Source: Bloomberg
Cobalt is finally getting its due. Driven by anticipated strong growth in electric vehicle sales, the LME price has increased 35% year to date with the cobalt chemicals pricing showing similar strength.
Just as with lithium, the demand story around cobalt is real and this is what has supply chain participants worried. It’s well known that 65% of mined cobalt originates in the Democratic Republic of the Congo (DRC) - a fact that has kept many investors away. Many of the cobalt “pure plays” are years away from meaningful cash flow generation so any value creation will be based more on discoveries of economically mineable deposits rather than sales into a market voraciously hungry for material.
As junior miners have begun to position themselves with opportunities mainly in Canada and Australia, Glencore (GLEN:LON) has moved to consolidate its holdings in the DRC by purchasing 31% of Mutanda for $922M and an additional 10.25% of Katanga for $38M. So the company effectively owns 100% and 86% of two of the best copper/cobalt assets in the world.
GLEN dominated the cobalt mining market last year, producing 28k t in 2016. With China Molybdenum (3993: HKG) and BHR Partners assuming majority control of the Tenke copper/cobalt mine in the DRC, it would appear that both GLEN and the Chinese have a stranglehold on the upstream portion of the cobalt supply chain. With the China Molybdenum acquisition of the Kokkola cobalt refinery, this also puts a majority of the downstream cobalt supply chain in China’s hands – furthering my thesis of the country playing the “long game” to dominate next generation supply chains.
Source: Glencore Press Release
While consolidation is one theme to be mindful of, another concerns the overall supply demand balance. When I wrote last on cobalt in the fall of 2016, I forecast an average price of $18/lb by 2018. This was based on the aggressive plans of OEMs to electrify some or all of their fleets in the coming years.
My forecast was also hilariously wrong as cobalt sits closer to $20 per pound today.
With roughly two thirds of the battery cathode demand out to 2025 centered on nickel and cobalt-heavy chemistries (NCA and NMC), the main demand driver for cobalt is in plain view. Almost 50% of cobalt chemical demand goes into the rechargeable battery business today and this is forecast to increase. Given the apparent shortage in available cobalt, it appears that a new long-term average price for the material will settle in the $20/lb range.
Source: Avicenne Energy
Cathode components by weight:
Source: Interviews with Industry Experts
To be clear, you could easily see cobalt prices accelerate well above this level (and likely will), but $20/lb could be a new long-term floor, just as many predict that $10,000/t is the floor for LCE based on lithium mining economics.
At current demand growth rates, my modeling shows a 10,000 t deficit of cobalt chemicals in 2020 as a distinct possibility. For this to be rectified, several things must happen:
· New cobalt supply from the likes of GLEN, ENRC, Katanga (KAT:TSE), or Zhejiang Huayou Cobalt (603799:SHA) must materialize. That most of the near-term supply is in the DRC is a key risk.
· Recycling must become more pronounced. Battery recyclers have indicated that a $20/lb cobalt salts price make the economics appealing. Umicore recycled 7,000 t of lithium batteries last year - the equivalent of 35,000 EVs.
· Copper and nickel prices must remain firm. Both metals have recovered from their post-supercycle lows but a major pullback in the price of either metal could also constrict cobalt supply as roughly two thirds of global cobalt supply comes from copper with the other third coming from nickel mining.
As I’ve stated in the past with lithium, placing a probability on these events can help paint a clearer picture of the supply and demand dynamics of the cobalt market.
The threats to overall cobalt demand growth remain primarily with lithium ion battery technology. I have written a great deal in the past on this subject as technological advances have an uncanny way of solving problems around raw material availability and concurrent high prices. One company I continue to watch closely in this regard is Nano One Materials Corp (NNO:TSX).
Source: Bloomberg
As cobalt prices continue their ascent, you can expect to see more attention paid to the likes of NNO to transform lithium ion battery economics.
The takeaway here is that cobalt is intent on following lithium into mainstream popularity. This is a unique opportunity but is dependent on continued pricing strength. I see three ways to express a view here: early stage exploration, buying physical cobalt and stockpiling it, and disruptive battery technologies which could serve to moderate cobalt demand.
The window is open.
Chris Berry
President of House Mountain Partners LLC and Co-Editor of Disruptive Discoveries Journal
Chris Berry (@cberry1) is a well-known writer, speaker, and analyst. He focuses much of his time on Energy Metals those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence emanating from the Emerging World and believes it will have profound effects across the globe in the coming years. Active on the speaking circuit throughout the world and frequently quoted in the press, Chris spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his financial destiny.He is also a Senior Editor at Investor Intel. He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute. Please visit www.discoveryinvesting.com and www.house-mountain.com for more information and registration for free newsletter as well as his disclaimer.
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