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Expect to pay 'premiums' in tighter cobalt spot market, analyst says

Cobalt supply has been increasingly locked into longer-term contracts, and cobalt buyers should expect to face higher prices on the spot market when the sector recovers, according to Caspar Rawles, a senior analyst with Benchmark Mineral Intelligence.

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Benchmark Mineral Intelligence senior analyst Caspar Rawles.
Source: Benchmark Mineral Intelligence

"If you don't fulfill your needs and you have to go to the spot market, what you'll find is that market is going to get tighter and tighter over the next 18 months, and you're going to pay the premiums there," Rawles said.

Some manufacturers, most notably automakers, have signed cobalt deals with major producers this year as they look to remove risk related to supply as well as environmental, social and governance factors. Cobalt, a key ingredient in many lithium-ion batteries that power electric vehicles, is a relatively small market in the mining sector, with most production coming from the Democratic Republic of Congo.

Recent deals include Bayerische Motoren Werke AG signing a €100 million, five-year cobalt contract with Moroccan miner Managem SA, citing ethical mineral extraction as a consideration. Tesla Inc. also secured up to 6,000 tonnes per year of cobalt from Glencore PLC, a major producer at its DRC operations.

The latest deals come amid a depressed cobalt market. Prices peaked in early 2018, hitting about US$90,000 per tonne, from under US$30,000/t in early 2016. They plummeted through 2018 and 2019, and cobalt recently traded under US$30,000/t. Prices for cobalt in chemical form, such as cobalt hydroxide, have followed a similar trend.

Given the timing of the deals, Rawles said automakers may be taking an opportunistic view of the market with cobalt prices well off the highs seen in 2018. Doing so could also help automakers avoid competition in the spot market if it heats up with increasing demand for cobalt from the battery sector, Rawles said.

Other cobalt buyers, such as in the aerospace industry, are less sensitive to cobalt prices. The metal is used in airplane alloys but makes up a tiny fraction of a total airplane's cost. Batteries can be far more cobalt intensive, leaving manufacturers more exposed to price swings.

"The price risk on the raw materials sits with them," Rawles said, referring to companies making or using cobalt-containing batteries in their products.

Analysts expect cobalt demand to shrink in 2020 in part driven by weak vehicle sales. HSBC Global Research analysts expect global cobalt demand to drop 10% year over year to 113,000 tonnes in 2020 but surge 21% in 2021 to about 138,000 tonnes and continue to climb through 2022 and 2023. By 2023, they project electric vehicles to account for 34% of cobalt demand, up from 24% in 2019, according to a July 22 note.

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Rawles also noted that 2020 demand for different forms of cobalt has bifurcated, reflecting the impact of COVID-19 on the aerospace and consumer electronic industries. The former sector typically buys cobalt in metal form, whereas the latter usually depends on cobalt hydroxide for batteries. Year-to-date, cobalt hydroxide prices have climbed 3.0% while cobalt metal prices have dropped 8.3%, according to a June pricing report by Benchmark Minerals.

"At the moment, demand for the metal is very low," Rawles said. "Industrial markets are suffering particularly badly because of the virus, especially aviation."

That is not the case in consumer electronics. "Demand for those has been pretty strong because people are now at home and want to spend more time on tablets and laptops," Rawles said. "Companies have also been moving people to work from home ... That's been a big driver."