Gearing up for a new automotive landscape

With roots tracing back to the 17th century, the London Metal Exchange (LME) has witnessed and taken part in the steady growth of metals including copper, aluminum, lead and, more recently, steel as they found their way into the burgeoning global fleet of cars and trucks.

While proud of its heritage, executives at the LME say they also are cognizant of fast-moving changes occurring in the automotive sector, with electric vehicles gaining market share in country after country.

Aluminum, copper and nickel are poised to remain vital to the shifting automotive sector, but newly configured batteries also include sizable quantities of cobalt and lithium.

Alberto Xodo, vice president of sales and market development at the LME, says that means the exchange’s traditional basket of metals is being joined by these emerging battery metals as candidates for the LME’s warehousing, pricing and hedging services.

On the eve of the Recycling Today Media Group’s inaugural Battery and Critical Metals Recycling Conference, Recycling Today Senior Editor Brian Taylor interviewed Xodo about the exchange’s approach to addressing the fast-changing automotive metals landscape.

Recycling Today (RT): When was the LME established, and why has it endured as a global marketplace for buyers and sellers of metals?

Alberto Xodo (AX): The London Metal Exchange (LME) was first established in 1877 as the London Metals and Mining Co. However, the role of the LME as a marketplace began a couple of centuries earlier, in the coffee houses of London, where merchants would meet to trade.

The Jerusalem Coffee House is often named as one of the favorite early venues for the trading of copper and tin among London metal merchants. Our rich heritage is still noticeable in some of the defining characteristics of the contemporary LME—for example, the three-month liquidity point equates to the amount of time it took in those days for ships to arrive to London with their loads of copper from Chile or tin from Malaysia.

RT: What copper trading, hedging or warehousing services does the LME offer to companies in the recycled-content red metals business?

AX: The LME has historically been a point of reference for the metal recycling industry. From copper scrap to the nickel content in stainless steel scrap, the recycling industry has been able to price raw materials at a discount to the LME price for primary metal.

This relationship is expanding further to cover more products as the LME steel scrap contract suite (CFR [cost and freight] Turkey, CFR India and CFR Taiwan) become increasingly accepted as the go-to price risk management toolset globally. The CFR Turkey heavy melting steel (HMS) 80/20 contract traded over 1 million metric tons this February alone.

Recently, the LME also launched a used beverage cans (UBC) contract to provide risk management tools to the secondary aluminum sector. And let’s not forget that 70 percent of lead comes from recycled materials.

RT: With nickel having increasingly become a battery material as well as an alloying metal, how has the LME responded to offer services to battery producers and nickel oxide traders?

AX: Although Class I nickel supply has remained stable, its relative share of global nickel production has declined in recent years. The rise of the battery material industry has been a major driver of growth for nickel demand and has led to the creation of significant new production capacity for intermediate products like mixed hydroxide precipitate (MHP) and nickel matte to be used in the production of nickel sulfate. The LME is fully cognizant of this structural shift and is exploring new initiatives to help the physical battery and electric vehicle industries manage their price risk.

In March, we announced that we would be exploring with market participants the potential addition of nickel powder as a deliverable shape for the existing LME contract. Nickel powder, a type of Class I nickel, can be dissolved to make nickel sulfate and its addition to the contract would allow for easier financing of nickel powder stocks and potentially increase the tradability of this grade in the spot market. However, it is important to note that there are a number of logistical challenges in storing and moving powders that would need to be resolved first.

Moreover, the LME is engaging with industry participants, price reporting agencies and platform providers to offer enhanced pricing mechanisms for the Class II nickel market.

RT: For how long has the LME offered cobalt and lithium contracts, and to what extent might these contracts be useful to recyclers handling large volumes of end-of-life electric vehicle batteries or other lithium-bearing batteries?

AX: The first LME Cobalt contract launched in 2010 and is physically settled, like copper and aluminum.

Just under two years ago in July 2021, we launched six new cash-settled futures including lithium hydroxide, two regional steel scrap contracts, European HRC, aluminum scrap and a duty-paid European aluminum premium contract. LME Lithium Hydroxide CIF (Fastmarkets MB) is a battery-grade futures contract designed to bridge the need for risk management for battery and car manufacturers, and the growing interest from investors seeking exposure to the rapidly growing sector. Transferring risk via derivatives such as these will help physical market participants manage their supply chain, facilitating planning, financing and long-term growth.

Our lithium and scrap contracts deliver a key part of LME’s sustainability agenda and were developed following valuable engagement with the industry. They provide pricing and access for products and services that support the circular economy and EV transition, making metals the cornerstone of a sustainable future. 

RT: How is hedging a risk management tool, and to what extent is it likely to grow in importance to collectors and processors of end-of-life batteries?

Futures can be used to manage risk in several ways. Some of the most common means include inventory hedging and accumulation hedging.

When inventory hedging, recyclers may be concerned that the value of their inventory (i.e. a long physical position) may drop due to adverse market moves. One way to protect this value would be to sell futures i.e., create a short financial position) to offset the long physical position held as inventory.

When accumulation hedging, a recycler may sell a large quantity of material to a client for delivery in six weeks, while not having the whole quantity available on site. The recycler is now holding a short physical position and is exposed to the risk that prices may rise over the accumulation period. One way to manage this risk would be to buy futures to offset the missing physical quantity. Then as material is delivered by suppliers, the recycler would regularly unwind the position so that when all the material has been collected there is no open futures position left.

Futures can also be used to enable a recycler to offer customized pricing structures to clients on long-term supply agreements, either to have a fixed price for the entire period or to index-link the sales to a recognized price reference, like the prices published by the LME.

RT: To what extent does the LME offer hedging or trading services that can overcome the time zone difference and be available to recyclers and traders based in North America?

AX: The LME’s electronic trading platform, LMEselect, is open from 01:00 to 19:00 Greenwich Mean Time, which means it is available until 2 p.m. Eastern Standard Time and 11 a.m. Pacific Standard Time. But this is not the only way to trade on the LME: the inter-office telephone market operates 24 hours a day and, during the American trading day, is serviced by LME members, brokers and banks based in the United States. This is augmented with liquidity from Europe in the morning and from Asia in the afternoon and evening. Metals trading is a truly global business and as such, trades around the clock.

RT: For those unfamiliar with hedging or how to incorporate it into their business, how does the LME recommend they learn more about it?

AX: Our website is a great source of information about risk management. It has a huge variety of learning materials including videos, webinars, white papers and other resources. We also provide several education courses, both online and in-person on various topics – the full calendar is available on the website. But I would strongly encourage all recyclers and scrap traders to just give us a call or send us an email on sales@lme.com, and we’d be pleased to help and support as much as we can.