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Tighter supply pushing up Chinese cobalt and nickel producers, commodity prices

Amid a tighter supply picture, shares of cobalt and nickel producers in China have rallied in recent months, with analysts expecting that a shortage in the supply of both metals will continue to prop up both the price of such stocks as well as the underlying commodities.

In September, shares of a string of cobalt and nickel suppliers were in demand on the Chinese stock markets amid investors' concerns over the recent adjustments in the supply side. Shares of Shanghai-listed Nanjing Hanrui Cobalt Co.Ltd. reached their five-month high and have gained 26% since Aug. 1. On the other hand, Chengtun Mining Group Co. Ltd., which owns a 35.75% stake in a nickel project in Indonesia, touched its highest since April 29 at 5.98 yuan apiece on Sept. 3.

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On the commodity market, nickel prices surged. The most traded nickel contract on the Shanghai Futures Exchange in September reached 149,190 yuan per tonne in September, compared with 136,960 yuan/t at the start of the month. The most traded contract of August closed at 130,690 yuan/t, an increase of 16% from the start of the month.

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Following weeks of speculation on the commodity after market rumors, Indonesia, the world's largest nickel miner, said it would ban nickel ore exports from 2020 as it seeks to process more of its resources at home. Earlier in August, mining giant Glencore PLC announced it would shut down its Mutanda cobalt mine in Congo due to falling prices and increasing expenses.

Analysts now expect that a shortage in both resources will happen in the next two years in China, the world's largest electric vehicle market and stainless steel consumer.

Xu Ruoxu, a commodity analyst with brokerage firm Shenwan Hongyuan Group Co. Ltd., said in an interview that the reason behind the price moves in stocks and commodities is that the existing situation of supply, demand and stockpile of the two commodities in China are providing support.

Xu said the cobalt industry might not be far away from a short-term deficit, which will lead to a further price increase for the metal. Xu expects domestic electrolytic cobalt prices to increase by 40% from the current level to 400,000 yuan/t in the next two years. As of Sept. 30, electrolytic cobalt was quoted at 285,000 yuan/t to 295,000 yuan/t at the Shanghai Metals Market, a Chinese information provider.

Xu believes "the worst time" of the demand side has passed, as the market expects instant demand growth coming from the fifth-generation mobile phone market while demand from the electric vehicle market remains stable. "Consumers might consider replacing their existing phones after the commercialization of 5G mobile phones. It will stimulate the demand for cobalt when the 5G networks take off in 2020 in China," he added.

Cobalt is used on batteries of phones that support 5G. Some industry experts expect an increase of 20% in the amount of cobalt required for each 5G mobile phone when consumers want to upgrade their phones, according to a Fastmarkets report.

In a Sept. 23 note, brokerage firm Macquarie sees a full-year deficit next year when Glencore's Mutanda closes, and the balance of refined cobalt, which will be oversupplied this year, will shift toward undersupply by 2022, but with weaker demand.

Speaking of nickel, Yang Huan, an analyst with data provider Shanghai Metal Exchange Market, said the ban of nickel ore exports is expected to lead to a shortage of 115,000 tonnes of nickel supply in China, and it might not be easy for the country to find other sources of alternatives to fill the gap.

The Indonesian ban is expected to reduce nickel exports to China by about 230,000 tonnes, according to Yang's estimates. "We assume the Philippines, which is the most obvious source of alternative supply, can only supply China with 90,000 tonnes of nickel ore every year, even though they plan to increase their production next year," Yang said. "Countries like New Caledonia and the Republic of Guatemala can provide 25,000 tonnes of supply. So China will still be facing a shortage of 115,000 tonnes of nickel every year."

On the other hand, stainless steel producers in China are trying to import more raw materials. According to Chinese customs data, China's nickel ore imports from Indonesia rose 26.5% year over year in August.

Macquarie analysts said in the report that a recovery in the stainless market from the second half of 2020 will cause a deficit in the nickel market from 2021 to 2024. Prices of nickel will continue to rise, reaching an average of US$19,500/t by 2024.

As of Oct. 7, US$1 was equivalent to 7.15 Chinese yuan.