Cobalt prices started to slowly recover in 2016, and both analysts and CEOs see a positive cobalt outlook for 2017.
Interest in the cobalt market started to rise a couple of years ago, when Tesla (NASDAQ:TSLA) announced the opening of its lithium-ion battery gigafactory. Cobalt, a raw material needed for these batteries, is on track for a price surge in the next few months as the electric car revolution unfolds.
Prices for cobalt are expected to rise above $16 per pound by 2020 from $14.75 at present, as stricter emissions controls boost demand for electric vehicles and push the market into deficit from this year.
Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal, said, “cobalt was finally discovered this year. Cobalt’s price on the LME is up by 25 percent year-to-date, and it looks like other forms of cobalt chemicals have enjoyed similar strength.”
As demand rises, it’s possible that cobalt supply could tighten substantially as political and human rights concerns continue to put the Democratic Republic of Congo, the top-producing cobalt country, in the spotlight.
Earlier this year, Amnesty International released a report showing that major tech companies are not ensuring that their products do not use cobalt mined by child laborers. In addition, concerns about the presidential election in the country could compromise cobalt-mining operations.
Cobalt outlook: Electric vehicles to drive demand
IHS Automotive expects electric vehicles to represent nearly 4 percent of all light vehicles worldwide by 2020, equivalent to 3.9 million cars. That’s up from just over 14,000 in 2010.
Rising demand for lithium-ion batteries in these vehicles and other electronic devices is expected to drive the cobalt market, among others, in the coming years as producers will need to secure raw materials.
Benchmark Minerals Intelligence analyst Caspar Rawles said, “the biggest driver at the moment in the cobalt market is electric vehicles and companies procuring their supply for the future of the electric vehicle market.”
Last year, only 37 percent of cobalt was consumed in metallurgical applications, and global demand is expected to continue to shift towards non-metallurgical applications.
Consultancy CRU Group said electric car and plug-in hybrid vehicle sales could top 17 million in 2030, assuming an average growth rate of 25 percent a year from 2016 to 2030.
As CRU Senior Consultant Edward Spencer said, “[d]emand for cobalt in non-metallurgical (chemical) uses such as in batteries will grow at more than 7.5 percent a year to 2020. Chemical demand growth will be buoyed by the electric vehicle sector growing out of its infancy and the lithium-ion sector for other applications also growing robustly.”
He sees global cobalt demand at approximately 120,000 tonnes in 2020, whereas Macquarie analysts see it at 107,000 tonnes. Both, however, are calling for deficits in excess of 7,000 tonnes at the end of 2020.
Macquarie analysts said in a note, “[c]obalt’s demand growth profile remains one of the best among industrial metals peers. Its exposure to rechargeable batteries continues to play a crucial role.”
Lithium-ion-batteries are not only used in electric cars but also in mobile phones, laptops, digital cameras, cordless drills and hedge trimmers.
According to Benchmark Mineral Intelligence forecasts, three-quarters of lithium-ion battery cathodes are expected to contain some volume of cobalt by 2020, with NCA and NMC cathodes benefitting from growth in automotive battery applications.
“This is projected to see significant growth in cobalt consumption from the battery sector over the coming years — demand which today’s industry appears badly placed to supply,” they said.
Rawles expects to see some more of the price increases already seen in 2016, “I think 2017 is definitely going to be a busy year for cobalt. At a distance we’re getting a lot more interest around cobalt than we have done historically.”
Cobalt outlook: The question of supply
Another factor stirring up the cobalt outlook is human rights concerns. They came after Amnesty International released a report showing that major tech companies — including Apple (NASDAQ:AAPL), Samsung (KRX:005930) and Sony (TSE:6758) — are not doing a good enough job of policing their supply chains and allowing so-called conflict minerals into their products as a result.
Some reports suggest that this year 60 percent of the world’s cobalt supply will come from this country, which could be an issue for companies that want full visibility of their resource supply chain.
“Interest in cobalt has shined a light on its origin and sourcing in the DRC, a region rife with conflict. With no substantial near-term source of cobalt available in other parts of the world, the uneasy relationship between sourcing a critical commodity in a challenging part of the world is set to continue,” Berry said.
The world’s biggest cobalt producer, the DRC, mined an estimated 67,735 MT of the material last year and approximately 20 percent of the total mineral is mined by unregulated “artisanal” miners. According to a 2014 estimate by UNICEF, about 40,000 of these miners are children.
“This has cast a big spotlight over cobalt at the moment. That with a responsible cobalt initiative and one thing or another might mean that we see some supply restrictions as that market changes. I think that’s what causing the change that we’re seeing right now,” Rawles said.
But Tesla pledged in 2014 to use only North American resources for its battery production at its gigafactory, and has also claimed that it will stop sourcing its cobalt from the Philippines this year, due to environmental concerns, which will be a future issue for cobalt extraction as demand rises.
“The refined cobalt market will fall into a 3,000 tonne deficit this year following seven years of overcapacity and oversupply. CRU anticipates prices to increase onward into 2017 as global demand for refined cobalt exceeds the 100 kt mark and mine and refined supply tightens,” Spencer said.
Stormcrow Capital’s Jon Hykaw said that annual global mined production clocked in at 120,000 tonnes, with 53,000 tonnes being used as cathode material. But, “by 2025, we’re looking at a requirement for cobalt of 121,000 tonnes, which is actually in excess of all producing cobalt today.” That, said Hykawy, is “interesting,” particularly in light of the fact that “cobalt is a by-product.”
About 60 percent of cobalt production is a by-product of copper and the volatile price of the red metal is further impacting the supply of cobalt and is leading to specialist companies entering the market.
Cobalt outlook: China’s long game
The Chinese State Bureau of Material Reserves has increased its stockpiling efforts since the start of 2015, and that is now limiting physical cobalt availability on the market.
This longer-term trend, alongside a more recent crackdown by Chinese authorities on environmental pollution from domestic refiners, has limited available volumes on the spot market.
“China now owns around 70 percent of the cobalt refinery business and doesn’t produce much from a mining perspective, but these deals give Chinese companies control of a more valuable part of the cobalt supply chain. Just how much cobalt is in stockpiles in China is the million dollar question. Clarity here can materially affect the cobalt price,” Berry said.
China Molybdenum (HKEX:3993) announced earlier this year that it plans to purchase Freeport-McMoRan’s (NYSE:FCX) interest in its TF Holdings for $2.65 million. The deal was completed in November despite efforts by state-owned miner Gecamines to block the deal.
As early as next year, China could be producing approximately 62 percent of global refined cobalt production, increasing its demand by more than two-thirds over the next decade. That will mean Tesla could find itself heavily relying on China for cobalt as it increases production of electric cars in the coming years.
“The Chinese are playing the long game to tie up that angle of the battery supply chain,” Berry added.
Cobalt outlook: Companies to watch
Cobalt outlook: Investor takeaway
So what’s the overall cobalt outlook for 2017? “Watch copper and nickel prices as sustainable increases here can mean more cobalt on the market. Major cobalt producers like Glencore (LSE:GLEN) will wait for price signals in the copper market before expanding production capacity there, which will directly affect cobalt production over the longer-term,” Berry said.
H added that investors should be watching for finances as well as technological advances in battery chemistry, as there is a great deal of financial and intellectual capital being put towards minimizing cobalt’s use in batteries. “The real winners in cobalt will be those companies that can harness illiquidity and volatility in 2017 and beyond,” he said.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: eCobalt Solutions is a client of the Investing News Network. This article is not paid-for content.