Glencore Signs Cobalt Supply Deal with China’s GEM

Mining giant Glencore (LSE:GLEN) has signed a cobalt supply deal with Chinese battery recycler GEM (SZSE:002340).

Under the deal, the Swiss trader will sell 52,800 tonnes of cobalt contained in hydroxide to GEM over the next three years. Cobalt is an essential metal in the lithium-ion batteries used to power electric cars.

“With the rapid growth of global new energy car production … cobalt has become a global resource in short supply,” GEM said. Consumers are now racing to secure supply.

In fact, cobalt supply will need to reach 180,000 tonnes by 2026 from just 48,000 tonnes in 2016 to fulfill the increasing demand for electric cars, Benchmark Mineral Intelligence says.

“The company’s need for cobalt is increasing daily, and the company’s recycled cobalt resources cannot satisfy our strategic demand,” GEM added.

According to a filing by GEM, the company and its subsidiaries will purchase 13,800 tonnes of cobalt hydroxide from Glencore in 2018. They will buy 18,000 tonnes in 2019 and 21,000 tonnes in 2020.

“[This deal] is not only significant because it means 20,000 tonnes of cobalt are off the market, but also because it is 20,000 tonnes of clean DRC material that is a prime target for EV/electronics manufacturers looking to secure supply at the mine level,” Benchmark Mineral Intelligence analyst Caspar Rawles told the Investing News Network.

GEM is one of the largest suppliers of cobalt to CATL, which recently said it has become the largest battery supplier in the world based on last year’s sales.

CATL, which is planning a US$2-billion IPO next year to boost its production, now provides batteries to car makers such as BMW (EBR:BMW) and Volkswagen (FWB:VOW).

Speaking about how this deal will impact the market, Rawles said, “[t]he primary thing this is likely to do is push prices higher, and we have seen an acceleration in price rise over the past couple of days.”

However, he noted that this is not only due to Glencore’s deal, but also because prices broke the psychological $40 per pound barrier in the metal markets and the demand for cobalt chemicals continues to surge.

Glencore, the world’s top cobalt producer, is looking to increase its output this year to around 39,000 tonnes, up from 27,400 tonnes in 2017, as its Katanga mine ramps up in the Democratic Republic of Congo.

Pricing for the deal with GEM has not been disclosed, although Glencore CEO Ivan Glasenberg said previously that the company would not sign fixed-price deals.

“[Even though] pricing wasn’t discussed in the announcement I expect Glencore to have locked in a healthy profit from the deal above current market rates, Rawles said.

According to the expert, locking in such large volume “makes sense” as it will work like a hedge, “[g]uaranteeing decent margins on a third of their production allows the company to take more risk in the shorter term contract/spot market with its remaining output.”

On Thursday (March 15), shares of Glencore closed down 1 percent in London, ending at GBX 379.15. The company’s share price is down 2.62 percent year-to-date.

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