Forward-looking auto companies shaping cobalt market

The structure of the cobalt market is evolving as a result of the arrival of companies from a new part of the supply chain looking for a convincing means to secure units on long-term contracts.

The automotive manufacturers that are pushing ahead with their plans to switch production to electric vehicles (EV) on larger and larger terms have turned their focus to the raw materials that are essential to this process, either directly or indirectly through the actions of their intermediaries.

Cobalt, where benchmark prices assessed by Metal Bulletin have more than trebled to a low of $29.30 per lb on October 13 from a low of $9.20 per lb on January 2, 2016, as a result of blows to metal supply and strong demand, is among them.

In focusing on how to secure the supply chains upon which multi-billion dollar investments depend, the auto manufacturers have discovered what has until now been a fact of life for the cobalt industry: that contracts are generally negotiated on an annual basis or even shorter terms.

And furthermore they have seen that the companies on which they rely for their cobalt and batteries do not have a lock on supply for any longer than a year, though of course they have highly professional and evolved networks to procure and process the cobalt that they need.

(There is a good reason for this of course: those intermediary suppliers themselves lack firm commitments or clarity from their customers in end-use markets about the volumes they will require beyond one year out.)

This realisation has been central to the auto companies’ attempts to come to grips with the market.

Cobalt refineries, chemical salts producers and battery manufacturers are well accustomed to obtaining large volumes of cobalt units on whatever the best market terms are.

Interest from the EV sector, where approaches to suppliers seem to vary from collegiate to peremptory, are making their presence felt as negotiations for 2018 contracts gather pace.

Where, in 2016 negotiations for 2017 units, only one auto company expressed significant interest, this year that number has multiplied.

Where previously companies looked to book cobalt units one calendar year at a time, the auto manufacturers and their intermediary suppliers are looking for far longer than that, though not always with conspicuous success, at least initially.

This strong interest in how best to secure units and assure supply over a number of years, combined with a fundamental picture in which supply has not kept pace with demand, is having an effect on the terms cobalt suppliers are offering.

In part, of course, this is because of the demand from the EV sector.

But it is also the result of other users of cobalt, from the non-battery chemicals sector to the super-alloys sector, waking up to the way in which EV buying of cobalt could affect availability of the units they themselves need.

In 2016, some suppliers said they shifted optionality on long-term contracts back towards themselves in some contracts.

Then, they made declarations on the minimum or maximum tonnage to be delivered subject to a mutual agreement rather than at the buyer’s option, or refused to give credit terms of 60 or 90 days as standard, and instead asked buyers to pay cash.

This year many expect the terms on long-term contracts to shift further towards sellers.

Some sellers are already claiming to have fixed long-term sales of the metal on the basis of a premium.

That is, they have agreed, or are discussing sales, on formulae under which between 20 and 50 cents might be added to the low side of the Metal Bulletin low-grade cobalt price assessment.

Some suppliers said they are looking to fix their sales based on the Metal Bulletin low-grade high, rather than the low-grade low price.

Other variations are also being discussed: formulae based on an average of the low-grade low and the low-grade high; or even the low-grade low and the high-grade low.

Until at least 2015 and even to 2016, discounts to the Metal Bulletin price were the means by which suppliers shifted units in a surplus market, so this discussion of premiums, or better-than-the-low-grade low, is significant.

It represents a return to the period before the financial crisis, when premiums were more prevalent than they have been subsequently.

To be sure, the degree to which this is the result of pure market supply and demand as opposed to inflated expectations of demand remains to be seen, though there are forecasts for a growing deficit of cobalt units next year.

Regardless of this, the cobalt processors and cobalt salts producers face a challenge as they battle for units on more expensive terms with the very entities that are powering the rise in demand which has improved the outlook for the whole industry.

But the effect of forecast demand from the automakers on both the fundamental outlook for cobalt and the terms on which supply is contracted should not obscure the challenges that they themselves face either.

After all, at least in part because of that demand, this is a market in which free optionality is no longer something that suppliers will be prepared to give up.

They face other hurdles too.

Automakers cannot forecast demand with conviction because their vehicle lines are in their infancy and they will be powered by technology whose chemical composition is changing.

In the latter area, their requirements will have to be met for appropriate returns by those same processors that face tougher terms for next year’s contracts.

And the prospect of selling fixed-price batteries or vehicles in a market where raw material prices are volatile and could move much higher must also give them cause for concern, unless they can fix very substantial fixed price deals – a move that suppliers’ shareholders might find hard to support against the current backdrop.

(Particularly as the fixed-price level of $20-per-kg over a number of years, with no take-or-pay clause, which one company was recently rumoured to have expressed interest in paying would have been out of the market at pretty much any time over recent years except during its recent nadir for a short period at the end of 2015.)

As mating season goes on, the key question that the cobalt market must ask is whether over the long term these new players will seek to dictate the terms and shape of the market, or whether they will simply seek to monitor them.

In either scenario, their approach to suppliers across the whole chain, their access to different parts of it and their market intelligence are likely to be crucial.

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