Cobalt starts 2021 with a bang – but does this spell the end of low prices?

Cobalt prices have started 2021 with a bang, with price increases observed across the supply chain, particularly for battery-focused feedstocks and chemicals.

The ground was set for a strong start to 2021 with the Chinese State Reserve Bureau (SRB) and its approved Chinese suppliers quietly agreeing a deal to acquire cobalt metal.

In late December, behind closed doors the SRB initiated its second round of cobalt metal purchasing in 4 months.

Whilst the deal has not yet been officially confirmed and may never be publicly disclosed, it is estimated the purchase could amount to up to 3,000 tonnes of metal delivered over the first half of 2021 on a fixed price basis – with the potential for more later in the year.

This adds to the recent purchase already reported by Benchmark in September 2020, with an estimated volume of 2,200 tonnes, delivered over the remainder of the year.

At the time, the purchase went largely under the radar outside of China, in part due to the festive shutdown for much of the industry, but in China prices for cobalt products began to react quickly.

Cobalt sulphate, which had otherwise been stable for the month of December began to climb with Benchmark’s December Cobalt Price Assessment tracking an average price increase of 3.2% for the month on an EXW China basis, with the high end of transactions reaching RMB 58,000/tonne ($8,900) by month end.

The purchase by the SRB not only took material out of the market, it gave confidence to the industry that prices were expected to rise.

It also calmed fears of an oversupplied metal market in 2021.

Metal demand from industrial markets continues to be stifled by the impacts of the pandemic, particularly on the superalloy industry linked to aviation.

This was expected to be compounded by additional supply from the anticipated return to production of the Ambatovy operation in Madagascar, which spent much of 2020 on care and maintenance.

Coronavirus still impacting China cobalt operations

By the start of January 2021, as the global industry returned to work, the cobalt price increases of late December continued.

These were driven not only by the SRB news but a confluence of factors that helped further fuel the flames lit by the government purchase, under a backdrop of rapidly increasing demand from the battery sector.

Whilst China has largely overcome the pandemic, with very few cases reported domestically, it is still having an impact on operations.

With the Chinese New Year celebrations expected in late January and early February, the country largely grinds to a halt, with an extended closure for domestic logistics in the country.

This year the impact of that closure is widened as truck drivers will need to isolate before returning to their families for the holiday period, resulting in a lack of logistics and a scramble by the domestic cobalt industry to ensure it has the material needed on hand to see through the period until after the celebrations.

Not only are domestic Chinese logistics a concern, but also supply chain contacts have reported increasing concerns over interruptions to the export of cobalt from Africa.

The concerns arise not only from the worsening coronavirus situation across the continent, potentially disrupting the flow of material, but also from the challenges in securing limited available shipping capacity to transport material to consumers in Asia, primarily in China.

These concerns have further driven prices rises in the first week of January with Benchmark observing an increase of more than 6.0% in the high end of cobalt sulphate transactions, the highest transacted price for the salt since March 2019.

Cobalt hydroxide, the feedstock for cobalt sulphate production, has also seen an increase in observed payables (the value of cobalt contained in hydroxide compared to metal), which reached the highest level since March 2018 – the high of the most recent price spike.

Cobalt metal has also reacted, with Benchmark observing the high end of transactions in January to date to have increased by almost 8.0% on December averages on an EXW Europe basis.

But how much should the supply chain read into this January price action?

What does it mean for the EV and battery supply chain?

Prices for cobalt sulphate in January typically perform well as Chinese refiners purchase increased inventories to see them through the closures and logistics shutdowns tied to Chinese New Year.

In January 2020 average cobalt sulphate prices (EXW China), as assessed by Benchmark increased by 10.3% despite significant price decreases in the preceding months and shortly thereafter in March as the virus took hold.

The January effect – average change in cobalt sulphate prices in China around the month of January

In January 2019 the recorded increase was more muted but still significant considering the falling market, rising by 3.8%

Equally, closures in China for the new year towards the end of January and in early February may provide some respite for cobalt prices, allowing things to cool off whilst the industry takes stock and prepares for the remainder of 2021.

So perhaps it is too early to call the end to low pricing in cobalt and the return to a bull market.

Ultimately, rapidly increasing prices are bad for the cobalt industry in the longer term, with the mineral already having a negative reputation with the downstream industry for high price volatility and high cost, driving substitution.

It should also be noted that prices are coming from a relatively low base, with average cobalt metal prices in December assessed at $15.45/lb ($34,050/tonne) sitting below the long-term average, and so positive news like that of a further SRB purchase and rising demand should naturally see prices increase to a slightly higher range anyway.

Tight cobalt supply in 2021 the differentiator

The one thing that 2021 does have that the preceding two years did not have is tight cobalt supply, particularly for the battery feedstock of choice, cobalt hydroxide.

Cobalt stocks have been whittled down due to the strengthening, real demand from the lithium ion battery sector due to electric vehicle (EV) sales.

The most recent cobalt price spike, which came to a head in April 2018 and saw Benchmark’s average prices for cobalt metal reach $43.63/lb ($96,200/tonne), was primarily driven by bullish sentiment for cobalt due to excitement about the growing demand for the mineral from the EV sector.

Whilst the sentiment was real, true demand was not, as rising EV sales in China began to slow due to a decreasing subsidy regime and the rest of the world’s auto industry still gearing up for EV manufacturing.

With ample supply for cobalt in 2018 and 2019, due in part to expansions driven by high sentiment and higher prices, the market took a tumble with average prices for cobalt metal reaching a low of $12.85/lb ($28,300/tonne) in July 2019, as assessed by Benchmark.

But as EV sales reached record highs in late 2020, totalling nearly 400,000 units globally in November 2020 alone, this current price rise is backed by real demand, as the world’s governments get behind the green revolution with financial stimulus and policy frameworks favouring emissions free transport.

Not only is demand increasing, but the cobalt market is set to transition into undersupply imminently as demand begins to outstrip supply, due to a lack of investment in the upstream following nearly 3 years of low or falling prices.

Cobalt’s fall from grace

Benchmark forecasts the cobalt market will fall into marginal deficit by late 2021, with this growing from 2022 and beyond. This has come about due to a number of factors but primarily the rapid acceleration in demand following the virus recovery, particularly in the European and Chinese auto markets.

Further to this the delayed transition to high nickel, low cobalt cathodes has meant cobalt demand on a per unit basis has not fallen to the levels some in the supply chain expected, as automakers continue to wrestle with the technical challenges associated with high nickel cathode use.

Finally, the delay to new supply, for example the closure and subsequent delays to Chemaf’s Mutoshi operation in the DRC and Glencore’s Mutanda being placed on care and maintenance has taken a toll on hydroxide availability.

Does the January price action so far mean a reversal in fortunes for the cobalt market, with prices rallying back to 2018 highs? Almost certainly not – but the outlook for cobalt is as strong as it has been since the last price spike.

Whilst it is too early to say this is the start of sustained higher cobalt prices in 2021, better fundamentals and therefore better times for cobalt do appear to be on the horizon.