FOCUS: China’s skepticism of Mutanda closure characteristic of short-term procurement strategy

Cobalt prices have risen by more than 25% since Glencore announced it would close its Mutanda mine and in doing so bring forward expectations of a shortfall in cobalt supply.

But with other projects ramping up or in the pipeline, stockpiles to be worked through, and a short-term approach to raw materials procurement, Chinese battery-related buyers are skeptical they will be affected by tightness in the near term.

Mutanda, in the Democratic Republic of Congo, is expected to produce about 25,000 tonnes of cobalt in 2019 before production is suspended at the end of the year. Glencore cited low cobalt prices as part of its decision to place the asset on care and maintenance for at least two years.

Fastmarkets’ benchmark price assessment for cobalt standard grade cobalt in-whs Rotterdam settled at $12.10-12.75 per lb on July 31, compared with highs of $43.70-44.45 per lb at the end of April 2018.

Large supply increases since 2017 were in part spurred by expectations of strong demand from the battery sector, and then, by the price rally that followed. Real consumption from the electric vehicle sector has not developed at the same pace, leaving the market in oversupply with prices reaching the near three-year lows recorded at the end of July.

While long-term cobalt demand looks healthy – Glencore noted earlier this month that it was not considering the sale of its African copper-cobalt assets – it had been expected that the cobalt surplus would not be absorbed until 2023-2024, according to Fastmarkets’ battery raw materials research team. The cobalt market is now likely to swing back into balance in 2021 given the looming closure at Mutanda, Fastmarkets analysts say.

Metal, salts and intermediates prices all quickly responded to the Mutanda closure news. The standard grade cobalt price rose to $15.50-16.75 per lb on August 16, up 28% since Glencore’s announcement

The news also triggered inquiries for cobalt hydroxide from buyers anticipating higher prices, wanting to lock in material before cobalt hydroxide payables and the underlying benchmark metal price climb further.

“I am willing to take units at 65% [against benchmark metal price], but suppliers are not really offering,” a consumer said.

Fastmarkets’ cobalt hydroxide payable indicator, min 30% Co, cif China, stands at 62-65% of the standard-grade cobalt price assessment (low end) as of August 15, up 5.8% from 59-61% on July 31.

‘Knee-jerk’ reaction
While cobalt prices have reacted to the news and traders have started to restock, consumers along China’s battery supply chain are skeptical of further pronounced moves, with the refreshed tightness still at least a year away.

“I don’t think 2020 is the issue: it’s what happens after that,” one distributor source told Fastmarkets.

The Chinese market had started to move higher at the end of July amid a recovery in buying for the fourth quarter and speculative interest.

“The Glencore news added fuel to the fire of metal having based out already; it has built momentum,” a trader said.

Sellers have been emboldened to hold out for still higher prices since the Mutanda announcement, and buyers have been working with low stocks levels, making purchases on a hand-to-mouth basis for much of the year, meaning they have so far accepted those offers.

Buyers expect immediate availability and cautious consumption will deter sellers from pushing too hard with their offers, citing ample stocks, the potential revival of artisanal mining (after the rainy season) and development of new mining projects that had been delayed due to low prices, should prices continue to increase.

“A lot of junior miners and new projects are likely to make up for the absence of Mutanda materials once the cobalt metal price rises to a profitable level; for instance, those Chinese-invested mines will definitely ramp up production,” a second consumer said. “There are raw materials elsewhere.”

Fastmarkets’ battery research team this week forecast a supply surplus of 14,000 tonnes in 2020, adjusted from a surplus at 16,000 tonnes previously.

Growing output from the likes of Glencore’s Katanga and ERG’s Metalkol Roan Tailings & Reclamation (RTR) project can well cover the market once Mutanda is absent, according to current expectations of demand, sources say. It is possible cobalt demand will reduce in the short term due, before electric vehicle (EV) adoption ramps up, due to a preference for nickel-rich batteries and cobalt-free batteries after China’s EV policy is phased out in 2020, the sources added.

“There’s a lot of material in the pipeline that can be used to cover the shortfall; the Katanga stockpile will cover part of [it] then RTR is ramping up, and Mutoshi, Chemaf and others are still producing,” a third consumer said.

Around 9,000-10,000 tonnes of material from Katanga will be produced but not sold this year, pending treatment for high uranium levels, Fastmarkets’ head of battery raw materials research William Adams noted.

“Mutanda is still producing until the end of this year,” a fourth consumer said. “And don’t forget there are a lot of stocks lying at Durban port, after all, China hasn’t been buying a lot this year.”

Chinese buyers’ preference for buying hydroxide on spot or short-term contracts this year – a function of uncertainty over the rate of battery demand and volatility around payables – also means that that material is not committed to supply agreements.

“Cobalt hydroxide prices need to be supported by the demand, but right now the demand is still gloomy,” a fifth consumer said. “Cobalt demand out of China in the short term [is of a concern] – greater use of lithium iron phosphate (LFP) and lithium manganese oxide (LMO) [batteries] is not good for cobalt,” he added.

By that token, Fastmarkets’ cobalt sulfate price stabilized in China last week at 45,000-50,000 yuan ($6,389-7,099) per tonne, (20.5% Co basis, exw China) on August 16, unchanged week on week amid downstream resistance to higher prices pending a change in downstream demand.

It is worth noting that a short-lived rally in international cobalt metal prices stalled in April this year, against a backdrop of cautious sentiment in China, where stocks were high and cobalt consumption from the battery sector remains modest.

Restocking ahead of late 2020 momentum
With the short-term approach to procurement, focus on ramping up supply that still leaves the cobalt market in a surplus next year, and relative flexibility around battery chemistries and associated cobalt demand, Chinese buyers are confident they won’t face a shortage in the near term.

But a deficit is on the cards longer term. According to Fastmarkets’ research analysts, cobalt demand from the EV sector will reach 75,000 tonnes in 2025, up from 9,500 tonnes in 2017.

In the fall-out from the Mutanda announcement, market participants outside China are looking at their longer-term strategy again.

“A lot of the downstream [buyers] are incorrectly skeptical,” the first trading source said. “The news just told me to get longer, sooner.”

Furthermore, some market participants told Fastmarkets the optimism, and recent price increases, is underpinned by the outlook for better demand from the battery sector in the fourth quarter, which had already been translated into rebounding cobalt metal prices and hydroxide payables even ahead of the announcement.

“We see a possible knee-jerk reaction up to $18 sometime in August and September, but then consolidation before the price picks up again in the second to fourth quarters in 2020,” Adams said, with sustainable price momentum materializing from late next year.

“We see the refined market remaining in a surplus next year, but the stock drawdown will be very constructive and that should support prices later next year and then meaningfully in 2021,” Adams added.

The benchmark standard grade cobalt price will average $16-16.50 per lb in the fourth quarter and first half of 2020, rising to $18-19 in the second half of next year, according to forecasts from Fastmarkets’ research team.

“One cut can make all the difference but stocks need to be drawn down first,” Adams said.

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