Cobalt Market Update: Q3 2019 in Review

After months of declines, cobalt prices edged up in the third quarter of 2019, with supply worries supporting prices throughout the period.

Demand for cobalt, a key metal in the lithium-ion batteries used to power electric vehicles (EVs), is expected to surge in the long term, despite ongoing debate about changing battery chemistries.

Read on to learn what happened in the cobalt market in Q3, including the main supply and demand dynamics and what market participants are expecting for the rest of the year.

Cobalt market update: Price performance in Q3

The most important news in the cobalt space during Q3 came from top producer Glencore (LSE:GLEN,OTC Pink:GLCNF). In August, it announced plans to shut down the Mutanda mine in the Democratic Republic of Congo (DRC) at the end of the year as it is no longer economically viable.

Mutanda is the world’s largest cobalt mine, with cobalt production reaching more than 27,000 tonnes last year. Its output makes up a fifth of global cobalt supply.

Up until August, the price of cobalt had declined more than 40 percent in 2019 due to a surge in supply in the DRC, the world’s largest producer. But the news from Glencore sent cobalt on a rebound.

“I think prior to the closure many were expecting a period of depressed prices in the cobalt market for the next 12 months or so,” Benchmark Mineral Intelligence Senior Analyst Caspar Rawles told the Investing News Network (INN). “The announcement had a big impact on prices and producer sentiment, which has seen a reversal of fortunes for the cobalt industry.”

Similarly, Fastmarkets Head of Base Metals and Battery Research William Adams told INN that before the news he was expecting prices to continue to lose momentum in 2019.

“We were expecting prices to weaken as increased supply from the DRC that started in 2018 and was being ramped up this year added to the oversupply, but Glencore’s announcement changed the outlook.”

According to experts, prices for some cobalt products increased more than 30 percent in the days after the announcement, with UBS (NYSE:UBS) forecasting that prices for the battery metal could jump 60 percent to reach US$20 per pound in the next 18 months.

Before Glencore’s news, prices were trading at US$12.10, according to Fastmarkets, but after the announcement the firm raised its forecast to US$14.60. In the end, Fastmarkets’ cobalt standard-grade in-warehouse price averaged US$14.73 in Q3.

Cobalt hydroxide, the product produced at Mutanda, rose by nearly 40 percent in price between August and September, according to Benchmark Mineral Intelligence’s Cobalt Price Assessment report.

“A rise like this was inevitable following the announcement as the mine is so large. Mutanda accounted for about 20 percent of global cobalt production in 2018 — or enough for about 2.5 million pure EVs in today’s technology.”

However, at the current price, between 20 and 30 percent of global cobalt mine supply is at risk of disappearing in 2020, said cobalt producer Eurasian Resources Group (ERG) at the end of August. To regain lost supply in the short term, a sustained price of US$15 is needed.

“In the long-term, US$20 and above is required to attract much-needed capital to the industry,” ERG CEO Benedikt Sobotka said.

Cobalt market update: Supply and demand

As expected, the announcement from Glencore has impacted the outlook for cobalt supply and accelerated the expected deficit in the space.

Benchmark Mineral Intelligence believes that the supply deficit has been moved forward by around 18 months from where analysts expected it to fall prior to the Glencore announcement. That means the impact could hit the market as soon as the second half of 2020.

“In the near term, other producers might be incentivized to increase production due to improved pricing, but the reality is that the long-term outlook has always been very positive for the cobalt market,” Rawles said. “Producers’ plans will have been focused on the longer-term outlook, which means they will have likely already been targeting accelerated ramp-up strategies.”

For his part, Adams said that with Mutanda out of the equation for two years, the market will be in a supply deficit in 2021.

“We mainly see output continuing to increase at RTR and Katanga, but also at Deziwa and Hezong.”

Other supply-side news during Q3 came from the London Metal Exchange (LME), which earlier this year announced plans to ban metal tainted by human rights abuses in 2022, including cobalt.

But in September, sources told Reuters that the exchange could postpone the deadline by three years, giving producers more time to comply with guidelines and allowing the exchange to rethink its approach.

