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Cobalt prices seen rising sharply as deficit balloons: BMO

New York — Cobalt prices are likely to rise significantly in the next two years asthe industry struggles to meet rising demand from batteries used in electricvehicles, BMO Capital Markets said Monday.

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It sees the annual average cobalt price peaking at $40.50/lb ($89,290 mt)in 2019, from current levels of about $30/lb and does not rule out thepossibility of cobalt prices doubling from current levels in the timeframe. Sofar this year, 99.6% broken cathode cobalt -- the grade often used inchemicals and batteries -- has averaged $25.58/lb, according to Plattsassessments, having started the year at a midpoint of $14.75/lb.

But the investment bank put this year's cobalt rally down to continuedgrowth in smartphone sales.

"Smartphone batteries are still the main end use market for cobalt," itsaid.

After a weak first half of 2016, demand growth recovered in the secondhalf "and has continued through 2017."

BMO estimated that global cobalt mine supply is down 2.7% in 2017, with"weakness at Glencore operations [Katanga] and disputes at GTL's Big Hillprimary cobalt tailings operations."

These issues have reduced cobalt production in the Democratic Republic ofCongo by 5,000 mt cobalt contained.

BMO said that on December 30, 2016, China announced a revised "E-bussubsidy policy." This prioritized higher battery quality technologies,essentially penalizing LFP (lithium iron phosphate) and benefiting NMC (nickelmanganese cobalt) battery technology.

"Chinese battery manufacturers have scrambled to add cobalt-containingNMC capacity and also raw materials to fill this given expectations thatequivalent quality-driven subsidies will be put in place for car batteries,BMO said.

Up until then, cobalt had been the "perennial underperformer in metalsmarkets," it added. While other industrial metals benefited from quantitativeeasing-led reflation, starting in 2010, cobalt continued to fall in price, " atrend which persisted until 2013," BMO said.

Cobalt prices have now risen more than threefold since December 2015 tolevels last seen just before the global financial crisis, beginning inSeptember 2008.


"This makes cobalt the best performer of the commodities we cover overthe past year in terms of price gains, and at current spot market pricing, amarket worth $6.6bn per annum," BMO said.

It also said cobalt had risen back above the longer-terminflation-adjusted average of $22/lb.

"Cobalt has a history of spikes higher following a period ofunderperformance, which is mainly related to the structure of the supply side.Without a primary mine supply side to speak of, cobalt has less of an elasticsupply buffer than peers," the bank said.

Most of the world's cobalt production is as a byproduct to either nickelproduction or copper output, but not all copper mines produce cobalt asbyproduct.

The bank said the industry continues to be overly dependent on supplyfrom the Democratic Republic of Congo. Around half of the cobalt producedglobally is mined in the DRC and refined in China, BMO said.

It said the cobalt market has been in deficit since 2013, and projected adeficit of 4,300 mt in 2017, which is the largest the market has seen. It putthe size of refined cobalt supply in 2017 at 96,200 mt, up from 92,900 mt in2016. For 2018, BMO forecast supply of 105,700 mt and consumption of 109,200mt.

Consequently, even a large increase in refined output is only likely toreduce the deficit, with surpluses unlikely again before 2020-2022.


BMO raised its share price performance for global mining and commoditiesgroup Glencore, largely on the outlook for the price of cobalt for the nextfew years.

It said cobalt has "proven to be surprisingly positive for Glencore'searnings."

BMO gave Glencore's shares an "outperform rating" and a price target of400 pence/share. Glencore's shares rose 3 pence to 341.75 pence on its primarylisting on the London Stock Exchange on Monday.


Citi also made a price forecast for cobalt on Monday of $75,000/mt($34.01/lb) in 2018 and $80,000/mt in 2019 and 2020.

"Cobalt prices have more than doubled to $68,000/mt during 2017. Thesustained high price level is a reflection of a deficit market and lowinventory levels," wrote Citi metals analyst Max Layton in a report.

Cobalt is typically priced in $/lb on the physical market, but on theilliquid futures contract on the London Metal Exchange, it is priced in$/metric ton to comply with EU legislation on weights and measures.

--Anthony Poole,

--Edited by Richard Rubin,