Cobalt deficit on the horizon

Cobalt prices have nearly doubled in the first quarter of the year, with demand for its use in rechargeable batteries and the electric-vehicle market, in particular, expected to take off. The Northern Miner spoke about the dynamics of the cobalt market with Edward Spencer, a senior consultant and head cobalt market analyst at the CRU Group in London. Spencer joined CRU in 2015 as a senior consultant to CRU’s nickel, stainless steel and special alloys group, and has worked on outlooks for molybdenum, nickel and ferrochrome. He has a PhD in economic geology from Imperial College London, where he specialized in the “decoupled mineralization” of base metals.

The Northern Miner: Where have cobalt prices ranged over the last year or so?

Edward Spencer: The price of 99.8% cobalt metal started at US$10.25 per lb. in January 2016 and ended the year at US$14.15 per pound. The prices have really ramped up in the first quarter of 2017, however, increasing from US$14.15 per lb. at the start of January, to US$27.75 per lb. at the end of March — nearly doubling over the three-month period.

Last year, the annual average price for 99.8% minimum cobalt metal came in at US$12.10 per pound. If you look at that on an annual average basis, the last time it was that low was in 2003, and, in real terms, 2002 was even lower. So we are seeing 14-year lows on the cobalt price on an average annual basis in 2016.

Part of the reason why we were so bullish last year was because we were scraping along the bottom, and yet there is all this growing demand for things like electric vehicles. We were always anticipating a big price response in 2017. There were some gains towards the end of 2016: the price went up US$2 in the second half  to US$14.15 per lb. at year-end. But this was only the beginning of the surge that we have seen in 2017.

We’ve gone up by over 100% on last year’s annual average. For 99.3% cobalt metal, the price is US$25 to US$26 per lb., whereas the high-grade cobalt (99.8% minimum) is just over US$27 per pound. But offers for high grade come in at just above US$28 per pound. The lower-grade metal type is 99.3%. Those are the two broadly stated metals — 99.3% and 99.8%.

TNM: A few years back there was a rush into rare earth metals, but the fundamentals for cobalt seem a lot different.

ES: China had a whole strategic position for rare earths supply. They were dominating rare earth production, with limited supply coming from elsewhere in the world.

In a similar fashion, China absolutely dominates cobalt chemicals production and in 2017, could produce 80% of the world’s cobalt salts — including cobalt sulphate and cobalt oxide, which are used in lithium ion batteries. China is in a position to produce these chemicals, and most of the material is refined from hydroxide and concentrates imported from the DRC. The DRC is responsible for 60% of the world’s mined cobalt production, so there are big questions about supply risk. If we see disruption to the DRC-China supply flow, we could see prices jump even higher. Demand for electric vehicles growing out of a small base is going to put pressure on cobalt supply.

“Over 90% of the world’s cobalt is mined as a by-product of nickel and copper operations … There is only one primary cobalt mine in the world and that’s in Morocco.”
Edward Spencer
CRU Group

TNM: Where do you see cobalt demand moving for electric vehicles?

ES: Cobalt demand for electric vehicles is going to grow 25% per year for the next five years, and while that isn’t the biggest end-demand, it drags up demand for cobalt. Demand for most other metals (such as nickel and copper) is only growing at 2–3% a year, whereas cobalt demand is growing at 7%. This puts pressure on cobalt supply, with over 90% of the world’s cobalt mined as a by-product of nickel and copper operations. If you have nickel and copper demand growing at a couple percent per year and demand growth for the by-product, cobalt, growing at 7%, you get a tightening of by-product supply.

TNM: Are there any primary cobalt mines?

ES: There is only one primary cobalt mine in the world, and that’s in Morocco. The mine is called Bou-Azzer and is owned by CTT or Managem — partly owned by Morocco’s royal family. It produces cobalt and arsenic. You also have primary material coming from artisanal miners in the DRC. The rest is by-product.

TNM: Can you discuss cobalt demand?

