In-depth Analysis of Lithium Carbonate Price Fluctuations and Futures Hedging Strategies for Lithium Battery Manufacturers

As a core raw material for power batteries, lithium carbonate has a relatively high price volatility in the global commodity market. From 2022 to 2024, lithium carbonate prices experienced a sharp roller-coaster ride: rising from about 300,000 yuan/ton at the beginning of 2022 to a historical high of nearly 600,000 yuan/ton in November 2022, then falling to a low of about 100,000 yuan/ton in 2023, a drop of more than 80%[1]. Since 2024, with the recovery of the new energy vehicle market and the growth of energy storage demand, lithium carbonate prices have gradually stabilized and rebounded, with the annual price fluctuation range maintained between 80,000 and 150,000 yuan/ton.

In terms of price fluctuation characteristics, the lithium carbonate market presents the following significant features: First, supply-demand mismatch is the fundamental reason for sharp price fluctuations. Lithium mining cycles are long (usually 3 to 5 years), while downstream battery capacity expands rapidly, leading to frequent imbalances in supply and demand. Second, the pricing mechanism for lithium carbonate is relatively opaque, spot market transactions are limited, and the price discovery function needs to be improved. Third, market participants are mainly mining enterprises and downstream users, with low participation of financial institutions and relatively insufficient liquidity.

The Guangzhou Futures Exchange (GFEX) officially launched lithium carbonate futures contracts in July 2023, which is the first lithium carbonate derivative trading product in China and provides an important price risk management tool for industry chain enterprises[3]. The basic elements of the lithium carbonate futures contract are as follows:

Contract Element	Details
Trading Variety	Battery-grade lithium carbonate, Industrial-grade lithium carbonate
Trading Unit	1 ton/hand
Quotation Unit	Yuan/ton
Minimum Price Fluctuation	50 yuan/ton
Price Limit	±4% of the previous trading day’s settlement price
Contract Months	1-12 months (year-round continuous contracts)
Minimum Trading Margin	8% of contract value

The listing of GFEX lithium carbonate futures is a milestone. First, it provides an open and transparent price reference for industry chain enterprises, and spot transactions can use this as a benchmark for basis pricing. Second, the hedging function of the futures market allows enterprises to lock in procurement costs or sales prices, effectively hedging price fluctuation risks. Third, the price discovery function of the futures market helps guide resource allocation and promote supply-demand balance.

In addition to GFEX lithium carbonate futures, lithium battery manufacturers can also use the following futures and derivative tools for risk management:

: The Chicago Mercantile Exchange (CME) and London Metal Exchange (LME) have both listed lithium compound futures contracts, providing enterprises with hedging channels in the international market. These contracts mainly target battery-grade lithium hydroxide, are denominated in US dollars, and are suitable for enterprises with export business or using foreign currency settlement.

: GFEX simultaneously listed lithium carbonate options contracts, providing enterprises with more flexible risk management tools. Option strategies can be customized based on enterprises’ judgments on price trends, locking in adverse risks while retaining profits from favorable price changes.

: The over-the-counter derivative market can provide customized lithium carbonate price swap agreements. Enterprises can sign swap contracts based on specific price indices with financial institutions to achieve more refined risk management.

For battery manufacturers that need to purchase lithium carbonate, long hedging is the core strategy to deal with price increase risks. Its basic operation principle is: buy the corresponding number of lithium carbonate futures contracts in the futures market to lock in future procurement costs. When spot market prices rise, profits from the futures market can offset the increase in spot procurement costs.

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: Enterprises should determine a reasonable hedging ratio based on their judgment of lithium carbonate price trends, risk preferences, and financial affordability. Full hedging (100% ratio) can completely eliminate price risks, but also lose the cost-saving benefits brought by price declines; partial hedging (e.g., 30% to 50%) retains the space to obtain favorable price changes.

