The ViDSS Blog

From mines to financial markets: Tracing price-setting across scales in cobalt and lithium global production networks

As the efforts toward a socio-ecological transformation intensify, the importance of electric vehicles will increase due to their lower emissions and reduced reliance on fossil fuels. However, the production of car batteries presents a sustainability contradiction, as it requires an increased supply of two minor metals – cobalt and lithium. There has been a growing literature on the problematic outcomes of the extraction of these metals, nevertheless, the studies so far have paid only limited attention to the process of price-setting. In my research, I analyse the price-setting processes that take place in the derivative markets and trace them across scales. Through examining the strategies of actors engaged in the extraction, trade and use of these metals in their particular policy contexts I discover the distribution of value and price risks in the metals trade.

Derivative markets play a crucial role in modern commodity trade. It is at these markets that commodity producers, traders and manufacturers, as well as financial actors, such as banks or hedge funds, conduct trade in financial derivatives. Derivatives are contracts, which, as their name implies, derive value from an underlying asset and can therefore constitute a right (“options”) or an obligation (“futures”) to purchase or sell a particular commodity at a specified point in time in the future, at a predetermined price.

The trade in derivatives has important implications for commodity sectors, as it constitutes a so-called open-market price discovery, which results in price benchmarks for the producers, traders and buyers. However, the term “price discovery” is problematic. It implies that prices are simply revealed, in alignment with the neoclassical paradigm in which prices are considered to be an outcome of an objective process driven solely by demand and supply in an abstract market. This language obscures a host of important factors that come into play in the price-setting process. As scholars in economic sociology have argued, price-setting is a contested process that reflects power struggles over the rules of trade and the distribution of value between actors in different social, institutional and political contexts.

Today, the dynamics surrounding price-setting have become increasingly complex, when we take into account the dynamics of financialisation. Scholars on the topic note that financial investors pursue strategies driven solely by financial gain and invest in commodities as an asset class, similarly to e.g., bonds and stocks, to benefit from price changes. Speculation – taking on price risks for profit – is not a new phenomenon in the derivative markets, yet investments of speculators have traditionally been largely based on the fundamentals of the underlying physical asset.

The post-2000s financial investor strategies are different because their investment decisions are made with little interest in the commodity itself. Instead, the investors’ strategies are driven by portfolio diversification considerations and, as a result, their positions may reflect events and conditions in other equity markets. This behaviour exacerbates uncertainty in the derivative markets, which translates into price volatility, conducive to high-risk/high-profit financial investment strategies. A lively discussion is therefore taking place on whether and how the financially-driven strategies in derivative markets influence commodity futures prices formation.

Price-setting, however, goes beyond derivative markets, where world prices for commodities are set. In physical trade, price-setting processes take place at all points of the material transformation of commodities through contracts that are developed between producers, traders, processors and consumers. The stipulations in the contracts are influenced by existing power relations between actors as well as the specific institutional and market contexts in which they are situated. The price-setting that takes place within contractual agreements, often using the global benchmarks as a starting point, determines who retains what value and who bears the risks in the context of volatile prices. These distributive outcomes can be highly uneven and affect not only individual enterprises but also whole regions if their economies are heavily dependent on a specific commodity.

In commodity markets, the physical trade between producers, traders and manufacturers is interlinked in complex ways with the financial trade in commodity derivatives. To understand the price-setting processes, the physical and financial spheres should therefore be studied concurrently. In my thesis, I embrace this perspective by linking the insights from financialisation literature with the Global Production Networks research. The latter is primarily concerned with the analysis of drivers behind the differential organisation and governance patterns within and across firms and sectors. Focusing on cobalt and lithium, I conduct research in two producer regions in Sub-Saharan Africa – cobalt extracted in DRC and Zambia and lithium produced in Zimbabwe – but I also look into the strategies of traders located in Switzerland and the processes at the London Metal Exchange derivative market. I am specifically interested in the distributive implications the price-setting processes have for different actors in the global production networks in terms of two key outcomes – the capture of value and exposure to price risks. (05.04.2022, Aleksandra Wojewska)

ViDSS student Aleksandra Wojewska studies the distributive implications that price-setting processes have for different actors in global production networks (© Pixabay)