Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Secured Critical Materials Through Offtake Agreements
Transcript
- Lucas: A few years ago, if you told a procurement team they could lock in a critical raw material for five years at a predictable price, they’d have laughed. Today, that’s exactly what some buyers are doing — through something called an offtake agreement. Luna: Offtake — that’s where a buyer agrees to purchase a fixed percentage of a supplier’s future production, right? It’s more common in mining and energy. Lucas: Exactly. Traditionally, offtake agreements have been the domain of large commodity traders and industrial conglomerates. But in the last three years, we’ve seen mid-sized manufacturers start using them to secure everything from lithium to rare earths to semiconductor-grade silicon. Luna: What changed? Why now? Lucas: The short answer is supply shock. Between 2022 and 2024, lithium prices swung from roughly $80,000 a tonne down to $12,000 and back up to $30,000. Battery makers who relied on spot purchases were hammered. One company I looked at — a mid-tier battery manufacturer in Europe — decided they couldn’t operate that way. Luna: So they went to a lithium miner and said, ‘We’ll take a fixed volume off your hands for five years’? Lucas: More or less. But the details matter. They didn’t just buy lithium on a forward contract. They structured an offtake agreement where they committed to purchasing 70 percent of a new mine’s annual output for five years, starting in 2025. In return, they got a price that’s tied to the miner’s production cost plus a fixed margin — so if spot prices spike, they’re insulated. Luna: That sounds like a huge win. But what’s the downside? If lithium prices crash, they’re stuck paying above market. Lucas: That’s the classic risk. The agreement typically includes a price floor and a price ceiling. The floor protects the miner, the ceiling protects the buyer. In this case, the floor was set at $12,000 a tonne — the miner’s breakeven — and the ceiling at $28,000. So if spot prices drop to $10,000, the buyer still pays $12,000. That’s a real cost. Luna: But if they hadn’t locked in, they could have been paying $40,000 or more during a shortage. You’re essentially buying insurance. Lucas: Exactly. And the insurance premium is the risk of overpaying in a low-price environment. But for a company that needs guaranteed supply to run its factory at capacity, that trade-off makes sense. The battery maker calculated that a production stoppage would cost them roughly $2 million per day in lost revenue. Paying an extra $2,000 a tonne on a small portion of their lithium intake is trivial by comparison. Luna: So they ran the numbers. That’s the key — procurement teams often get excited about the strategic upside without modelling the downside. Lucas: Right. And the due diligence goes beyond pricing. The buyer’s team spent three months auditing the miner’s feasibility study, securing permits, and even visiting the mine site. They wanted to be sure the mine would actually produce. Because an offtake agreement is only as good as the supplier’s ability to deliver. Luna: That’s a huge point. I’ve heard horror stories where buyers signed offtake agreements with junior miners who couldn’t get financing or permits, and the contract was essentially worthless. Lucas: Exactly. In this case, the miner had already secured all major permits and had a binding agreement with a construction firm. The buyer also negotiated a clause that if the mine missed its first production date by more than six months, the buyer could reduce its commitment by 20 percent. That’s a smart safeguard. Luna: So the contract includes performance milestones and remedies. That’s more like a partnership than a simple purchase order. Lucas: It really is. And that partnership dynamic changes how both sides behave. The buyer shared their production forecasts with the miner, so the miner could plan extraction rates. The miner shared real-time grade data, so the buyer could adjust their battery chemistry. They started co-developing specifications for a higher-purity lithium hydroxide. Luna: That’s the hidden benefit — you’re not just buying a commodity, you’re influencing the product. In procurement, that’s a huge leverage point. Lucas: And it goes beyond lithium. We’re seeing offtake agreements pop up in other critical materials — rare earths for EV magnets, cobalt for batteries, even silicon for solar panels. The common thread is that supply is concentrated, demand is growing fast, and buyers want predictability. Luna: I wonder if this model works for smaller buyers. Not everyone can commit to millions of tonnes over five years. Lucas: There are ways to scale it down. Some buyers form consortiums to aggregate demand. A group of five mid-sized battery makers might collectively negotiate an offtake agreement with a larger miner, sharing the volume and risk. That’s becoming more common in Europe, where small manufacturers are banding together. Luna: That’s smart. It also gives the miner a more stable revenue stream — they’d rather have five committed buyers than one who might default. Lucas: Exactly. And from a procurement perspective, the key takeaway is that offtake agreements force you to think like a strategic investor, not just a buyer. You need to understand your supplier’s business model, their cost structure, and their risks. If you’re willing to do that work, you can lock in something that’s increasingly rare in today’s market: certainty. Luna: I think that’s a good place to mention — if this episode has given you a new lens for thinking about supplier relationships, and you’d like to support the show, you can buy us a coffee at buy me a coffee dot com slash fexingo. It’s a small gesture that helps us keep the show ad-free and focused on strategy. Lucas: Exactly. No pressure, but if you found value, that’s the link. Now, back to that battery maker — they actually saw a second benefit from the offtake agreement that they hadn’t anticipated. Luna: What was that? Lucas: Because they had a guaranteed supply of lithium at a known cost, they were able to sign long-term contracts with their own customers — automakers. Those customers valued the supply chain visibility enough to pay a slight premium. So the offtake agreement became a competitive differentiator. Luna: So it cascades down the value chain. That’s a powerful argument for presenting to your CFO. Lucas: Absolutely. The takeaway for any procurement leader is: if you’re sourcing a material that’s critical, volatile, and supply-constrained, an offtake agreement might be worth exploring. Start by mapping your own demand, identify a supplier with a credible development plan, and then model the scenarios — high-price, low-price, and supply disruption. If the numbers work in two out of three, it’s probably worth the conversation. Luna: And if you don’t have the internal expertise, bring in a consultant or a lawyer who’s done these deals before. The contract structures are nuanced. Lucas: Right. One wrong clause — like a force majeure definition that’s too broad — can unravel the whole deal. But done right, an offtake agreement can turn your supply chain from a source of anxiety into a source of strategic advantage. Luna: Alright, that’s the buyer’s side for this episode. Lucas, next week we’re looking at how procurement teams are using digital twins to simulate supplier disruptions. Lucas: Looking forward to it. See you then.