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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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China’s New Lithium Futures Market Outpacing London Metal Exchange

  • For decades, the London Metal Exchange has been the global hub for metals trading thanks to a vast network of warehouses outside of China.
  • Thanks to China’s dominance in the global lithium supply chain, the Guangzhou Futures Exchange is gaining an edge over other global exchanges.
  • Although Australia is the world’s largest lithium producer, it ships almost all of it to China as low-grade ore where it is refined into a battery-grade chemical.
Lithium China

Last month, China’s Guangzhou Futures Exchange launched its first ever lithium carbonate future contracts, making it the fourth exchange worldwide to offer such contracts. The introduction of these trading instruments is intended to stabilize prices of raw materials to promote the EV industry's sustainable development. But in that short period of time, Guangzhou Futures Exchange's new lithium carbonate business has already gained more market activity than competitors such as the London Metal Exchange and Singapore Exchange, thanks to China’s dominance in the global lithium supply chain. China is the largest lithium consumer in the world, and is also home to a  rich lithium reserve of 17.0 megatons of LCE, good for 23% of global reserves.

For decades, the London Metal Exchange has been the global hub for metals trading thanks to a vast network of warehouses outside of China. However, LME is now facing greater competition and damage to its reputation following the historic nickel crisis. Last year, a record-breaking nickel short squeeze sent nickel prices soaring to an astonishing $100,000 per tonne--doubling the previous all-time high over the course of one morning-- and plunged the London Metal Exchange into an existential crisis. The LME subsequently closed trading and took the dramatic step of retroactively scrapping $3.9bn worth of trades made prior to the suspension--outlining the nickel market had become disorderly with prices no longer reflecting the underlying physical market.

Interestingly, just like the famous copper squeeze of more than a century ago, the nickel market snafu was largely linked to enormous short positions held by a single man: Chinese metal trader Xiang Guangda, the founder of China-based Tsingshan Holding, the world’s biggest nickel producer. According to Bloomberg, Xiang Guangda, also known as the “Big Shot” for his towering position in the metal industry, held an enormous short position of over 150,000 tons of nickel, more than 5x the 30,000 tons held directly by LME. The remainder was held via bilateral, “over-the-counter” deals with banks led by JPMorgan Chase & Co, and including BNP Paribas SAStandard Chartered Plc and United Overseas Bank Ltd. Guangda had built up the biggest short position in the metal, and is now facing a hit of nearly $8bn.

The proposal for greater transparency for over-the-counter positions came at the same time as the LME was facing an outcry from users over a proposal to close its open-outcry trading floor, “the Ring,” from which it later backed down. The LME, which since 2012 has been owned by Hong Kong Exchange & Clearing Ltd, is the ultimate decision maker on changes to its rules and consults with market participants, including many big banks. The industrial metals industry relies on LME prices as benchmarks for physical transactions, while financial investors in products like commodity indexes use the exchange’s prices to value their positions. 

Australian Threat

It’s, therefore, hardly surprising that hordes of lithium speculators view Guangzhou Futures Exchange as a viable alternative to LME. But it won’t be a walk in the park for GFE to completely steal the show from LME thanks to the latter’s large network of warehouses as well as the use of a currency that is not freely traded.

China’s lithium dominance is likely to continue thanks to challenges being faced by a key rival, Australia.

Australia’s dream to refine lithium hydroxide onshore in a bid to break China’s global battery supply chain dominance is facing a serious threat as local lithium producers have been opting to strike refining deals with major Asian conglomerates. Although Australia is the world’s largest lithium producer, it ships almost all of it to China as low-grade ore where it is refined into a battery-grade chemical. The Australian government has been harboring ambitions to build lithium hydroxide refineries in the country and become less dependent on China.

But local lithium producers have started partnering with Asian companies mostly due to cost issues. Pilbara Minerals Ltd. has partnered with South Korea’s Posco Holdings Inc. to manufacture a highly-refined product in the Asian nation. Liontown Resources Ltd., developer of large lithium mines in Western Australia, has announced an agreement with Japanese trading company Sumitomo Corp. on Monday to explore production of lithium hydroxide in Japan. Back in May, Posco revealed that it was 40% cheaper to build a lithium processing plant in South Korea than Australia thanks in large part to cheaper labor and materials costs.

The current Australian lithium hydroxide refineries--operated by US’-based Albemarle Corp. (NYSE:ALB) and China’s Tianqi Lithium Corp.--have been struggling to meet production targets. Meanwhile, domestic conglomerate Wesfarmers Ltd. is slated to commence production next year. 

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By Alex Kimani for Oilprice.com

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