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London’s $13T Metals Exchange Just Got Even Hotter

London Metals

Demand for metals used in Li-ion batteries has been surging, thanks to a booming electrical vehicle, or EV, industry as well as rapid growth in the global electronics industry. And now it’s about to get easier to place your bets on these booming metals.

The London Metal Exchange (LME), the world's largest metals exchange with a $12.7 trillion annual turnover, plans to offer new lithium, manganese and graphite futures contracts to capture the huge opportunity offered by the EV industry. LME has an 18-month timeline for the new contracts.

The giant exchange is also exploring additional contracts for already tradeable copper, nickel, cobalt and aluminum as well as gold and silver.

(Click to enlarge)

Source: LME

LME is owned by Hong Kong Exchanges and Clearing (HKEX). The exchange brings together buyers and sellers of metal futures and options. Miners use the exchange to hedge against price fluctuations and lock-in prices using futures and option contracts. LME contracts lots range from 1 to 65 metric tonnes. All contracts are priced in dollars.

Traders can access LME through two main routes:

• By becoming an LME member

• By trading as a client through an existing LME member

Apart from futures and options, LME also offers monthly average futures, Traded Average Price Options (TAPOs), LMEminis and LMEX, the exchange's index product.

Booming EV Market

Investment managers have forever been harping about the need to put at least 5 percent of a portfolio into precious metals to diversify and stabilize it. Yet investors have been fleeing from gold and silver with abandon.

Prices of safe-haven metals have been going nowhere for nearly a year as the kind of hyper-inflationary environment that was expected from a massive wave of global QE programs has failed to materialize. Meanwhile, an improving global economy has given a boost to equities and bonds at the expense of precious metals.

Maybe it's time for investors to shift their attention to base and industrial metals instead. And few sectors look more promising than battery metals, thanks to a booming electrical vehicle market.

EV sales have really take off over the past two years, surpassing 1 million for the first time in 2017 after growing an impressive 56 percent. EV sales are expected to hit 4 million by 2020, a healthy 58.7 percent robust annual growth. Bloomberg Energy Finance has predicted there will be 100 million EVs on the roads by 2040, or about 1 in every 3 vehicles.

(Click to enlarge)

Source: Bloomberg New Energy Finance

Falling manufacturing cost of Li-ion batteries is a key reason why EVs are increasingly becoming affordable and starting to approach prices of conventional gasoline vehicles. The EV powertrain takes up a huge chunk of the total costs of an electric vehicle.

The ongoing green energy drive by many nations across the globe is also playing a big part. Related: The Indisputable Link Between Gold And Energy Prices

Norway plans to phase out the internal combustion engine by 2025 and EVs already account for 40 percent of the country's market share. Other countries with similar plans in the crosshairs include Netherlands, France, Slovenia, Scotland and Ireland as well as U.S. cities such as Los Angeles.

Demand for metals used in Li-ion batteries has likewise been surging--lithium is up 45 percent in the year-to-date; manganese +10 percent, cobalt +54 percent and graphite +57 percent. Nickel prices have, however, declined 23 percent due to increased supply from Indonesia and muted demand from China.

Historical Lithium Price per Metric Ton

(Click to enlarge)

Source: Metalary

Graphite in particular looks promising for investors.

Although graphite prices have been on an uptrend, the current price of $1,175/t is still a long way off the US$2,800/t peak achieved during the commodity supercycle of 2012. Li-ion batteries currently account for 25 percent of global graphite demand with much of the rest going to steel production.

With the explosion and China's steel industry rebounding, the graphite outlook is favorable.

By Alex Kimani for Safehaven.com

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