Commodities 2023: Term negotiations for 2023 cobalt challenging as China demand slumps, supplies surge

Term negotiations for 2023 cobalt took a challenging turn for sellers following the severe decline in demand from China, which pressured prices and left the market well supplied ahead of next year's expected surplus.

This, after 2022 was set to have been a boom year for the metal as it was expected to ride on the back of a post-pandemic demand recovery and gain traction from the electric vehicle sector.

Sulfate plunges on sluggish consumer electronics

Chinese cobalt sulfate prices started the year strong, hitting a multi-year high of Yuan 120,000/mt as logistical bottlenecks in Durban tightened the inflow of cobalt hydroxide, pushing production costs higher.

However, the market spiraled into a downturn from end-March all the way to July as sweeping pandemic control measures were implemented across China to control the spread of COVID-19, impacting logistics and subsequently the economy.

While the Chinese EV sector has since rebounded, the consumer electronics sector, making up 30% of global cobalt demand, struggled against weaker consumer spending.

Sources reported of high inventories across the supply chain and battery makers cutting production, putting further pressure on prices.

"The scrapping of EV subsidies in China next year is definitely impacting consumers' appetite for raw materials," a Chinese precursor maker said.

Platts assessed battery-grade 20.5% Co cobalt sulfate at Yuan 54,000/mt DDP China Nov. 30, down 55% from its peak of Yuan 120,000/mt on March 9, S&P Global Commodity Insights data showed.

Metal supply tight but outlook uncertain

The tight market a year ago allowed sellers to include premiums into term contracts and move buyers on to the mid-point of the spot assessment range, up from the traditional low end.

With Europe suffering from high energy prices and inflation, North America has been more resistant to these headwinds; leading to a two-tier spot market where metal sold in the US for alloying has commanded a premium over the European market.

Alloy grade sellers reported signing term contracts prior to LME Week over Oct. 24-28 at discounts "not differing too much" from 2021, which was attributed to no new supply and more units designated to the EV market via multi-year contracts.

Others were more bearish as spot metal prices continued to fall.

"We still signed a few contracts, but for small quantity in North America [to the alloy market]," one miner said. "Last year, we were talking about flat or premiums, now we are giving small discounts."

Reports of China stockpiling cobalt metal on Nov. 17 failed to lift the market, with sources describing the volumes as "underwhelming".

Platts assessed cobalt metal at $21.25-$23.85/lb IW Rotterdam in the week to Nov. 30, down from $25.10-$26.50/lb a month ago, S&P Global data showed.

Hydroxide free-falls though supply risks remain

With no green shoots of recovery in sight, supply-side disruptions came into focus as the only supportive factor.

China Molybdenum's copper-cobalt mine, Tenke Fungurume, has been subjected to an export ban since July. There is no firm information as to when the ban will be lifted, but sources said there were stocks waiting to be exported from the mine site.

Despite this, sources said an oversupplied market caused hydroxide prices to tumble 64.5% from its peak of $34.10/lb on April 27. Platts assessed 30% Co cobalt hydroxide at $12.10/lb CIF China Nov. 30, S&P Global data showed.

Sources said current pricing mechanisms, payables tagged to metal, lifted cobalt hydroxide to trade at a premium over sulfate, causing refiners to operate at a loss through most of 2022.

This has led to buyers requesting steep discounts or fixed pricing, with some saying that current mechanisms were "unsustainable" for the battery industry.

Contract negotiations stall on diverging metal, salt dynamics

With divergent opinions surrounding the metal and salt markets, sources said 2023 contract negotiations have been progressing slowly.

Apart from mine ramp-ups in the DRC, growing volumes of mixed hydroxide precipitate from Indonesia were expected to bring as much as 20,000 mt of metal into the market next year.

This, coupled with declining prices over the last six months has made consumers skittish about signing contracts.

In China, some have proposed fixed pricing or tagging hydroxide to sulfate prices, which they feel is more reflective of market fundamentals.

"Metal prices are increasingly disconnected from the salts markets, and while buyers have been delaying shipments to cope with increased raw material costs, it doesn't solve the root problem," a Chinese refiner said.

"Big refiners won't even discuss term contracts. There is so much uncertainty around the payable because international prices are not reflecting the Chinese market," the miner said.

Like metal, some believe that many could turn to the spot market with consumers reluctant to lock down contracts.

"We are not willing to compete against some aggressive discounts [in the contract market] so the worst case scenario is we are more exposed to the spot market," a second miner said.

What's next for 2023?

The cobalt market is looking to China as key to recovery given its role as the world's biggest cobalt consumer. However, uncertainty surrounding consumer electronics and the removal of EV subsidies, which could temper EV sales growth, suggests that the demand outlook is dim.

The supply-demand fundamentals for the metal may ease as customers with flexibility move to cheaper hydroxide, though several metal producers reported being well sold.

As cobalt prices continue to fall, sources said it will be difficult to see a turning point. However, many see this as an opportunity for the market to reevaluate pricing methods that more closely reflect fundamentals -- not unlike the decoupling of nickel sulfate from LME nickel -- which paves a more sustainable way forward for the industry.