Explore Topics and Trends impacting today's markets

Breakthroughs in battery technology, as well as economies of scale in production of batteries, have drastically improved the cost competitiveness of electric vehicles versus internal combustion engine vehicles, making EVs one of the big stories of the energy transition. And while China is ahead of other regions in terms of market penetration, there is a global trend toward higher EV adoption.

Considering this EV market growth and wider decarbonization efforts in the global economy, which metals stand to benefit the most? Copper and aluminum are old stalwarts of the global metals landscape – widely used across industries and applications and with a rich history of being traded on commodity exchanges.

The energy transition is adding a new angle to that story. Copper will be in high demand because it is so versatile and used in energy storage, EV charging infrastructure and related applications. For instance, the International Energy Agency estimates that “clean energy technology” may account for over 40% of total copper demand. Due to its low weight, aluminum can be helpful in offsetting the weight of EV batteries, and thereby increasing vehicle range. Aluminum is also required to construct solar panels. In total, BloombergNEF estimates that between 30-40% of global aluminum demand will be tied to the energy transition.

If copper and aluminum are old stalwarts, that makes cobalt and lithium the new kids on the block of the metals trading universe. Ten or 20 years ago, these metals were used in niche applications, such as superalloys or magnets (in the case of cobalt) or the production of ceramics and glasses (lithium). Because volumes were small, and the universe of participants limited, trading was often done using fixed price long-term contracts. The introduction of lithium-ion batteries, first for consumer electronics and then progressively in EV batteries, has dramatically changed this once tranquil landscape. Market analysts forecast that overall demand for lithium-ion batteries may grow by 30% year-on-year over the coming decade. Expectations are that EVs will dominate demand and account for 90% or more of total consumption of lithium and cobalt. The industry has had to adapt to this new environment by changing long-established practices. For instance, lithium procurement is now often tied to spot prices, or formula indices that reflect current market pricing.

The required ramp-up in supply required to meet this demand surge may pose challenges to the mining industry. In the case of cobalt, supply is heavily concentrated in the Democratic Republic of Congo, and cobalt is often extracted as a byproduct of copper and nickel production – meaning, what happens in these metals can influence how much cobalt will be produced. In the case of lithium, supply is more evenly distributed with mining in Australia, the South American “lithium triangle” (Argentina-Bolivia-Chile), and other regions. But lithium faces other challenges; it does not store well, meaning that stocking excess production to clear the market is, at best, an imperfect solution. With industry growth rates of around 20-40% annually, small shifts in the supply/demand balance can have a huge impact on prices – something witnessed over the past 36 months. Over that time, lithium went into a wild ride with spot prices growing by a factor of 6x before coming back down to earth.

The chart above would most likely send a shudder down the spine of any corporate treasury risk manager. Fortunately, financial derivatives are quickly evolving to help manage that cobalt and lithium price risk. In the case of cobalt, CME Group entered the fray back in 2020. The Cobalt Metal futures contract, which tracks the price of metal stored in Rotterdam warehouses – conveniently located between America and Asia – has quickly found adoption by industry participants as documented by a steady rise in open interest to around 20,000 tons (or about 10% of annual world production). In quick succession, CME Group also launched a Lithium Hydroxide futures contract, which tracks the import price of battery-grade lithium hydroxide into North Asia, the main hub for battery manufacturing. Over the past year, the contract quickly grew to around 10,000 tons open interest, versus an overall annual production of around 800,000 tons in 2023.

Growing awareness of hedging activity in these markets has led to demand for more products tailored to the battery supply chain. These new contracts offer even more granular hedging of risk: participants are now able to directly trade and hedge cobalt hydroxide (the material that typically finds its way into batteries via chemical refining) and lithium carbonate (a lithium product similar to hydroxide but best suited for different types of batteries). While the derivatives market for battery metals is still in its infancy, growth rates and contract adoption are progressing swiftly, reflecting the ramp-up in activity and volumes moved in the real world.



OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).

©2024 CME Group Inc. All rights reserved