Battery metals futures heat up as volatility stirs markets

Hello and welcome to Energy Source, coming to you today from London and New York, where AI technologies and the World Cup remain top of mind for investors.

My FT colleague Steve Johnson reports on how the AI investment boom is reshaping financial markets, with big investors moving out of highly concentrated stock markets and into private credit and infrastructure.

Cash-rich sovereign wealth funds such as Singapore’s Temasek are finding alternative pathways to make bets on the rapid build-out of data centres and the energy sources needed to power them. The shift also reduces growing concentration risk on public markets, where the weight of the 10 largest stocks in the S&P 500 has doubled to 38 per cent over the past decade.

The AI investment boom has also spurred a major M&A spree in the power and utility industry, with a record $203.6bn deals in the first five months of the year. This is more than 40 per cent higher than the $141.7bn figure for the whole of last year, according to research by Deloitte.

The explosion in dealmaking is being driven by companies seeking to build scale to capitalise on data centre construction and on a growing trend among companies to divest non-core businesses to finance expansion. Private capital has also been attracted to the utility industry, either by taking some assets private or pursuing minority investments.

For our main item, the FT’s commodities correspondent, Camilla Hodgson, investigates the surge in futures trading in battery metals on European and US exchanges. Thanks for reading, Jamie

Volatility sparks a boom in battery metals futures

Futures trading in battery metals is heating up, with cobalt traded on the leading European and US exchanges jumping this year amid rising prices and surging demand.

The year so far has brought a rise in the trading of futures contracts for cobalt and lithium on the London Metal Exchange and US’s CME. The metals go into batteries that power electric vehicles and act as energy storage solutions for renewable energy projects and the data centres that underpin AI. 

Increased activity comes in the context of growing demand for the metals and as traders and industrial users look to better manage their exposure to volatile prices and secure access to the materials.

Global exchanges are vying to capture that demand and win market share, and have launched a series of battery metals products over the past several years — though the volumes traded overall remain small compared to the trading of industrial metals such as copper and aluminium. 

A substantial rise in the price of cobalt over the past year has been driven by radical intervention in the market by the Democratic Republic of Congo, the largest producer of the metal. It has introduced a quota system for cobalt exports, capping the amount that can leave the country in order to address a persistent glut in the market and drive up prices. 

“The increase in liquidity on the exchanges is a direct result of the increase in market volatility that has been caused by export restrictions and subsequent supply adjustments — in turn raising the need for price risk management,” said Andries Gerbens, trading director at Darton Commodities. 

Traders and commercial users of metal use futures markets to manage their exposure to changing prices by locking in a future buying or selling price today.

A “rising futures volume is considered a bullish indicator for market maturity as it improves liquidity and increases the participation by financial investors rather than just industry participants”, said Gerbens.

Outside China, the CME is becoming a go-to venue for the metals. January was a record month for the trading of the CME’s suite of cobalt and lithium products, rising to more than 1,200 contracts traded each day on average, and the exchange saw record second-quarter volumes of cobalt traded. 

The group has also seen a jump in the trading of battery metal options — contracts that give traders the right to buy or sell at a set price by a certain date — of more than 400 per cent in the second quarter compared with the same quarter last year, it said.

“The industry has progressively adopted these financial instruments for hedging purposes,” the CME said, adding that positions held by traders extended out to December 2029.

There is also growing demand for the CME’s lithium carbonate contract — as opposed to hydroxide — as battery chemistries evolve. The increasingly popular lithium iron phosphate (LFP) batteries typically use carbonate rather than hydroxide, and do not contain cobalt.

Meanwhile, the average daily volume for the LME’s physically settled cobalt contract — in which buyers take delivery of the metal — is up more than 250 per cent in the year so far, to almost 200 contracts traded daily on average, compared with the same period last year. 

The LME’s lithium contracts are generally not used, with China’s GFEX exchange the most popular venue for the trading of the metal. China dominates the lithium supply chain, production of batteries and pricing. 

In June, however, price reporting agency Fastmarkets said it planned to design a new platform for spot physical lithium trading — meaning for immediate delivery, not delivery in the future.

The idea is to create a new digital venue where parties can trade bilaterally in order to improve price discovery and liquidity as the lithium market scales and matures. Participants will have control over pricing, which will not be linked to any reference price, but the data will be used to inform Fastmarkets’ benchmarks. 

“If the market requires index-linked products to be available to initiate deals then we would look to develop that,” said Przemek Koralewski, Fastmarkets’ global head of market development. (Camilla Hodgson)

Power Points

• Europe is set to enter the heating season with the lowest gas storage levels in at least 15 years.

• Western battery start-ups are turning to underused production lines in Asia to scale up their operations.

• The EU should delay its 2027 ban on Russian liquefied natural gas or risk becoming overdependent on the US, the head of one of Europe’s main import hubs for the fuel has warned.

Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Rachel Millard, Malcolm Moore, Ryohtaroh Satoh and Stephanie Findlay with support from the FT’s global team of reporters. Reach us at [email protected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.