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How can the futures market help my country transform its super-large-scale market advantages into pricing and competitive advantages by enhancing the influence of prices in important commodity markets? my country's lithium carbonate futures have written a story of thriving growth.

　　Price influence is beginning to show

Lithium carbonate is known as "industrial MSG" and "white oil". It is a strategic mineral of the country and is widely used in new energy industries (electric vehicles, energy storage), high-end manufacturing fields (aircraft, rockets), nuclear power fields (uranium reactor fission) and traditional industries such as chemicals. On July 21, 2023, with the approval of the China Securities Regulatory Commission, lithium carbonate futures and options were listed on the Guangzhou Futures Exchange and have been running smoothly for a full year.

The futures market has two basic functions: price discovery and risk management. Before the listing of lithium carbonate futures, my country lacked a fair price reference for lithium carbonate, and could only choose third-party market quotations, but the data accuracy, transparency and timeliness were all lacking, and the bargaining costs of upstream and downstream trade were high. After the listing of lithium carbonate futures, the gap in the market forward price was filled, and the futures price was gradually recognized and accepted by industrial enterprises, becoming an important reference for market trade.

In the international market, the influence of my country's lithium carbonate futures prices has also begun to emerge. Although the listing time of lithium carbonate futures of Guangzhou Futures Exchange is later than that of overseas markets such as London Metal Exchange (LME), Chicago Mercantile Exchange (CME) and Singapore Exchange (SGX), my country's powerful new energy industry has developed rapidly and has a high degree of industrial participation, which has attracted great attention from the international market. It is reported that the lithium products of Zimbabwe Minerals Marketing Company (MMCZ) are currently priced using the 10-day average price of the fourth month contract of lithium carbonate futures of Guangzhou Futures Exchange.

The rapidly growing market transaction data outlines the growth trajectory of the variety. As of July 19, 2024, the cumulative trading volume of lithium carbonate futures and options was 74.9254 million lots, with a cumulative trading volume of 7398.384 billion yuan, and the market size has grown steadily. From the perspective of monthly trading position size, the average daily trading volume of lithium carbonate futures and options in July 2024 was 256,500 lots, and the average daily position was 445,700 lots, an increase of 302.06% and 2635.68% respectively from July 2023. The scale of futures positions accounts for about 57% of the spot scale. The lithium carbonate futures market already has the liquidity required to serve industry risk hedging.

As of July 19, 2024, the number of lithium carbonate industry customers exceeded 15,900, and the average daily position of general corporate customers in lithium carbonate futures accounted for 32.2%. Leading enterprises actively participated. Among the top 20 lithium carbonate production enterprises, 11 enterprises have participated in futures trading; 7 of the top 10 lithium iron phosphate production enterprises have participated; and 4 of the top 10 ternary material production enterprises have participated. Overall, the participation of leading enterprises in the futures market exceeds 50%, and the number of industrial customers and the level of market participation are still steadily increasing.

According to incomplete statistics, from 2023 to the present, a total of 56 A-share listed companies have issued announcements to carry out hedging business, which clearly include lithium carbonate varieties.

　　Service entity functions begin to emerge

Since the end of 2021, due to the explosive growth of new energy vehicles, the price of lithium carbonate has continued to rise from 100,000 yuan/ton. In order to ensure production and supply, positive electrode materials, lithium battery and new energy vehicle manufacturers in the industrial chain have swarmed to buy from upstream lithium carbonate manufacturers. As a result, the market was in short supply in 2022, with the highest price approaching 600,000 yuan/ton. The average price for the whole year exceeded 400,000 yuan/ton. The price was running at an irrational high level, and companies in all links of the industrial chain passively hoarded a large amount of lithium carbonate inventory at high prices.

At the beginning of 2023, as companies in all links of the industrial chain began to digest their inventories in a concentrated manner, the lithium carbonate market suddenly cooled down, and the market price began to decline rapidly and sharply. In the first quarter, it fell from nearly 600,000 yuan/ton to below 200,000 yuan/ton, a drop of nearly 70%. Downstream cathode materials and lithium battery manufacturers cancelled orders on a large scale. In April 2023, with the centralized procurement of companies in the industrial chain, the spot price exceeded 300,000 yuan/ton again within one month, an increase of more than 50%. Companies in the entire industrial chain are struggling to cope with the sharp rise and fall in prices, and the supply security of the industrial chain is seriously threatened.

After the listing of lithium carbonate futures, the decline in the spot market and the pace of decline slowed significantly compared with the first half of 2023.

"As a lithium carbonate manufacturer, it usually takes us three months from the preparation of raw materials to the output of products. In the past few years, the price of lithium carbonate fell from a high of 577,000 yuan per ton to 176,000 yuan per ton, a price drop of more than 70%, causing losses to the company. After the listing of lithium carbonate futures, we combined inventory and costs to lock in a reasonable profit through hedging." A person in charge of a lithium company told reporters that with the protection of futures, the company has locked in orders for tens of thousands of tons this year.

