3 Reasons to be Bullish on Cobalt

In today’s difficult markets it can be tough for investors to know where to turn. Precious and base metals are not faring as well as they could be, and positive predictions are few and far between. 
However, amid that turmoil, some have pointed to the critical metals space as a beacon of possibility. In particular, analysts believe that metals that are part of the battery supply chain — specifically, lithium, graphite and cobalt — could have enormous potential in the coming years. On that note, here’s a brief overview of reasons some market watchers are bullish on cobalt.

1. Electric vehicles

Anyone who’s dipped a toe into the cobalt space in the last year and a half or so is likely well aware of the positive impact electric vehicles are expected to have on the metal.
Optimism was spurred early last year, when Elon Musk’s Tesla Motors (NASDAQ:TSLA) announced plans to build a $5-billion lithium-ion battery gigafactory. Lithium-ion batteries, which are used in electric vehicles, require not only lithium, but also graphite and cobalt, and the scale of Tesla’s gigafactory has attracted interest to all three markets.
As yet, Tesla has not said how much lithium, graphite and cobalt it will require; however, that hasn’t stopped market participants from making estimates. In terms of cobalt, Benchmark Mineral Intelligence has said that if the gigafactory reaches its target capacity of 35 GWh by 2020 it will require 7,000 tonnes of cobalt a year.
Given that other major companies — FoxConn Technology (TPE:2354) and LG Chem (KRX:051910), to name a couple — also have lithium-ion battery megafactories in the works, many are optimistic that demand for lithium, graphite and cobalt is set to surge.
Some have also suggested that the recent Volkswagen (ETR:VOW3) scandal may boost demand for electric vehicles as well. The idea is that with the automaker’s diesel cars under scrutiny, more people may turn instead to electric vehicles.

2. Production cuts

As the above information shows, cobalt demand seems set to increase dramatically in the coming years. Indeed, oft-cited statistics indicate that cobalt demand is growing at a compound annual growth rate of 6 percent, while battery sector demand grew just under 10 percent last year, with further growth expected in years to come.
While that wouldn’t necessarily be an issue if the world’s cobalt supply was strong, cobalt supply is currently facing pressure. Perhaps most notably, Glencore (LSE:GLEN) recently suspended production at Katanga Mining and Mopani Copper Mines for 18 months. The suspension will take 400,000 tonnes of copper cathode off the market.
For those in the cobalt space, that’s significant because Katanga and Mopani both produce cobalt as a by-product. As Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal points out in a recent note, Glencore produced 8,100 tonnes of cobalt in the first half of 2015, and presumably those shutdowns will take some of that off the market. In 2014, global cobalt mine production stood at only 112,000 MT.

3. The DRC

As a final note, it’s worth being aware that production cuts aren’t the only threat to cobalt supply. Another issue is that the world’s top cobalt-producing country by a long shot is the Democratic Republic of the Congo (DRC), which is known for its instability. While that is not currently a pressing concern, supply disruptions due to problems in the country are an ever-present possibility.

Investor takeaway

These are just a few reasons that some market watchers are excited about cobalt’s potential moving forward, and there are certainly other factors that may positively impact the metal. Even so, investors should also know that threats to cobalt’s future do exist. For a good overview of the pros and cons of cobalt investing, take a look at the market overview by Berry that’s mentioned above.
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.