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Lithium Futures Trading Booms on CME 

Surge in open interest signals maturing market for battery metal

by Victor Adetimilehin

The trading of lithium hydroxide futures contracts on the CME Group exchange is experiencing a surge in activity, despite a recent slump in lithium prices. This growth indicates a maturing market for the battery metal, essential for electric vehicle production.

Record Open Interest and Growing Liquidity

The number of outstanding lithium hydroxide futures contracts on the CME hit a record high of 24,328 in the first quarter of 2024. This signifies increased liquidity for the contract, which was launched in May 2021. Furthermore, open interest now extends to September 2025, indicating longer-term participation in the market. The trading volume for the first three months of 2024 is already close to the total volume traded in all of 2023.

A Sign of Market Maturation

This surge in open interest is a positive development for the lithium industry. A well-developed derivatives market allows producers, traders, and consumers to hedge against price fluctuations in the physical market. Additionally, hedge funds and other financial institutions can participate in the market to profit from price movements.

“We expect to see more participants from the physical market entering these markets as open interest continues to grow,” said Jin Hennig, global head of metals for the CME.

Bright Spot in a Challenging Industry

The increasing liquidity in CME’s lithium contract stands out against a backdrop of headwinds for the industry. Lithium prices have plummeted by over 80% since their peak in November 2022 due to a shift from shortage fears to a surplus of supply. This price collapse has created difficulties for producers, leading to project delays, cancelled deals, and production cuts.

The recent price drop has flipped the lithium market into contango, where futures prices are higher than spot prices. Also, this situation presents opportunities for investment funds. The rise in open interest provides them with the confidence to trade the contract actively, as they can easily adjust their positions if market conditions change.

More Players Entering the Market

“The rise in open interest assures funds and financial participants that they can trade the contract efficiently,” said Leon Hoffmann, a broker at SCB Environmental Markets. He added that more Asian-based funds are participating in the CME contract this year, alongside existing players in the metals market who are expanding their portfolios to include lithium.

The CME’s lithium futures contract is poised to shatter last year’s trading volume record. However, with over 20,000 contracts traded in the first quarter of 2024 alone, the exchange is on track to surpass the 2023 total of 20,307 contracts.

Source: Mining.com

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