Cobalt sellers push for midpoint formula contracts as EV demand bites

Cobalt producers are citing market conditions and the incoming demand from vehicle electrification to move long-term, formula contract prices off the low end of published ranges, a shift from how the market was priced previously.

Contracts for metal and cobalt hydroxide were typically settled from the monthly average of the low end of the spot market, often with a discount. For supply in 2022, sellers are looking to push sales to price midpoints

Given that there are many companies in the market new to buying cobalt units, the sell side has seen an opportunity to create a new normal, according to market sources.

Projects expanding

"Sellers are now offering the midrange plus a premium for briquettes," an Asian consumer said. "Given the interest from automotive, they are under no pressure to sell."

"I don't think other shapes can be sold at that level. I wouldn't buy metal units at the midpoint plus a premium," the Asian consumer said. "If the sellers think the Chinese will buy at these prices, they are wrong. At one point, the buyers will just tell them to get lost. Cobalt briquettes have been limited [in] supply for a while. It is easier to buy cobalt hydroxide. Three projects are all expanding."

The Pumpi mine in the Democratic Republic of Congo is being brought on stream by Wanbao and has a capacity of 5,000 mt of cobalt contained per year, roughly 16,500 mt of cobalt hydroxide.

Glencore's Mutanda asset, also in the DRC, has come back online, and while the target figure is under wraps, Glencore has said it will be gradually bringing the mine back to the market over several years.

Already in 2021, production from January-September was up 8%, or 1,800 mt, year on year, to 23,400 mt, according to Glencore's latest results.

Consumers will also be pleased to see more cobalt hydroxide entering China, with 27,430 mt of cobalt hydroxide being imported in September, according to China customs data. This was up from 21,645 mt the previous month.

China Molybdenum's Tenke Fungurume mine in DRC is being expanded by an additional 17,000 mt of cobalt by 2023. This adds to the existing 15,400 mt produced in 2020.

Negotiations

A hydroxide consumer said the bulk of business was concluded and they had not signed contracts basis the midpoint but conceded that negotiations were different to previous years given the market was more balanced.

"I think the hydroxide market is larger in terms of volumes and there are less producers, and they can create a market tightness by telling buyers they are not offering units," the hydroxide consumer said.

This has been the case for sustained periods over the last six months, with sellers having little spot units to offer on.

The source added that most of the contacts had been concluded, which was earlier than last year. Many contracts dragged on through to December and January because visibility was low because of the coronavirus pandemic.

Sellers reported holding firm in the face of resistance among buyers.

"When we issued our final offer, the hydroxide consumers were the ones who crossed the aisle, although they were not happy about it," a hydroxide seller said.

"Depending on who you talk to, it is not impossible there are discounts, but they are discounts on the mid, not the low." the hydroxide seller added.

A trader had this take on the situation: "For cobalt hydroxide, I have seen business concluded basis the midpoint plus a premium. I haven't seen directly, but secondhand there is metal business basis the midpoint.

"That is an eyebrow raiser, particularly as metal is traditionally priced on the low, minus discount, whereas the hydroxide long terms are less mature and therefore the pricing mechanisms are less embedded."

Because the available hedging mechanisms use the midpoint of a monthly average assessed price, it is possible that consumers would be looking to align their contracts with the futures market, the trader said.

However, that would be counterintuitive to pay more in the physical market in order to create a better aligned hedge.

Moving on spot

"We know of at least 100 mt a month of long-term contracts that are going on the spot market next year because they can't accept such a small discount and will take their chances on prompt metal," a second trader said.

The net effect could be twofold. There could be more availability, which could depress prices, although sellers remain adamant they are bullish and that increased spot sales would help push prices higher. "If you want 5-10 mt of cobalt per month, why would you pay a premium on the spot price for a contract?" the first trader asked.

The metal market is generally seen as less tight by market participants. Briquettes, commonly used by the chemical market as an alternative feedstock to hydroxide, less so.

But, given there are more numerous sellers of metal, it has given metal buyers more opportunities to negotiate.

"From what I know, most decent-size metal consumers still got a discount," a metal consumer said. "I know some sellers were being firm not trying to offer any discount."

"It is not correct to say there was no discount on contracts, as we got some," the consumer source added.

Metal prices have been moving higher since September, reaching a fresh multiyear high lately.

Platts assessed 99.8% Co metal at $27.90-$28.70/lb in-warehouse Europe Nov. 5. This is the highest price since December 2018.

Higher prices, higher risk

Consumers naturally are averse to paying more, but high prices may concern some producers, who believe that this would accelerate engineering cobalt units out of the battery pack.

Some automotive manufacturers are already producing nickel-cobalt-manganese (NCM) 9/0.5/0.5 cathodes, whereas NCM 6/2/2 and NCM 8/1/1 had been the preferred chemistry.

Other sellers remain confident that cobalt is needed for batteries over the next 10-plus years because of the thermal stability it brings to the battery pack.

The outlook for the lithium iron phosphate battery has brightened in the last 12 months, as technologies have improved energy density, allowing LFP batteries to be used for longer drive ranges between charges.

"For market fundamentals and the trend for LFP market share, then there are some concerns for cobalt consumption over 2022. It will be interesting to see how the market develops," the hydroxide consumer said.