Spodumene, a lithium-containing mineral, has gained importance as demand for electric vehicles (EVs) and renewable energy storage solutions has surged. In this context, the introduction of our Spodumene futures offers multiple advantages, particularly for market participants looking to hedge outright price risk, manage conversion margins or speculate on the future relationship between spodumene and lithium chemical prices. Before diving into some use cases where Spodumene futures may be used, it is worth noting how spodumene is currently priced.

Pricing for lithium products has gone through profound changes in the last few years. Index-based pricing has come to dominate the supply chain and has to a large extent displaced fixed-price long term offtake agreements. The growth in more dynamic pricing structures has been accompanied, and arguably been supported, by higher market activity in Lithium futures both on CME Group and on GFEX, a Chinese domestic exchange. Today, spodumene prices are typically linked to the price of lithium chemicals through formula pricing, meaning that spodumene is sold based on formulas that include either spodumene or lithium spot price indices, conversion costs, recovery fees and the refiner’s margin. This allows converters to buy spodumene and sell finished lithium products on a similar contractual pricing basis,thereby passing through (some of) the price risk. At the same time, spodumene producers are also using spot sales and auction mechanisms to support spodumene price indices and encourage price discovery in this sub-segment of the lithium market.

In any commodity market, price volatility can have significant financial consequences for businesses. The lithium supply chain, driven by growing demand for lithium-ion batteries, is no exception. Lithium prices can fluctuate widely due to various factors, including supply-demand imbalances, technological advancements and changes in government regulations regarding mining, environmental policies, subsidies for electric vehicles, etc.  Since launching in 2021, trading in Lithium Hydroxide futures has seen a sharp rise as market participants increasingly recognize the need for risk management tools in a fast-growing and highly volatile market. The Exchange’s Lithium futures contracts have allowed companies to hedge against price swings in lithium carbonate (launched in 2023)  and lithium hydroxide—key chemicals used in lithium-ion batteries. However, until now, the industry lacked a futures contract that specifically addressed spodumene, a key mineral from which lithium chemicals are refined.

The introduction of Spodumene futures fills this gap by offering a dedicated instrument to manage price risk associated with the raw material itself. Market participants,such as spodumene miners, cathode and battery manufacturers and traders, can use these futures to lock in spodumene prices, effectively stabilizing their exposure to price fluctuations. For example, a mining company could sell Spodumene futures to guarantee a fixed price for its production months ahead, even if market prices decline. On the other hand, an intermediary concerned about rising spodumene prices might purchase futures contracts to secure a stable cost base.

By using futures to hedge against adverse price movements, companies can stabilize their margins and revenues, ensuring predictable financial outcomes despite market volatility. This type of hedging is particularly important in industries like electric vehicle production, where the supply/demand balance for raw materials is complex to model and future profitability is closely tied to stable input costs. With Spodumene futures, companies can protect themselves from sharp price declines, or alternatively, prevent losses from unexpected price spikes, thereby mitigating the risks associated with an unpredictable market.

A more nuanced use of Spodumene futures lies in the ability to hedge the conversion margin between spodumene ore and refined lithium chemicals. Spodumene is a critical feedstock for producing lithium chemicals such as lithium carbonate and lithium hydroxide, both of which are essential in manufacturing batteries. However, the conversion process from spodumene to these lithium chemicals involves significant costs and exposes companies to a distinct type of price risk: the fluctuation in the price spread between raw spodumene and refined lithium chemicals. 

This conversion margin is a crucial determinant of profitability for companies involved in processing spodumene into lithium chemicals. If the price of spodumene rises while the price of lithium chemicals remains stable, the conversion margin narrows, leading to reduced profitability for refiners. Conversely, if the price of lithium chemicals increases faster than spodumene prices, refiners benefit from a wider margin, enhancing their financial performance. This is particularly relevant for non-integrated merchant refiners who need to buy spodumene and sell lithium chemicals in the open market. 

Spodumene futures provide a way for these market participants to hedge against adverse movements in the conversion margin. By simultaneously taking positions in spodumene and lithium chemical markets, companies can protect their profitability. For instance, a company that refines spodumene into lithium hydroxide may purchase Spodumene futures to lock in the cost of its input material while selling futures contracts in lithium chemicals. This hedge ensures that even if spodumene prices rise or the spread narrows, the company can maintain a stable margin between its input costs and its revenue from selling refined lithium chemicals. Protecting conversion margins with futures contracts allows companies to maintain financial stability and avoid being caught off guard by unfavorable shifts in market prices. Looking beyond the lithium market, such margin hedging activity is a key component of the business of oil refineries that buy crude and sell refined products, utilities that buy natural gas and sell electrical power, or grain merchants that buy soybeans and crush it into soybean oil and meal. 

While hedging is an essential function of Commodity futures, speculation also plays a vital role in ensuring market liquidity and price discovery. Speculators, unlike hedgers, do not engage in futures contracts to offset physical exposure to a commodity; instead, they seek to profit from price movements by identifying future market trends. In the case of Spodumene futures, speculators can take positions on both outright price changes and on fluctuations in the price spread between spodumene and lithium chemicals.

For example, a speculative trader might take a long position on Spodumene futures and a short Lithium Hydroxide futures position if they believe spodumene prices will rise quicker than lithium hydroxide due to a spodumene-specific supply disruption event. Speculators might also focus on the conversion margin, betting that the price spread between spodumene and lithium chemicals will widen or narrow towards an equilibrium level based on changing market dynamics. Speculation on conversion margins is particularly attractive in a market like spodumene, where the relationship between raw materials and processed lithium is often complex and subject to rapid shifts. As more traders participate in Spodumene futures, market liquidity improves, making it easier for both hedgers and speculators to execute trades efficiently. Speculation can also provide vital signals to the market as it can help identify bottlenecks in the supply chain.

xSince both Spodumene futures and Lithium Hydroxide futures are listed on the same exchange, and typically exhibit a strong positive price and return correlation, we may also apply margin offsets between long Spodumene / short Lithium futures positions (or vice-versa), thereby potentially providing margin efficient trading to our clients.

The introduction of Spodumene futures into Commodity markets marks a significant development for the lithium supply chain, providing market participants with a new product to manage risk and engage in speculative trading. Whether used to hedge outright price risks, protect the conversion margin between spodumene and lithium chemicals or speculate on future relative price movements, Spodumene futures offer a versatile instrument for addressing the risk management challenges of participating in a dynamic, volatile and growing market. As the global demand for lithium continues to grow, driven by the rise of electric vehicles and renewable energy, Spodumene futures could play a helpful role in ensuring price stability, enhancing market efficiency and facilitating long-term investment in the critical minerals supply chain.