enormous low cost to the CME hydroxide contract.
Now, the value distinction between China and the CME has began to slender, with the EV slowdown intensifying in some Western markets.
“The main focus has now shifted towards buying and selling primarily based on market fundamentals,” mentioned SCB’s Hoffmann. Funds and different monetary gamers have been largely shorting lithium on the CME because the battery metallic market is predicted to stay in a surplus within the subsequent couple of years, though some members are slowly going lengthy as they see costs bottoming out, in line with Hoffmann.
(By Yvonne Yue Li)