Cobalt Market Update: Q1 2021 in Review

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Battery metals have been making news headlines over the past few months as widespread interest in electric vehicles (EVs) continues to surge. 

Cobalt prices saw an uptick during the first three months of the year on the back of strong demand for the key EV battery raw material.

Read on to learn what happened in the cobalt market in Q1, including the main supply and demand dynamics and what market participants are expecting for the rest of the year.

Cobalt market update: Price performance

Despite the coronavirus pandemic, which broke out in earnest during March of last year, cobalt prices showed unexpected resilience in the face of uncertainty throughout 2020.

After a year of relative stability, a combination of tight supply and rising demand from the battery industry saw prices outperform expectations for the quarter, Greg Miller of Benchmark Mineral Intelligence told the Investing News Network (INN).

“I think the main surprise was the strength of demand in Q1,” he said.

Prices so far this year have been strong for a number of reasons, with Harry Fisher of CRU Group pointing to stockpiling from China’s State Reserve Bureau, EV market demand, raw material logistics issues in South Africa and a positive post-COVID-19 outlook as the main drivers.

“The sulfate premium has been particularly high, reflecting both strong EV market sentiment as well as continued weakness in the European metal market,” he told INN. “Cobalt metal prices have been weak relative to raw material prices, leading to some Chinese metal producers temporarily halting production in early 2021, or switching to sulfate production to benefit from higher prices.”

This is not the first time the cobalt market has seen a price spike, with the current rally reminding seasoned battery metals investors of what happened during 2017 and early 2018.

Commenting on how the current increase is different from what the market saw a few years back, Miller said the difference now is that demand is real and it’s here.

“Much of what happened in 2017/2018 was driven by bullish sentiment for cobalt due to excitement about the growing demand from the battery industry. Whilst the sentiment was real, true demand was not, and when EV sales in China began to slow due to a decreasing subsidy regime, prices crashed.”

For his part, CRU’s Fisher said 2018 prices were driven by premature speculation about EV demand, a bottleneck in the intermediates market and stockpiling of metal.

“The drivers differ this time due to robust demand (particularly from EVs and not too premature this time) and sulfate, not metal, prices leading the growth,” he said.

The CRU analyst expects less price volatility going forward due to reduced market speculation, although Benchmark’s Miller said price volatility will likely continue to some degree.

“But I think it will be more tempered going forward,” Miller said. “(That’s) because there is now a growing recognition from major players in the supply chain that a long-term approach to pricing is necessary and that price spikes, such as 2017/2018, will only serve to further damage cobalt’s reputation.”

Cobalt market update: Supply and demand

Cobalt is an essential element in the batteries used to power EVs, with EV sales remaining strong in China, Europe and the US at the start of 2021.

Low-cost EV models have been particularly popular in China, primarily relying on lower-cost lithium-iron–phosphate (LFP) cathodes, according to Fisher.

“LFP has regained market share in the last 12 to 18 months, and this will have a small negative impact on cobalt demand,” he said to INN. “Overall though our EV demand outlook has been strengthened, which more than offsets this.”

Speaking about demand, Miller said it went from strength to strength in January and February, before slowing in March as prices began to drift from highs in late February.

“Although we saw demand slow in late Q1/early Q2, I expect demand to pick up once restocking activity picks up later in the quarter,” he added.

Looking over to supply, availability is expected to improve as logistics issues in Africa ease and several operations in the Democratic Republic of Congo (DRC) continue to ramp up production, according to Benchmark Mineral Intelligence.

“However, with most major producers locking their supply into long-term contracts, spot availability is still expected to remain relatively tight going forward,” Miller said.

In the medium term, Fisher pointed out that investment in mined supply is required.

“The DRC will remain the major producer with continued medium-term supply growth, but significant risks remain around the timeline of Mutanda’s restart,” he said. “This could have fundamental implications on the overall market balance.”

Top producer Glencore (LSE:GLEN) closed Mutanda, the world’s largest cobalt mine, in late 2019, saying it was no longer economically viable due to the lower price environment at the time.

Additional supply is also expected from new high-pressure acid leaching capacity in Indonesia, albeit with risks around its technical complexity and ramp-up timeline, Fisher said.

Questions around artisanal supply have also emerged, with analysts expecting increased artisanal supply to come to the market over the coming months.

“However, it is becoming increasingly difficult for the battery industry to accept artisanal supply due to heightened awareness over the environmental, social and governance risks associated with such supply,” Miller explained to INN.

In March, the DRC, the world’s top cobalt producer, kicked off operations at Entreprise Générale du Cobalt (EGC), which has monopoly rights to the purchase and sale of the country’s hand-mined cobalt.

The state-owned company will sell cobalt hydroxide under a five year deal with trading house Trafigura Group, which will provide financing for the Congolese company.

“I think the formalization of artisanal mining is certainly positive and provides greater transparency to the sector,” Miller said. “However, it has the potential to add a further layer of complexity to the supply chain and may limit the ability of artisanal supply to act as ‘swing supply’ in times of market tightness.”

Similarly, Fisher said EGC’s release of new responsible sourcing standards is a positive step to ensure better-regulated, traceable and ethical artisanal supply from the DRC.

“This should allow more consistent supply to support price stability,” he said. “However, there are a large number of new regulations for miners, processors and traders, which may limit the flexibility of the artisanal mining sector to react quickly to price volatility as seen in the past.“

Cobalt market update: What’s ahead?

Looking ahead at what could be in store for cobalt prices, Fisher said market sentiment is relatively stable at present.

“We expect prices to maintain or adjust down slightly,” he said. “Cobalt intermediate prices are likely to decrease as port logistics in South Africa recover following COVID-19 restriction disruptions.”

CRU expects sulfate prices to maintain their premium over metals prices with continued EV market growth and some uncertainty around the recovery of European metal end-use markets, particularly aerospace applications.

For Benchmark’s Miller, after the significant price increases seen in Q1, prices in Q2 are expected to be more muted as the market stabilizes. “I think investors should pay attention to the uptrend in global EV sales as a key driver of demand in the market,” he added.

In terms of factors to watch out for in Q2, Fisher said South African logistics impacting cobalt intermediates supply to China will be key to keep an eye on.

In addition, any early indications of the impact of the EGC in the DRC and capacity announcements from the Chinese refined sector (both metal and chemical) could be catalysts in the next few months.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.