How Digital Bidding Events Help With Lithium Price Discovery

Lithium supply initially struggled to keep up with the surging demand for batteries and electric vehicles, prompting many producers and OEMs to secure future supply through long-term contracts.

What followed was a significant price rally, with prices peaking at nearly 80,000 USD per tonne in December 2022. However, as the economy and, with it, demand slowed down and supply caught up, lithium prices dropped by more than 80%.

In such conditions, a sound mechanism for price discovery becomes vital to a company’s success. If done correctly, it allows sellers to optimise their sales book across spot and long-term contract opportunities.

To meet the demands for reliable price discovery mechanisms, market participants are considering three options:

• Price Reporting Agencies (PRAs)
• Commodity Exchanges
• Digital Bidding Events

PRAs gather data by conducting surveys with market participants through phone calls and emails, collecting information on transactions, bids, and offers.

At times, these prices may be biased or inaccurate depending on who is surveyed and what methods are used. Lithium’s dynamic market nature, with its rapid technological advancements and evolving supply chains, makes it challenging for PRAs to capture real-time market shifts accurately. As a result, reliance on PRAs can lead to outdated or inaccurate pricing information, causing buyers or sellers with long-term contracts in place to under- or overpay relative to actual spot market conditions.

Commodity exchanges are venues where standardised commodities and financial derivatives can be traded. In theory, these exchanges could offer a centralised platform for physical lithium trading, ensuring transparency and liquidity. However, the practical application has proven challenging.

The Guangzhou Futures Exchange (GFX) launched futures with physical delivery for lithium. However, the prices of futures traded at the GFX were extremely volatile and turned out to at times, decoupled from physical spot prices with little correlation to physical spot pricing due to the financial speculation of retail investors.

Established exchanges, such as the LME and CME, have tried offering Cash-Settled-Futures based on PRA indices. Here, price differentials between spot and future markets can lead to clear backwardation or contango formations and may aid price discovery. However, next to the accuracy risk of PRA indices, the exchanges also currently do not show sufficient liquidity to fully reflect the market.

Digital bidding events represent a modern approach to price discovery. In this instance, an independent software provider will enable sellers to invite bids from potential buyers and conclude legally binding transactions digitally. Different auction formats may be chosen or, alternatively, bidding may also proceed through several rounds of bilateral negotiations. The process is secure and efficient, allowing the seller to evaluate multiple bids and select the most competitive one.

The democratisation of information through these events reduces the risk of information asymmetry and bias. Moreover, given sufficient volumes, these events may also allow providers to publish reliable, transaction-based spot indices, ensuring an equitable market environment. Consequently, this model has gained significant traction with market leaders choosing providers, like Metalshub, to conduct regular digital bidding events.

Effective price discovery mechanisms will be crucial for the entire lithium supply chain to operate with greater transparency. Commodity exchanges and PRAs are working on meeting the demand. If enriched with data from digital bidding events, they may prove invaluable to the industry in the future. Thus, digital bidding events will likely gain more and more importance for establishing standards for efficient price discovery and transparent markets.