Long term contracts prevail for lithium and cobalt as EV supply chain prepares for growth spurt

By Simon Moores, Managing Director, Benchmark Mineral Intelligence

SQM’s lithium contract with LG Chem is the latest in a string of long-term battery supply chain deals to be made public in 2020, a clear signal of the growing urgency among automakers to lock in critical inputs to fuel their push to electrification ahead of a growth spurt in 2021.

Today, SQM announced a 55,000 tonne LCE (lithium carbonate equivalent) deal with LG Energy Solutions, the newly formed auto battery spin-off from LG Chem, for a contract to begin in 2021 and end in 2029.

The SQM deal adds to other deals confirmed recently, such as Livent’s extended deal with Tesla, and Tesla’s long-term spodumene offtake with Piedmont Lithium.

In cobalt, Glencore has made public deals with Umicore (cathode), and battery cell makers, Samsung SDI, SK Innovation and GEM.

Long-term supply contracts with pricing breaks tied to public references and independent market data, such as that provided by Benchmark Mineral Intelligence, are now the clear trend in an industry that has always favoured private contracts between buyer and seller.

It also marks a change in the approach of OEMs as they begin to appreciate the more nuanced nature of the battery raw materials, compared to existing ICE supply chains.

Falling prices across many battery raw materials over the past three years initially saw end-users seek to leverage lower input pricing to meet battery cost reduction goals. However, the past 18 months has made clear that this continued period of low-pricing was not going to incentivise the scale of supply expansion required to meet the increasing EV ambitions of OEMs.

As a result, there has been a growing acceptance that to meet the supply security goals of end-users, there would have to be more firm commitments to long-term order volumes for raw material suppliers.

Pricing – the key component in making this trade-off achievable – has been a central focus of the negotiations that have brought these multi-year deals to fruition over the past 12 months.

While long-term contracts have been the standard across many of these niche mineral markets for some time, pricing flexibility is a new component that has required more specialist and independent references than those historically applied, such as trade statistics.

Market evolution forcing price innovation

Today, supply agreements with major consumers are becoming larger in volume and longer-term, allowing more secure visibility of how the electric vehicle supply chain will build out.

Benchmark’s latest Q4 2020 forecast outlines that lithium’s supply base will need to grow from 320,000 tonnes LCE in 2020 and attempt to bridge an ever-growing chasm between supply and demand which is now at 2.3m tonnes (1.8m tonnes from lithium ion batteries) in 2030.

Cobalt has a similar growth story: from 121,000 tonnes in 2020 to 438,000 tonnes in 2030.

At Benchmark Week 2020 – which is available to view online for all Benchmark Members – Glencore’s Head Cobalt Trader, David Brocas said the following:

“The longest contract we had in the book two years ago was one year.”

“[That] provides very little visibility to the miner that needs to invest in new supply and very little safety of supply to the consumers.

“Our goal was to modify the mindset [of the industry which was] very short term minded.

“With these long-term agreements our hope is our customers can focus on their core business and not be worried about safety of supply.”

It is this long-term clarity, supported by independent references and private negotiations, that is at odds with what other mechanisms offer.

The aim of introducing financial derivatives to markets facing serious structural issues will not address the underlying problems for consumers in the short-term. An efficient landscape for supply chain negotiations must emerge ahead of derivative and exchange-traded mechanisms, otherwise they threaten to impede the growth of the supply chain rather than support it.

Benchmark’s Lithium & Cobalt Prices 

Benchmark was established in 2014 with the specific goal of providing independent and accurate price data for the lithium ion battery supply chain, assessed using industry-specific methodologies based around the nuances of specialist markets.

Designed to encompass the variations in pricing across different specifications of material and different parts of the world, our 11 lithium price assessments and 3 cobalt price assessments have become essential references for stakeholders across the battery supply chain.

With data collected directly from active market participants, by a team of expert analysts, Benchmark ensures the lithium ion battery supply chain has a set of respected and accurate references to base its raw material negotiations and aid the build out of the supply chain.

Our price data series and indices are trusted by the active players in the industry the world over, as well as by governments, institutional investors, and lenders seeking to enter the space.