Lithium price stages massive reversal on COP28: "transitioning from fossil fuels"

There's chatter in social media channels the big turnaround in lithium prices was as a result of the closing announcement at COP28.
Carl Capolingua

Livewire Markets

Just after the market closed yesterday, I broke the news on X of a stunning turnaround in China's Guangzhou Futures Exchange (“GFEX”) Lithium Carbonate Futures. The most traded July 2024 contract was trading at a 3.1% loss around 11:30 am local time, extending Tuesday’s heavy losses. But just before the close of the trading session, it performed a sudden about-face to close up 10.0%.

GFEX Lithium Carbonate Futures for July 2024 delivery went on a wild ride on Wednesday. Source: SMM
GFEX Lithium Carbonate Futures for July 2024 delivery went on a wild ride on Wednesday. Source: SMM
10% is the maximum the contract can trade from its previous settlement. Traders call Wednesday’s move a “limit-up” move. Due to recent volatility in its lithium carbonate futures contracts, GFEX increased their daily limit move from 7% to 10% last week, and today they’ve increased it to 13%.

This is because limit moves have become commonplace on GFEX lithium carbonate lately. The benchmark July 2024 contract has closed limit-down three times and limit-up three times in the last eight trading sessions. Given today’s limit has been increased to 13%, it could be a very interesting day for lithium fans indeed!

GFEX Lithium Carbonate Futures for July 2024 have experienced six out of eight limit trading sessions. Source: SMM
GFEX Lithium Carbonate Futures for July 2024 have experienced six out of eight limit trading sessions. Source: SMM
All this volatility simply adds to the controversy around GFEX’s lithium carbonate futures contracts which have been labelled by some industry pundits as a plaything of Chinese lithium carbonate producers and speculators.

There’s some evidence to support this claim, given reports last week the exchange had to send back some deliveries of materials due to poor quality. This triggered two of the limit-up sessions mentioned above, as local market participants feared there wouldn’t be enough raw material available for January contract delivery.

In a move to quell these concerns, GFEX announced on Monday it had added three warehouses for delivery of lithium carbonate and had increased storage capacity for the material at ten of its other storage sites. It also announced higher margin requirements to weed out speculators, and that it would be implementing stronger scrutiny of market participants and implementing punitive actions against those caught violating exchange rules.

Don’t mess with the elephant

China is the elephant in the room when it comes to lithium carbonate production. It is both the world's largest consumer and producer of the material, which is a key input in the battery supply chain.

The price of lithium carbonate is generally considered a major influence on other lithium minerals important in the battery supply chain such as lithium hydroxide and spodumene concentrate. Think of it as the lowest common denominator in the lithium minerals pricing mechanism. So because China has plenty of clout in the lithium carbonate industry, it also has plenty of clout with respect to influencing lithium pricing.

China’s lithium carbonate supply dominance comes from its domestic production of lepidolite – a hard rock lithium ore of which China has abundant resources. Many analysts believe China’s lepidolite production, and knock-on lithium carbonate production, will be the driving force behind lithium minerals prices for some time to come.

As I wrote in a previous article, UBS has forecast China’s production of lepidolite will rise substantially over the next few years, from 130 kt in 2023 to 189 kt next year, and 282 kt in 2025. The broker believes China’s lepidolite will increasingly define the marginal cost of production for lithium carbonate, and therefore for other lithium products like spodumene which is more important to Australian producers like Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN), Core Lithium (ASX: CXO) and Liontown Resources (ASX: LTR).

UBS pegged around 80,000 RMB/t as their floor price, and to their credit, the market has steadily pushed prices there throughout 2023. The low on the July 2024 contract was set on 6 December at 85,400 RMB/t – some 61% lower than the 218000 RMB/t when the contract commenced trading on 21 July. Nice call UBS!

The lithium carbonate spot price has lagged its futures counterpart ever since GFEX launched its lithium carbonate futures in July. This phenomenon is typically referred to as backwardation. Backwardation in a commodity futures contract is often explained by market participants expecting a lower commodity price in the future.

The lithium carbonate spot price has lagged the futures price for many months
The lithium carbonate spot price has lagged the futures price for many months
According to major Shanghai-based metals research house SMM, the spot price for lithium carbonate was 109,000 RMB/t yesterday. In light of yesterday’s bullish move in GFEX futures, today could mark the first time since the contract’s inception it trades above the spot price. If this occurs, it could signal a major shift in thinking among market participants.

Lithium bears COP major blow

Whilst the shenanigans in GFEX lithium carbonate futures means most market participants take pricing in its contracts with a small sampling of sodium chloride (yep, that’s terrible! 😁), there was plenty of chatter in social media channels among lithium diehards that the big turnaround in the July 20204 contract was as a result of the closing announcement at COP28.

Countries attending the conference agreed to “transitioning away from fossil fuels in energy systems” to help achieve a net zero by 2050 target. This is the first time in the conference’s short history fossil fuels have been directly referred to, and it’s not hard to connect this dot to “the lithium is going to be a key component in the transitioning” dot.

A final note on the TA

So, maybe GFEX lithium carbonate futures got a boost from COP28 yesterday – the timing is probably too big a coincidence to ignore – or just maybe, just maybe, there were also a few technical factors at play. After all, the July 2024 contract had already logged a key technical signal consistent with a major low on 6 December.

This sparked a modest rally in ASX lithium stocks – which many local lithium bulls were quick to claim is a signal “the low” is in. Then, of course, we experienced a few days down and lithium bulls fell silent again! Clearly, yesterday’s surge in GFEX lithium carbonate prices is going to get them up and about today, and yes, local lithium plays are popping as I type this.

It’s worth reading my Did we just see the low in lithium minerals prices? article which I wrote in response to the 6 December low. Yesterday’s price action is a major confirmation signal the low is likely in. Indeed, I tweeted as such yesterday afternoon! The big white candle on substantial volume, and its positioning above the 6 December low, is typical of major price reversals.

Typical. Not guaranteed. Nothing in technical analysis, nor markets, ever is. But technical analysis when done correctly is simply the study of how the balance between demand and supply changes in a market. I’ll leave you with a technical analysis primer on how to confirm the low of any market. Apply it to the lithium carbonate market if you wish!

A quick technical analysis primer on spotting the low in any market
A quick technical analysis primer on spotting the low in any market

This content originally appeared on Market Index.

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Carl Capolingua
Content Editor
Livewire Markets

Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl...

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