: The delivery month of the futures contract should match the enterprise’s actual procurement time. For lithium carbonate to be purchased within the next 3 months, the current or nearby month contract can be selected; for longer-term procurement plans, the corresponding forward month contract should be selected.

: For enterprises that want to maintain a low level of physical inventory, they can establish a “virtual inventory” through the futures market—hold long positions equivalent to the target inventory in the futures market while maintaining low physical inventory in the spot market. This method can reduce capital occupation and storage costs.

For lithium salt enterprises with lithium carbonate production capacity or traders who want to lock in sales prices, short hedging is the main strategy to deal with price decline risks. Its basic operation principle is: sell the corresponding number of lithium carbonate futures contracts in the futures market to lock in future sales prices. When spot market prices fall, profits from the futures market can offset the reduction in spot sales revenue.

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: The short futures position should match the enterprise’s expected sales volume. For lithium salt enterprises with stable production capacity, short positions can be established according to a certain proportion of the annual sales plan (e.g., 60% to 80%); for enterprises with large production fluctuations, the hedging ratio should be adjusted more flexibly.

: Considering the real-time fluctuations of futures prices, it is recommended to use batch position building to establish short positions, avoiding establishing all positions at an unfavorable price level at one time. For example, the planned hedging volume can be divided into 3-4 batches and gradually establish short positions at different price levels.

: The actual effect of short hedging depends on the basis change between futures prices and spot prices. Enterprises should closely monitor basis changes and adjust the hedging ratio in a timely manner when the basis is favorable (e.g., spot prices strengthen relative to futures prices).

Mature lithium battery manufacturers usually adopt more complex portfolio strategies and dynamic hedging mechanisms to optimize risk management effects:

: For continuous procurement or sales needs, enterprises can adopt a rolling hedging strategy—when the nearby month contract is about to expire, roll the position to the far month contract to maintain the continuity of the hedging exposure. This strategy is suitable for enterprises that need long-term stable hedging.

: Enterprises can set a target price range and only perform hedging operations when prices break through the range boundaries. For example, buy futures to establish long positions when lithium carbonate prices are below 80,000 yuan/ton to build low-cost inventory; sell futures to lock in partial profits when prices are above 120,000 yuan/ton. This strategy can reduce hedging costs while retaining price flexibility within the range.

: Using option tools for hedging can lock in adverse price risks while retaining profits from favorable price changes. For example, enterprises can buy lithium carbonate call options to hedge against procurement cost increases, with the maximum loss limited to the premium paid; when prices fall, enterprises can abandon the option and purchase at a lower spot price.

The position size of futures hedging should match the enterprise’s actual exposure. Too large a position will occupy too much margin capital, increasing capital costs and forced liquidation risks; too small a position cannot fully hedge price risks. It is recommended that enterprises determine the position size according to the following principles:

: First, accurately calculate the lithium carbonate price exposure faced by the enterprise, including existing inventory, signed but unexecuted procurement/sales contracts, and expected future procurement/sales volumes.

: Conduct sensitivity analysis on enterprise profits and cash flow under different lithium carbonate price scenarios to determine the acceptable price fluctuation range.

: According to the exposure size and risk tolerance, reasonably allocate hedging positions between tools such as futures and options. For futures contracts with good liquidity, larger positions can be assumed; for contracts with poor liquidity, the position ratio should be reduced.

Futures trading uses a margin system, and enterprises need to reserve sufficient margin to cope with adverse price changes. Key points of fund management include:

: It is recommended to reserve funds equivalent to 10% to 15% of the hedging position value as a margin buffer to cope with additional margin requirements during sharp price fluctuations.

: Reasonably arrange fund scheduling to ensure that funds can be supplemented in a timely manner after receiving an additional margin notice, avoiding forced liquidation due to insufficient funds.

: Incorporate factors such as margin capital costs, futures transaction fees, and basis changes into the comprehensive accounting of hedging costs to evaluate the economic benefits of the hedging strategy.

