Analysis: LME Lags Behind Rivals as Battery Metals Trading Gains Momentum

By Eric Onstad

LONDON – The London Metal Exchange (LME) is struggling to keep pace with emerging exchanges in the rapidly expanding market for metals essential for electric vehicle (EV) batteries, such as lithium and cobalt. As other markets gain traction, the LME’s complex futures structure and more subdued marketing strategies have led to a lack of interest in its battery metals futures.

Despite being the world’s oldest and leading market for industrial metals like copper and aluminum, the LME risks missing out on significant growth as both miners and EV manufacturers increase their hedging activities, unless it can attract more traders to its contracts for materials critical to the energy transition.

Among Western exchanges, the U.S. CME Group has taken the lead in trading volumes for lithium and cobalt. Specifically, volumes in the CME’s lithium hydroxide contract skyrocketed by 759% in the first eight months of this year compared to the same period in 2022, while the LME’s lithium contract has not seen any trades this year.

In China, the Guangzhou Futures Exchange has experienced considerable growth in lithium carbonate futures since launching in July 2023, although there are obstacles for foreign participation.

"The LME is not receiving the market engagement that the CME is experiencing," commented Jack Nathan, head of battery metals at broker Tullett Prebon. "Market participants are not tied to specific contracts or exchanges; they are simply in search of the most accurate hedge and efficient trading venue."

Part of the LME’s liquidity issues may stem from its complex trading structure. The CME and most futures exchanges typically utilize a single expiry date for monthly contracts, whereas the LME allows trading on different days, enabling physical users to customize their transactions according to delivery schedules. LME Chief Executive Matthew Chamberlain acknowledged that this complexity can hinder liquidity growth, suggesting that a more standardized market structure could boost trading volumes for battery metals.

To stimulate activity, the LME recently announced a series of proposals aimed at enhancing electronic trading and liquidity. Industry sources also noted that the CME’s larger volumes are partly due to its more aggressive marketing campaigns designed to attract brokers and traders to its battery products. Additionally, the LME introduced fee waivers for cobalt and lithium in an effort to boost engagement.

Historically, most lithium supply was negotiated through fixed-price annual contracts, similar to practices used in the iron ore market decades ago. The shift began when major producer BHP spearheaded a move in 2010 to abandon a long-standing annual pricing system for iron ore, paving the way for a vibrant futures market. Analysts believe lithium has similar potential for growth—albeit on a smaller scale—as price volatility stabilizes and major companies become more comfortable utilizing futures markets.

"It has been a turbulent three years," stated Daniel Fletcher-Manuel, director of prices and data at Benchmark Mineral Intelligence. Lithium prices surged by 500% in the year leading up to May 2022, as automakers scrambled to secure supply amid concerns over potential shortages. However, a wave of new mine outputs and disappointing EV sales led to an oversupply, causing prices to plummet back to previous levels.

"There remains significant anxiety surrounding price uncertainty, which has made some opportunists hesitant to enter the battery metals derivatives space, but this is expected to change," Fletcher-Manuel noted. Benchmark predicts that lithium hedging could more than triple to 1 million metric tons annually by 2030, based on conservative estimates.

Regarding cobalt, the LME finds itself lagging in comparison to the CME, which has recorded volumes twenty times greater in cobalt metal futures this year. While the LME’s cobalt volumes have been modest, they have seen some improvement, which Chamberlain attributes in part to the exchange’s responsible sourcing guidelines.

The LME has also benefited from warehouse deliveries based on its physically-settled cobalt contract, helping to absorb some of the market’s excess supply. It is anticipated that additional cobalt brands will apply for listing on the LME, potentially enhancing liquidity further.