The proposed rules would see all LME brands go through a red flag assessment, to be based on guidance from the Organization for Economic Co-operation and Development.

“Responsible sourcing remains a key topic in the industry. Undertaking the correct due diligence to ensure the material you source is sustainable is absolutely paramount to automakers,” Rawles said.

In news from battery makers, Umicore (OTC Pink:UMICF,EBR:UMI) joined forces with LG Chem (OTC Pink:LGCLF,KRX:003550) to supply nickel-cobalt-manganese cathode material for battery production.

“This supply agreement will support LG Chem in meeting the growing demand for rechargeable lithium-ion batteries as car manufacturers are expanding their offering of longer-range electric vehicle models in several regions,” Umicore said in a press release.

In May, Umicore signed a long-term deal with Glencore for cobalt supply from the mining giant’s operations in the DRC, which Umicore said at the time meet its responsible sourcing standards.

Additionally, at the very start of Q4, mining giant Glencore signed a new cobalt supply deal with Chinese battery materials maker GEM (SZSE:002340).

Adams pointed out that there has been a pickup in supply deals in the cobalt space, and it is interesting that they are not all with China.

“With more supply tied up in contract deals, those without supply contracts may well feel more exposed, so may well look for deals, or decide to hold more stock,” he said. “Given a more bullish outlook going forward and given how volatile cobalt prices can be, now may well be the time that (original equipment manufacturers) look at hedging cobalt.”

Looking over to demand, Benchmark Mineral Intelligence forecasts total cobalt demand of 127,000 tonnes in 2019.

“We expect a pickup in demand in Q4 2019 and Q1 2020, and this might have a bigger impact on cobalt prices now that the market is looking much more balanced,” Fastmarkets’ Adams said.

Cobalt market update: What’s ahead?

As the fourth quarter of the year begins, there are some factors investors should keep their eyes out for that could impact the cobalt space.

For Rawles, one of the key factors to watch is the economic recovery in China and what could happen with the trade dispute between the US and the Asian country. Any revised EV policy incentivizing sales will also be key to pay attention to for the battery metals sector.

Similarly, Adams said a resolution to the trade talks will be a main catalyst during Q4.

“There appears to be some slack in the supply side, given stocks have run up, so I think the areas that could surprise on the upside revolve around demand — so either Chinese stimulus, or a new US-China trade deal that revives demand for EVs in China,” he said.

For the expert, more long-term contracts could also underpin a more bullish outlook for cobalt.

In terms of prices, Fastmarkets forecast prices to average US$16.50 in Q4, with analysts expecting prices to pull back from the current level of US$17.70 and trade sideways.

“We expected a knee-jerk reaction after the Mutanda news and then for prices to settle into a range, albeit well above the recent lows,” Adams said.

He added that, while Mutanda will cut global production significantly in 2020 and 2021, it will be countered to a large extent by the continuing ramp ups at ERG’s RTR and at Katanga.

“Also, considerable stocks have built up over the past two years, so we expect producers will want to reduce those to more normal levels,” he added.

For Rawles, looking forward to the last quarter of the year there are two conflicting forces at play. On the one hand, producers have been buoyed by the Mutanda closure and are not willing to sell at the low prices that the market saw in Q2 2019.

“The outlook for the supply/demand balance in 2020 is looking far better than it has previously, which has given producers a stronger hand in negations with consumers,” he explained.

On the other hand, China, where the largest buyers and refiners of cobalt are located, has seen floundering EV sales following the EV subsidy reduction, which came into effect in June, as well as a weakening economy due to macroeconomic factors.

“This is likely to dampen the rising spirits in the cobalt supply chain,” Rawles added.

As a result, for Rawles, the cobalt space may still see some marginal price decreases between now and the end of the year, but nothing like the low levels that were seen earlier in 2019.

“Equally, as November and December are typically hot season for battery and EV production in China — prices could rise well on rising demand,” he said. “Ultimately, I think we are probably looking at a price of relative stability to where we are today, assuming we have no major shock to the supply chain.”

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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.