Basis (the difference between spot prices and futures prices) changes are important factors affecting hedging effects. Enterprises should establish a basis monitoring and early warning mechanism:

: Analyze the historical change rules of lithium carbonate basis to understand the seasonal characteristics and influencing factors of the basis.

: Monitor basis change trends in real time and adjust the hedging strategy in a timely manner when the basis changes abnormally.

: When the basis is at a historical extreme level, enterprises can consider adjusting the hedging ratio or conducting basis trading to obtain additional basis income.

To prevent major losses during the execution of hedging strategies, enterprises should establish a sound risk limit and stop-loss mechanism:

: Set maximum limits for individual contracts and all futures positions to avoid excessive concentration.

: Set maximum loss limits allowed per day, week, or month, and activate risk control procedures when losses reach the limit.

: Conduct regular stress tests under extreme scenarios to evaluate potential losses and capital needs in the case of sharp price fluctuations (e.g., price limits, continuous limits).

A domestic lithium salt enterprise effectively controlled price decline risks through futures hedging during the rapid decline of lithium carbonate prices in 2023. When lithium carbonate prices were still at a high level of 400,000 yuan/ton at the beginning of 2023, the enterprise established short futures positions according to 50% of its annual sales plan. As spot prices fell all the way, the enterprise’s profits in the futures market effectively offset the losses from spot sales.

However, this case also reveals some problems in the execution of hedging strategies: First, due to the hedging ratio of only 50%, the enterprise still suffered about 20% loss in sales revenue during the price decline; second, some hedging positions were forced to close during the price rebound, losing part of the futures profits. Experience shows that enterprises should dynamically adjust the hedging ratio based on their judgment of price trends, while maintaining a sufficient hedging ratio to control risk exposure.

A small and medium-sized battery manufacturer effectively controlled procurement costs through futures long hedging during the sharp rise of lithium carbonate prices in 2022. The enterprise expected to purchase about 500 tons of lithium carbonate in the fourth quarter of 2022, so it established corresponding long positions in the futures market, locking in a procurement cost of about 550,000 yuan/ton. Although the spot market price soared to nearly 600,000 yuan/ton during the same period, the enterprise’s actual procurement cost remained at a relatively low level.

The success factors of this case include: First, the hedging timing was properly grasped, and positions were established before prices started to rise; second, the hedging ratio was reasonable, covering 100% of the expected procurement volume; third, fund management was in place, with sufficient margin buffer to cope with price fluctuations.

The high volatility of lithium carbonate prices has become an important operational risk for enterprises in the lithium battery industry chain. The listing of GFEX lithium carbonate futures provides an effective price risk management tool for industry chain enterprises. Enterprises should formulate differentiated hedging strategies based on their own business characteristics, risk preferences, and market judgments.

: It is recommended to mainly adopt short hedging strategies, dynamically adjust the hedging ratio according to price trends, increase hedging efforts when prices are high, and moderately reduce the hedging ratio when prices are low to retain price rebound benefits.

: It is recommended to mainly adopt long hedging strategies, establish virtual inventory for long-term procurement needs, and select opportunities to build positions to lock in costs for short-term procurement needs. At the same time, consider using option tools to optimize hedging effects.

: It is recommended to establish a systematic price risk management framework, including sound exposure measurement, position management, risk limits, and performance evaluation mechanisms, to achieve organic integration of futures hedging and production operations.

During the implementation of futures hedging, enterprises should always adhere to the principle of “risk management first, hedging function as the foundation” and avoid异化 futures trading into speculative behavior. It is recommended that enterprises establish a sound internal control system, clarify the authorization and approval, risk monitoring, and information disclosure processes for futures trading, and ensure that hedging business is carried out in a standardized and orderly manner.

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[1] Lithium Carbonate Price Fluctuation Analysis - Industry Research Report

[2] Power Battery Cost Structure Analysis - China Association of Chemical and Physical Power Sources

[3] Guangzhou Futures Exchange Lithium Carbonate Futures Contract Rules - GFEX Official Website