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CME Seeks to Tap Electric-Car Demand With Lithium Futures

04/08/2021 | 12:49pm EDT

By Joe Wallace

Commodities exchange operator CME Group Inc. plans to launch a futures contract for lithium, seeking to capitalize on growing demand for a metal that helps to power electric vehicles.

The contract will be for lithium hydroxide delivered to China, South Korea and Japan, where most batteries globally are produced, CME said Thursday. If the futures contract is approved by regulators, it will begin trading on May 3.

Allowing lithium to trade freely on an exchange could help shed more light on historically opaque prices for the metal, a key ingredient in rechargeable batteries for smartphones, laptops and electric vehicles. Market participants currently rely on assessments from commodities-data trackers such as Benchmark Mineral Intelligence, S&P Global Platts and Fastmarkets.

Lithium's role in powering rechargeable batteries has made it a strategically important commodity as governments seek to limit carbon emissions. The U.S. is racing to catch up with China in mining and refining the metal to support its auto industry and tackle climate change.

Demand for the metal is expected to boom amid efforts by governments to wean economies off fossil fuels, as well as moves by car makers including General Motors Co. to unveil suites of electric vehicles. But limited visibility over prices, which are mostly set in quarterly or annual contracts, have put buyers at a disadvantage in negotiations with producers.

Spot prices for lithium hydroxide and lithium carbonate, the other main compound of the white metal, have risen this year due to surging demand for electric vehicles. Prices could drop in the next few months because some Chinese lithium converters are boosting production, Platts analyst Jia Hong Ong wrote in a note last week. But many analysts and investors expect prices to head higher again as a glut that weighed on the market in recent years dissipates.

CME's contract will initially be used by car makers, battery manufacturers and other companies to lock in prices for future lithium deliveries, said Young-Jin Chang, head of metals at the exchange operator. Later, investors may trade the futures to bet on the direction of lithium prices.

"For car makers, you can't change the price of automotives on a daily basis based on the input costs," Ms. Chang said. "So there's definitely a need there."

The contract won't be for delivery of actual lithium hydroxide. Instead, buyers and sellers will exchange the difference between the futures price and an assessment of prices in the physical lithium market by U.K.-based Fastmarkets when contracts expire.

Opting for lithium hydroxide marks a bet by CME that auto makers will shift toward longer-range batteries that harness the compound. Lithium carbonate, in contrast, is used in cheaper batteries. Ms. Chang said prices for the two compounds are highly correlated, so auto makers using lithium carbonate should also be able to use the contract.

The futures contract could help lift lithium production to meet demand in coming years, said Ernie Ortiz, managing director of Lithium Royalty Corp., an investment fund that buys revenue royalties from battery-metal projects. If investors know that producers are protected against future swings in prices they will be more willing to lend money to finance new lithium projects, he said.

"It's potentially going to unleash capital from investors," Mr. Ortiz said.

However, the contract faces challenges in getting off the ground, said George Heppel, head of battery metals at consulting firm CRU Group. One obstacle: There isn't one reference price used in most lithium deals, so the contract won't provide a perfect hedge for many market participants, he said.

Write to Joe Wallace at Joe.Wallace@wsj.com

(END) Dow Jones Newswires

04-08-21 1248ET

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