ANALYSIS: Commodities market needs better benchmarks to tackle energy transition

Commodities exchanges and producers need to develop pricing benchmarks that more accurately reflect the requirements of end-users as they navigate the energy transition, a panel of experts has suggested.

Speaking at the FOW Trading Singapore event on Wednesday, the head of metals for Asia Pacific and the Middle East at StoneX Financial said the sector would see positive demand dynamics from a combination of power generation, storage and electric vehicle related consumption over the next 25 years, but challenges in the new battery metals markets remain.

“In the derivatives market, we are still focussing on underlying commodities that have existed for a hundred years, but now the world has changed – specifically the energy transition,” Amar Singh said. “This means that we need to think about what is the right hedge for the specific underlying risk that you have.

“For example, whether nickel is really the right contract or whether nickel sulphate needs to be something that more directly connects to the producer and consumer needs… Those kind of innovations and evolutions have to take place on most of the exchanges in my view.”

A key part of meeting this demand will be the adoption of pricing benchmarks that more closely resemble industrial usage, rather than the widely used proxy benchmarks that have been used.

“The whole world still trades on LME, so it has to step up and I think they are taking some steps in Asia to bring liquidity back to the exchange,” he said. “I hope it will get better – CME Group is trying hard, but in most of the world except some parts of the US the physical underlying is not priced to their benchmark. So the producer has to take the initiative to drive a benchmark change. CME does have liquidity, and of course a history and track record.”

CME has developed liquid copper and aluminium markets as well as a “class 2” lithium hydroxide contract that is growing. The US group reported metals trading up 43% year-on-year in August to a daily average of 708,000 lots after a string of lithium records at the end of July.

The LME has been making strides recovering volume after the 2022 closure of its nickel market. August volume was up 14%, including a 23% rise in the HKEX-owned market's nickel contracts.

Speaking to FOW in October last year, LME chief executive Matthew Chamberlain said class 2 nickels in Asia had contributed to the disorderly market in 2022.

“As we saw the demand for electrification and nickel bearing batteries, we saw a class 2 market emerge that was Asia focussed and priced things like nickel sulphates off the LME or Shanghai Futures Exchange contract and those class 2 metals are obviously not deliverable under those contracts,” he said at the time. “As we now know, that class 2 factor to some extent contributed to the March situation.”

While the LME has decided not to move into class 2 nickel, others plan to enter the market.

Singapore-based Abaxx Exchange and Clearing House, which launched on June 28, has applied to list a nickel sulphate contract while rival Intercontinental Exchange (ICE) has said it is expanding its partnership with Global Commodity Holdings to develop the US group's first nickel futures contract.

Speaking about the agricultural sector, the chief executive of Cygnus Capital said there has a been a huge investment in increasing sustainability in value chains but government policy in also a key factor in the Asia.

“Whenever a shift in policy comes, whenever there is a new direction in certain countries, that changes the margin, changes the dynamics, and it affects the pipeline down the chain,” Lawrence Lu said. “So it is a step forward, it is a decision in terms of the direction that each company wants to take but I think in general the economics will push the direction that the industry takes, and I think it is clear now where it is going.”