ES: The cobalt market is 100,000 tonnes per year. If you have demand growing at 7% per year, it means that five years down the road you’ll need to find 40,000 tonnes of cobalt. We’re looking at — in five years — needing another 40,000 tonnes of cobalt to meet growing demand from the lithium-ion battery industry. Eurasian Resources’ RTR project and Glencore’s restarting of Katanga could provide 40,000 tonnes of contained cobalt to the market once in full capacity.

TNM: Apart from the battery markets, where else is cobalt used?

ES: Outside lithium ion batteries, cobalt chemicals are used in things like pigments, dyes, catalysts and ceramics, which consume quite a lot, but in terms of the main growth areas, the next biggest after lithium ion batteries are airplane turbines. All aircraft engines will need super-alloys with a high content of cobalt in their hot sections. That’s the next biggest sector. You’ve also got cemented carbides, which are used in metal cutting, automotive production and a number of other applications, where having hardened tools are key.

We model 50 end-uses for cobalt and out of these, we forecast pretty healthy growth in about 46. There are only four uses that appear to be contracting, such as gas-to-liquid catalysts and NiCd batteries. Across the board there is strong demand growth.

TNM: Are there any big cobalt projects coming online in the near future?

ES: If you look at the market balance going forward, we’re waiting for big projects like Eurasian Resources’ RTR project and Glencore’s Katanga to come online in the DRC — that probably will be in 2019. Meanwhile, we have the ramp-up of Tesla’s Gigafactory and a series of other battery factories coming online in 2018–2019, so the market will be squeezed for the next three years, which should support prices at current levels.

TNM: But they could move higher.

ES: They could go higher if there’s political instability in the DRC for example, or energy infrastructure problems in the DRC. Then we could see a huge shock in supply going to one of those peaks — around US$50 per tonne — but at this point we think indications from consumers and suppliers suggest that prices can be supported at US$25 to US$30 per pound.

Eurasian’s RTR project will reprocess tailings in the Kolwezi areas in the DRC to create cobalt hydroxide, which can be sent to China for refinement into battery salts. The project has a high cobalt-to-copper ratio, which gets over the problem of creating lots of unneeded copper to bolster cobalt output. The rocks are already broken up, making the ramp up fairly rapid. Glencore is the biggest producer.

TNM: Where are most of the other mines that produce cobalt as a by-product?

ES: There are 60 cobalt mines in operation. There are quite a few in Australia. There are laterite deposits in Indonesia, the Philippines, New Caledonia and Papua New Guinea. You have by-product cobalt coming from platinum mines in South Africa and you’ve got quite a few big sulphide nickel-cobalt mines in Canada and Russia. They are all over the place, but most are coming out of the DRC.

TNM: Which are the ones in Canada?

ES: Some cobalt is coming from the nickel operations of companies like Vale and Glencore, such as Voisey’s Bay, Raglan and Thompson. They are all producing lots of cobalt. They’d struggle to produce more cobalt, however, because of the problem of subdued nickel prices. Ramping up nickel production so that you can produce more of your cobalt metal isn’t a possibility.

TNM: How big do you think the cobalt deficit will get in the next few years?

ES: The market could move into a 5,000-tonne deficit in 2017 — having been in a smaller deficit in 2016 — and the pricing reflects that we’re moving into a global deficit. There are global stocks that are moving down, and that drawdown will make the market more prone to price volatility going forward. There are precious few projects that are in advanced stages of development, and that’s because of the falling investment cycle in new nickel and copper projects. Because cobalt is all by-product supply, it’s hard to get projects up and running regardless of the cobalt price, so you  have to find those rare deposits that have cobalt, and there are precious few of those anywhere near an advanced stage at the moment, so it’s all pointing to more of a squeeze going forward.

With prices having done what they’ve done, we’ll see a bit of a response in global supply, but because there are very few projects being developed, supply is going to struggle to keep up with demand growth.