5 Reasons Why Your Business Needs Spodumene？

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.

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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 , 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 )  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. 

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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.

As the world embraces electrical vehicles (EVs) and renewable energy, lithium has emerged as an indispensable mineral, with global demand expected to surge. In response, we're introducing Spodumene futures (SPM).

Spodumene futures will serve as a critical price risk management tool, enabling market participants to hedge against fluctuating prices or diversify their portfolios with one of the most vital raw materials in the energy transition. 

By trading Spodumene futures, you'll gain exposure to the lithium market and benefit from the transparency and liquidity of our futures market. The final settlement will be based on the monthly average of all daily price assessments for Spodumene min 6% Li2O, spot price, CIF China, $/ton, as published by Fastmarkets (FM) during the contract month.