Cobalt Prices Rebound on Glencore News, Uncertainty to Continue

Cobalt prices have been on the rebound since top producer Glencore (LSE:GLEN,OTC Pink:GLCNF) announced plans to close the world’s largest cobalt mine at the end of 2019. 

According to Benchmark Mineral Intelligence, prices for some cobalt products have increased more than 30 percent since the Anglo-Swiss mining giant announced Mutanda is no longer economically viable.

“Whilst the number sounds high, it is important to note that prices have gone from very low levels to back within historic ranges at this point,” Benchmark Mineral Intelligence Senior Analyst Caspar Rawles told the Investing News Network (INN).

Prices for cobalt, a key raw material in the lithium-ion batteries used to power electric cars, saw their highest level in early 2018, but started to decline significantly during the second half of last year, with poor performance seen since then.

Analysts seem to agree that the positive price reaction seen in the past two weeks is based purely on the news about Mutanda, which is located in the Democratic Republic of Congo (DRC) — the world’s largest producer of the metal.

According to Fastmarkets, standard-grade cobalt prices have rebounded 28 percent, climbing from US$12.10 per pound at the end of July to US$15.50 this week. Similarly, metal prices in China have jumped to 276,000 yuan per tonne — increasing more than 30 percent since July.

“Sulfate prices in China have climbed to 45,000 yuan, up from a low of 35,000 yuan on July 24, so a 28.5 percent rise — so the rise has been fairly consistent across metals and salts,” William Adams, Fastmarkets’ head of battery and base metals research, told INN.

But looking ahead, forecasts on how high cobalt prices could go and whether these levels are sustainable have taken many different directions, with UBS (NYSE:UBS) predicting that prices for the battery metal could jump 60 percent to reach US$20 in the next 18 months.

“Prices are continuing to rise; US$20 could very well be possible in this rally, but for higher prices to be sustained, we would need to see a more positive sentiment from the downstream market, particularly in China, but it is still early days (following the Mutanda news),” Rawles said.

Fastmarkets forecasts that prices will average US$16.50 in the fourth quarter, with spot prices possibly increasing to US$18.

“We expect a knee-jerk reaction on the upside in the weeks ahead, and then for prices to consolidate in the US$16 to $16.50 area, before getting stronger again in later in 2020 as stocks are drawn down and as demand continues to grow strongly,” Adams said.

Price volatility seems to be the fate of the cobalt space going forward, as supply and demand dynamics continue to shift and the market outlook swings between oversupply and undersupply scenarios.

“The market had foreseen oversupply until the early 2020s, which now looks unlikely to be the case,” Rawles said.

“Looking beyond this timeframe there is still a lot of uncertainty as to where the volume of cobalt needed will come from, which hasn’t been helped by the low price environment recently and has seen investment been canceled or postponed.”

Rawles explained that stock levels of cobalt that have built up over the past 12 to 18 months alongside 2020 production look likely to be enough to feed the market for next year, but beyond this, supply might not be adequate to meet demand.

“The key factor to influence this will be the reaction from other producers following the Glencore announcement,” he said. “With the market dynamics changing due to the Mutanda closure, we may see other producers take this opportunity to ramp up production more rapidly and/or gain market share.”

Optimism to return?

Despite the recent uptick in prices, cobalt stocks are still to see any significant movement, with investors waiting to see what may happen in the sector overall going forward.

“If it takes one of the biggest mines out there being threatened with closure to push prices a little higher, it seems kind of crazy for anyone to suggest that investors should get too excited,” Jon Hykawy of Stormcrow Capital told INN. “Prices are still going to be stuck in a range for years to come.”

Even so, he believes prices will probably eventually go higher. “(However,) it is going to take sustained prices of above US$20 to see any chance of getting new projects into production, and that isn’t happening this week.”

For Fastmarkets’ Adams, the Mutanda news is a turning point for the market, but the space needs to see the metal and hydroxide stocks run down before the fundamentals tighten.

“The demand side has also weakened following the subsidy changes and due to the general economic slowdown caused by the US-China trade dispute,” Adams added.

For Rawles, the main drivers of prices remain the same as 18 months ago, when prices broke US$40.

“Sentiment in the cobalt market will change when consumers begin to question security of supply and will be willing to pay higher prices than their competitors to ensure they get the material they need,” Rawles said. “That is what drove the price rises in 2017 and early 2018.”

What is next for cobalt?

Looking ahead to the rest of 2019, Rawles said the key factor to watch next is how quickly production ramps up from the DRC and from new and existing projects.

“If prices remain high, we might see production from industrial miners grow more quickly, but also a boom in artisanal production as we observed in 2018,” he added. Artisanal mining contributed to 20 percent of the DRC’s total cobalt output last year.

For Hykawy, one of the factors to watch out for is the ongoing split in new energy vehicle sales in China, not only the battery electric vehicles.

Investors should keep an eye out for the mix between cars with small batteries, which use cathode chemicals that don’t contain cobalt, like lithium-iron–phosphate or lithium-manganese oxide, and cars with much bigger batteries, which use cathode chemicals like lithium-nickel-manganese-cobalt oxide.

According to the expert, China has been providing financial incentives to try to grow the proportion of vehicles with bigger, more energy-dense batteries — an effort that has been a failure to date.

“How that mix goes is how Chinese and probably Malaysian and Indonesian and Indian new energy vehicle sales will go, and that will be a very important factor in determining how much cobalt and nickel we need for automotive batteries in the future,” said Hykawy.

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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.