Lithium price stages massive reversal on COP28: "transitioning from fossil fuels"

Just after the market closed yesterday, I broke the news on X of a stunning turnaround in China's Guangzhou Futures Exchange (“GFEX”) Lithium Carbonate Futures. The most traded July 2024 contract was trading at a 3.1% loss around 11:30 am local time, extending Tuesday’s heavy losses. But just before the close of the trading session, it performed a sudden about-face to close up 10.0%.

This is because limit moves have become commonplace on GFEX lithium carbonate lately. The benchmark July 2024 contract has closed limit-down three times and limit-up three times in the last eight trading sessions. Given today’s limit has been increased to 13%, it could be a very interesting day for lithium fans indeed!

There’s some evidence to support this claim, given reports last week the exchange had to send back some deliveries of materials due to poor quality. This triggered two of the limit-up sessions mentioned above, as local market participants feared there wouldn’t be enough raw material available for January contract delivery.

Don’t mess with the elephant

The price of lithium carbonate is generally considered a major influence on other lithium minerals important in the battery supply chain such as lithium hydroxide and spodumene concentrate. Think of it as the lowest common denominator in the lithium minerals pricing mechanism. So because China has plenty of clout in the lithium carbonate industry, it also has plenty of clout with respect to influencing lithium pricing.

As I wrote in a previous article, UBS has forecast China’s production of lepidolite will rise substantially over the next few years, from 130 kt in 2023 to 189 kt next year, and 282 kt in 2025. The broker believes China’s lepidolite will increasingly define the marginal cost of production for lithium carbonate, and therefore for other lithium products like spodumene which is more important to Australian producers like Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN), Core Lithium (ASX: CXO) and Liontown Resources (ASX: LTR).

The lithium carbonate spot price has lagged its futures counterpart ever since GFEX launched its lithium carbonate futures in July. This phenomenon is typically referred to as backwardation. Backwardation in a commodity futures contract is often explained by market participants expecting a lower commodity price in the future.

Lithium bears COP major blow

Countries attending the conference agreed to “transitioning away from fossil fuels in energy systems” to help achieve a net zero by 2050 target. This is the first time in the conference’s short history fossil fuels have been directly referred to, and it’s not hard to connect this dot to “the lithium is going to be a key component in the transitioning” dot.

A final note on the TA

This sparked a modest rally in ASX lithium stocks – which many local lithium bulls were quick to claim is a signal “the low” is in. Then, of course, we experienced a few days down and lithium bulls fell silent again! Clearly, yesterday’s surge in GFEX lithium carbonate prices is going to get them up and about today, and yes, local lithium plays are popping as I type this.

Typical. Not guaranteed. Nothing in technical analysis, nor markets, ever is. But technical analysis when done correctly is simply the study of how the balance between demand and supply changes in a market. I’ll leave you with a technical analysis primer on how to confirm the low of any market. Apply it to the lithium carbonate market if you wish!

This content originally appeared on Market Index.