As a lithium carbonate industry operator, Xiamen Xiangyu New Energy can now manage price fluctuation risks and smooth operating profits through futures hedging of its standing lithium carbonate spot inventory. "Lithium carbonate futures allow the industry to have more diversified choices in risk management, business models, pricing mechanisms, etc., and also provide a good 'reservoir' for lithium carbonate social inventory, which has effectively promoted the healthy development of the new energy industry." Lin Chaoqun, general manager of Xiamen Xiangyu New Energy, told reporters that the current spot price of lithium carbonate futures is stable at 80,000 yuan/ton to 120,000 yuan/ton, which is at the balance point of industry supply and demand, and the price is more rational. The use of derivative tools such as futures and options plays an important role in the planning and management of production and procurement for upstream and downstream enterprises.

Futures can not only discover prices, but also guide the rational allocation of resources and avoid oversupply and waste of production capacity.

Stimulated by factors such as the rapid rise in lithium battery product prices in 2021, domestic lithium carbonate production capacity has increased significantly, and many companies have carried out cross-border industrial layout outside of their main business. However, as production capacity is gradually built, capacity utilization has also dropped significantly. At present, the utilization rate of lithium carbonate capacity is less than 50%, resulting in a large waste of capacity and investment. "Futures prices are expectations of future prices. With this signal, blind expansion of production capacity can be alleviated to a certain extent, while promoting enterprises to make rational use of production capacity." Li Yusheng, chairman of the Lithium Industry Branch of the China Nonferrous Metals Industry Association, said that lithium carbonate futures have gradually been recognized and accepted by industrial enterprises and have become an important reference for market trade.

　　Enhance the competitiveness of the new energy industry

Lithium batteries and new energy vehicles are my country's "new three" exports. Previously, due to the long-term high price of lithium resources, the profit distribution of the industrial chain was uneven, the competitiveness of downstream products was weakened by the high price of raw materials, and a large amount of profits were transferred to the resource end.

After the listing of lithium carbonate futures, with open and transparent price guidance, the import price of lithium ore also declined simultaneously. It is understood that since the fourth quarter of 2023, the pricing model at the mine end has changed from a long-order pricing model based on historical prices to a reverse pricing model based on lithium carbonate futures prices. In the past, lithium mines were generally priced based on the average price of the previous quarter, but now most of them have switched to pricing based on futures prices. When some companies acquired lithium mines in Nigeria and Zimbabwe, they priced lithium mines based on forward futures contract prices and hedged in the lithium carbonate futures market to avoid risks. This change in pricing model will help to significantly save the cost of importing lithium ore.

After the listing of lithium carbonate futures, the price of lithium carbonate has gradually returned to a reasonable range. It is understood that for every 100,000 yuan/ton increase in the price of lithium carbonate, the cost of new energy vehicles will increase by 3,000 yuan/vehicle to 5,000 yuan/vehicle. The reduction in costs will help further enhance the international competitiveness of my country's new energy vehicles.

Behind every futures product is an industry to support it. Conversely, the development of an emerging industry is also inseparable from the empowerment of futures. The rapid development of my country's new energy industry has provided a strong industrial soil for the explosive growth of lithium carbonate futures; in addition, the healthy growth of lithium carbonate futures will also better serve and lead the industry forward. Li Yusheng believes that with the continuous maturity of the lithium carbonate futures market, it is of great significance to help companies operate steadily, ensure the safe and orderly development of the lithium battery industry chain, and enhance my country's voice in the global lithium market.

The lithium battery industry is an emerging field in which my country has absolute industrial advantages. In an interview with the Economic Daily, a relevant person in charge of the Guangzhou Futures Exchange said that the Guangzhou Futures Exchange will continue to follow up and study the lithium carbonate industry, optimize the contract rules, and better meet the needs of the spot market. At the same time, it will further enrich and improve the raw material variety system of the lithium battery industry, accelerate the research and development of lithium battery related varieties, including lithium hydroxide and other varieties, to safeguard the security of my country's lithium battery industry chain and supply chain.

Once upon a time, my country's futures market was called a "small pond", but today, my country's futures market has undergone a gorgeous transformation and is of great importance in the international arena. my country's commodity futures market transaction volume accounts for more than 70% of the global total, and commodity futures trading volume has ranked first in the world for many consecutive years. "Of the 20 most traded commodity futures contracts in the world, 16 are listed on China Futures Exchange. When you think about China's production capacity and purchasing power on the world stage, it's not surprising." Walter Luken, President and CEO of the Futures Industry Association (FIA) and former Chairman of the U.S. Commodity Futures Trading Commission (CFTC), understands the weight of China's futures market in this way. The Chinese story of lithium carbonate futures is a gorgeous wave in the vast sea of ​​​​stars in my country's futures market. (Economic Daily reporter Zhu Huichun)