News that Chinese battery giant Contemporary Amperex Technology (CATL) (300750.SZ) has suspended operations at its giant Jianxiawo mine has lit a fire under the lithium market.
The CME lithium carbonate contract has surged by 27% since the start of August, breaking a long-running downtrend, with the bull momentum sweeping through the shares of listed producers.
The market reaction is not irrational.
Jianxiawo is China's largest lithium mine and even CATL's anticipated three-month suspension will make a significant dent in a massively over-supplied market. Nor is it the only Chinese producer in the lithium hub of Yichun facing heightened bureaucratic scrutiny.
But the price surge looks over-exuberant. Any underlying market signal has been swamped by speculative excess on China's Guangzhou Futures Exchange.
GUANGZHOU LITHIUM RUSH
Guangzhou only started trading lithium carbonate futures in July 2023 but has muscled out the Wuxi Stainless Steel Exchange as China's primary price reference point for the battery metal.
Guangzhou's lithium contract notched up turnover of nearly 24 million lots in July, far exceeding the previous monthly record, while open interest climbed to an all-time high of 699,164 lots.
Trading activity in the options contract mushroomed from 2.9 million lots in June to 8.6 million last month.
The exchange's volume figures denote both buy and sell transactions but, even allowing for this double-count, July's turnover was many multiples the size of a global market that is growing fast but still only amounts to around 1.6 million tons each year.
The Guangzhou exchange implemented position limits, specifically targeting non-exchange members, at the end of July after the September contract had traded limit-up on two consecutive days.
The measures seemed to be damping down the speculative heat until CATL made its announcement on August 11, at which stage the bull flames erupted again with the lithium price again going limit-up over the next two days.
While some market participants, particularly industrial players, may have been aware of CATL's licence problems, the price volatility in itself has acted as a magnet for local speculators chasing the next big thing.
Such crowd surges are commonplace in the Chinese commodities futures landscape and have the same effect as a giant momentum fund feeding on a fast-moving market.
WAR ON INVOLUTION
Last month's price action on the Guangzhou lithium contract was "a masterclass in sentiment-driven volatility," according to Paul Lusty, Head of Battery Raw Materials at price assessment agency Fastmarkets.
Fastmarkets' view is that "beneath the surface demand remains tepid, inventories high and buyers cautious, underscoring a disconnect between price action and market reality."
How much has actually changed in the wake of CATL's confirmation it needs to reapply for its expired mining licence?
Chinese speculators are betting that it is symptomatic of a change in government policy.
Lithium is not the only market to have interpreted this as presaging a broader clamp-down on chronic excess capacity in China's industrial base.
There have been equally exuberant rallies in steel, coal and polysilicon, a building-block for the over-heating solar panel sector.
NEW DAWN?
Whether this is really a new dawn for the bombed-out lithium price remains to be seen.
The focus of the market, particularly in China, will be on whether CATL gets its new mining licence and what happens to the other producers clustered in Yichun.
All of them are under scrutiny for possible discrepancies between their licensed mining rights and actual extraction rates, according to consultancy Project Blue.
In a market that has been weighed down by excess production capacity, any sign of producer restraint, whether voluntary or involuntary, is a price positive.
However, just how positive is going to depend on the Chinese speculators massing in the Guangzhou lithium market.
The exchange's lithium futures contract has already recorded over 12 million trades so far in August.
The speculative froth is still there.
The opinions expressed here are those of the author, a columnist for Reuters.
