Paul Wightman, Gregor Spilker, Payal Shah, CME Group
At a Glance:
- A push toward more environmentally friendly solutions has helped spur growth in futures trading in metals, energy and equities, among others
- The ESG investment landscape in 2024 will largely be shaped by the economic outlook and policy uncertainty
At the COP28 conference in Dubai in December 2023, nearly 200 countries agreed on “transitioning away from fossil fuels in energy systems in a just, orderly and equitable manner.” That focus could add momentum to some sectors already seeing increased attention from market participants.
Demand for new fuels to power transportation fleets and metals to build batteries for electric vehicles are among the fundamentals that define this new green era in commodity and financial markets. Prices for many of these in-demand assets are discovered in the futures market, where contracts help traders and investors manage their exposure to price risk, and position themselves for opportunities when volatility emerges.
We decided to take a closer look at some of these markets where interest in sustainability and the materials that support it are growing the most. Below, we highlight three important areas, focusing on how fundamentals have shaped futures trading activity.
Lithium – Where and When is the Bottom?
Since hitting all-time highs of around $80/kg in early 2023, the market for lithium hydroxide has faced a challenging environment with prices dropping below $20/kg by the fourth quarter of that year.
Market analysts have pointed to a well-supplied market, with African production surprising on the upside and muted demand, notably a destocking occurring in the Chinese EV manufacturing sector. Market watchers now believe that spot prices have dropped below the cost of production of some lithium chemical producers, meaning that we may see those firms reduce output. If that happens, the price of lithium units could find a new, higher, equilibrium level, and today’s prices could turn out to be the bottom of this cycle.
In 2024 and beyond, participants will pay attention to whether the mining sector is able to continue to deliver new production capacity at the rate of these past years. Greenfield mining projects are often at risk of multi-year delays, and lithium is no exception.
At the same time, derivatives markets in lithium are going through an unprecedented growth phase. CME Group’s Lithium Hydroxide contract, which is the most actively traded lithium futures contract on a global exchange, already experienced more trading activity by early April 2024 as it saw over the entire 2023 calendar year, with over 20,000 tons traded.
Biofuels Re-enters the Global Stage
Biofuels are regaining interest alongside the feedstocks that support them. What is behind the rise in demand? The International Energy Agency notes that biofuels can play an important role in decarbonizing transport in the hard to abate sectors such as aviation, shipping and trucking.
Vegetable Oils
Trading volumes in the vegetable oil markets have been robust, partly reflecting the growing demand for biofuels and lower carbon feedstocks. The CME Group Soybean Oil futures contract remains the world’s most liquid futures vegetable oil market and trading volumes have averaged to around 3.2 million contracts per month over the prior 12 months to end March 2024.
U.S at the Forefront of the Scale Up in Biofuels
Trading volumes in ethanol, both in the U.S and Europe are expanding rapidly as more countries adopt higher blending mandates. The European market is now operating with a 10% blend of ethanol into gasoline, up from 5% previously and the U.S is mulling over a move to E20 in some states which would see 20% of ethanol blended into road transport gasoline. Rising demand has had a positive effect on the traded volumes in ethanol with Chicago and European volumes rising sharply over the past 12 months.
The U.S is also playing an expanded role on the global stage with exports rising month on month to several international markets across Europe, Asia, and the Middle East. Data from the U.S Energy Information Administration (EIA) shows that the U.S exported around 7 million barrels to Europe in 2023, up from the 4.7 million barrels sold in the prior-12 months.
S&P 500 ESG Index Marches On
The investment landscape of environmental, social and governance in 2024 will largely be shaped by the economic outlook, ESG disclosure regulations, product innovation and policy uncertainty.
In the equity space, the S&P 500 ESG Index is a broad-based, market-cap-weighted index that is designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.
Now in its fifth year since launch, the S&P 500 ESG Index has outperformed its benchmark, the S&P 500, by 7% over its history — including two bear markets on either side of a growth boom. The index seeks to reflect many of the attributes of the S&P 500 itself, while providing an improved sustainability profile as a result of an updated ESG score.
Underlying this ESG evolution is tremendous growth in ESG investments, including derivatives, like CME Group’s E-mini S&P 500 ESG Index futures, which have become the most liquid ESG equity index futures contract globally. These futures are becoming crucial for investors aiming to leverage the strength of the S&P 500 while incorporating meaningful and measurable sustainability-focused enhancements.
Recent trends in E-mini S&P 500 ESG Index futures illustrate how investors can find solutions that fit their ESG needs. Average daily volume in ESG futures has steadily grown since the contract’s launch and reached a record open interest of approximately $4.2 billion notional value.
The adoption of this and other sustainability-focused futures products could serve as an indicator of future interest in sustainability markets. With more investors and traders managing their exposure to ESG trends or the transition to more forms of renewable energy, these assets are positioned to take on a larger role in global economic outcomes.