In recent years, the mining industry has seen very large fluctuations in the prices of lithium products, and the methodology of pricing is becoming an increasing point of discussion.
Historically, lithium products have been priced consistently as an agreement between buyer and seller. This practice was fine in a market which had a high level of stability and limited growth; however, with the emergence of electric vehicles (EVs), demand for rechargeable batteries grew and the demand for lithium chemicals subsequently followed. The growth essentially reset the entire industry from a mature industry to one in its infancy. At the same time, the quality requirements for lithium chemicals are increasing, and the market is moving away from a commodity market towards a specialty chemicals market.
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The question is: how do you price a product in a transitioning market?
The need for long-term offtake agreements by EV manufacturers, battery manufacturers, cell manufacturers, and cathode manufacturers is very strong. Each producer is required to prove their ability to deliver the quantities needed. To do this, they must have consistent supply in terms of qualified volume. On the other hand, producers will, in most cases, need to ensure they have offtake agreements in place. Before financiers, including their own boards, commit hundreds of millions of dollars to construct new plants, these agreements are required to prove they can sell their products in the future. These requirements will be very similar for mineral concentrate producers as well.
Other markets, such as iron ore, moved away from annual pricing towards a market where spot trades are taking place on public platforms daily. The ‘industry accepted’ reference prices are then used by buyers and sellers in their contract agreements. But what happens when there is no, or very little, spot market? This is where the lithium industry is now.
Looking forward, there are some options for the industry to consider. Firstly, a spot market can be created where cargoes are placed for sale and buyers can bid. The volume available needs to be sufficient to be representative of the whole market and not just the marginal tonne. However, providing sufficient volume to the spot market, given the need for producers to meet offtake agreements, could be challenging. A further challenge with the creation of a liquid spot market for lithium chemicals is the need to have the product qualified by cathode producers – a process that can take several months.
Another option is value-in-use pricing, where the value lithium brings into the cathode is calculated and the lithium chemical is priced accordingly. This would require the buyers to open their books to a large degree, which could be controversial.
A third option is profit sharing. Here, the cost of the lithium chemical would be calculated and buyer and seller would split the net profit of the cathode sales. This option could present several challenges, and it will require a high level of trust between partners.
Wood Mackenzie believes that in time a representative spot market will develop. In the meantime, there will be different methodologies incorporated into contracts and some will be a hybrid of the above. The individual contracts will depend on the commercial risk appetite of both buyers and sellers.