11 Jul 2023 | 04:51 UTC

TRADE REVIEW: Cobalt braces for subdued Q3 amid oversupply, uncertain battery demand

Highlights

More supply from Tenke Fungurume mine a downside risk

Mixed views in Europe on reports of stockpiling by China

Trajectory of electric vehicle sales in H2 key for pricing cues

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This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper , alumina, cobalt, lithium , and steel and scrap . We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Cobalt metal and sulfate prices may see slight support in the early part of the July-September quarter on potential restocking demand from China, but this is unlikely to be sustained amid overarching fundamentals of oversupply and mixed indications on higher demand emerging from an increase in battery sales, market sources said.

Cobalt prices had bottomed out in Q2 amid a pick-up in buying interest in the downstream plug-in electric vehicles (PEV) and consumer electronics sectors.

Market participants said they expect the bulk of the demand in the year's second half to come from PEV sales. Its impact for cobalt remained unclear as sources said the market was slowly moving away from batteries with cobalt chemistries. An expectation of higher supply from Tenke Fungurume mine (TFM) in the Democratic Republic of Congo is also a significant downside risk.

Metal prices rebound

Cobalt metal prices may improve slightly in July after news emerged of China's National Food and Strategic Reserves Administration planning to buy about 5,600 mt of electrolytic cobalt from domestic refiners and traders in the week to July 7.

However, sources said that this may only lead to a short-term spike and was unlikely to carry prices throughout Q3. Reaction to the reported stockpiling was mixed in Europe, with some saying it could tighten supply in China while others said the impact will be minimal amid a lack of demand for Chinese-origin metal in Europe.

Platts had assessed European cobalt metal prices at a near-three-year low of $13.50-$14.30/lb in-warehouse Rotterdam on May 22 amid weak demand and general oversupply, showed data from S&P Global Commodity Insights.

In late May to early June, there was general market consensus that prices would bottom out at $13-$14/lb IW Rotterdam. This drove buyers from the US and Europe to lock in the last of the spot volumes available at these prices.

Part of the pressure on prices had come after TFM operators -- China's CMOC Group (80% stake) and state-owned Gécamines (20%) -- came to an agreement on royalty payments, lifting a ban on exports from the mine late April. Sources said it remains unclear how quickly stockpiled production at the mine would reach the market amid logistics bottlenecks between DRC and the main Southern African ports.

Platts assessed cobalt metal at a stronger $15-$18.50/lb IW Rotterdam June 30, showed S&P Global data, amid higher demand. Sources also reported slightly stronger demand from aerospace and medical end-user sectors in July.

Chemical grade prices also gained after some consumers failed to source adequate volumes of alloy grades.

Midstream, cobalt hydroxide was pressured by ample availability and slow battery demand in Asia at the start of Q2 and prices bottomed out at $7/lb May 19, the lowest since 2020.

Prices for the intermediate rebounded in late May as sellers raised or held on to firm offers despite weak demand. Prices continued to rise in June, with Platts assessing 30% Co cobalt hydroxide at $8.30/lb CIF China June 30, still down 7.8% from early Q2 and 58.5% lower on the year, showed S&P Global data.

Some consumer sources said they saw supply of cobalt hydroxide from TFM returning in August, adding that it may have a limited impact on prices because the market is already oversupplied and Q3 is also traditionally when spot purchases slow amid plant maintenances.

"It won't be a V-shaped recovery. It will drift for some time and trade sideways, there is no imminent recovery because demand and inventory continue to weigh on pricing," a cobalt seller said.

Cobalt sulfate improves; battery demand uncertain

Battery demand from the consumer electronics segment in China had improved mid-Q2, supporting cobalt sulfate prices in May and improving liquidity for various cobalt chemistries throughout the quarter. PEV sales in China also rose 12.6% on the month in May, showed data from China Association of Automobile Manufacturers.

Cobalt sulfate prices were also supported by higher offers from sellers on higher production costs amid strong cobalt hydroxide prices.

Platts assessed battery-grade 20.5% Co cobalt sulfate at Yuan 41,100/mt DDP China June 30, up 8.2% from the start of Q2 but 46.9% lower on the year, S&P Global data showed.

Close to 54% of chemical grade cobalt demand in 2023 is expected to come from PEV batteries, with electronic batteries accounting for approximately 26%, according to S&P Global. The bulk of the demand for cobalt is expected to come from downstream PEV sales in Q3 and the entire second half of the year.

China's value-added tax exemption for new energy vehicles has been extended to end-2027, which is expected to further support PEV sales in the near term. However, the Chinese market is dominated by lithium iron phosphate batteries which had a 66.9% share of the country's total battery market output in May, followed by nickel-rich nickel manganese cobalt batteries with 33.1%.

This meant there were questions over actual demand for batteries containing cobalt, especially within domestic shores, and if the trend persists it may further limit the growth of cobalt prices in H2.

"Cobalt prices are expected to be rangebound until clearer indications of actual PEV sales support emerge in the second half," according to Alice Yu, senior analyst at S&P Global Metals and Mining Research.