In seasonally-slow summer trading, such activity has contributed to steep falls in physical prices in the international market in recent weeks.

Metal Bulletin assessed low-grade and high-grade cobalt prices at $35.40-37.70 per lb, in-warehouse, on Wednesday July 25. Low-grade prices were down 1.6% compared with the previous assessment on July 20, while high-grade prices were down 2.1%.

Sellers playing the arbitrage are offering aggressively to secure scant summer spot business in Europe, safe in the knowledge that even cheaper units are arriving in September, in time for the anticipated seasonal resumption in spot demand.

“The Asia-Europe arbitrage opportunity is a no brainer, provided you have units on the ground,” a source at a trading company said.

Summer spot inquiries in the international market still amount to little by way of volume, although a slight uptick in inquiries over the past 10 days has tested the market, with the pace of declines outside Europe ramping up.

“It’s the last bit of activity before the August holidays,” a second trader said.

The cheapest sales reported to Metal Bulletin on July 25 were in the low to mid $35s with competition from other sellers’ offers at $36 and below. By comparison, forward business, for September arrival in Europe, was booked at $34 per lb earlier this week.

Price gap with China opens up
The arbitrage window between the Chinese market and the rest of the world opened in earnest in May.

The benchmark low of the Metal Bulletin low-grade cobalt price is down 18.6% since May 2, when prices turned after an uninterrupted seven-month rally.

But domestic prices for cobalt metal in China have staged greater declines, down 25.1% over the same period. Metal Bulletin’s price assessment for Chinese cobalt metal stands at 510,000-550,000 yuan ($75,245-81,147) per tonne, delivered, as of July 25, down 0.5% from the previous assessment. 

Metal Bulletin China cobalt vs low-grade cobalt prices

Taking the low-end of the price assessment for cobalt metal in China, less VAT at 16%, a theoretical arbitrage of $6.28 per lb opened up between the Chinese and international prices on May 4, according to Metal Bulletin data.

That came after the end of the consistent rally in benchmark cobalt prices since October last year, triggering a sharp psychological shift in sentiment in China.

But cheap selling from China did not commence in earnest until June, when Chinese sellers were faced with tight credit lines, competition for business with other local brands in the domestic market, and the need to generate cash.

That arbitrage reached its widest on July 6, when cobalt prices in China, less VAT, were $8.21 per lb cheaper than the in-warehouse cobalt benchmark, Metal Bulletin data shows.

Theoretical cobalt arbitrage

The difference in prices in and outside of China has created both a platform for Chinese sellers to generate much needed cash flow from sales to the international market, and the opportunity for traders to lock in post-summer units at what are expected to prove competitive prices.

Chinese sellers have accepted aggressive bids to shift units, free up cash, and still secure a premium relative to prevailing domestic market prices. A sale at $34 per lb earlier this week to Europe compares with domestic prices below $30 per lb (with VAT of 16% removed), using Wednesday's exchange rate.

In some cases, sellers are shifting units at a loss, but are weighing that up against their requirement for cash, and potential greater losses should prices take more time to bottom out.

“It makes sense. Material is below cost in some cases but it’s very tempting to liquidate volumes where you can,” a distributor said.

Tight supplies should prevail
After July 25’s pricing, that theoretical arbitrage window has narrowed to $6.08 per lb, according to Metal Bulletin calculations.

There are other variables which will affect the appeal of Chinese exports, but availability of cheap units from China could in theory continue to weigh on international prices.

“As long as the Chinese are offering cheap it’s going to be difficult for the international market to pick up,” the second trader said.

Purchases from China at this point also do not come risk-free.

“It’s not a sure thing; you’re still taking a punt – what happens if the Chinese market continues to go down?” a producer source said.

Cobalt prices have been relatively stable in China over the past two weeks but could still face pressure from invisible stocks and lackluster demand.

On the other hand, some market participants spoken to by Metal Bulletin still see no reason to sell at such cheap numbers in Europe, even given the current arbitrage opportunities.

“The fundamentals are still healthy and we haven’t seen people reducing their offtakes over the summer, which they often would,” the producer said.

Additional spot sales were reported in the mid to high $37s midweek, accounting for the current wide price range reported by Metal Bulletin.

Higher numbers can still be achieved, especially where customers have tight specification, shape or brand requirements, leaving no need to “chase” the market down, sources said.

Even so, the emergence of trader buying is a sign of some confidence that prices will recover after the summer.

“Ultimately I’m still puzzled [by the cheap numbers],” the producer source added. “If [people are] taking a punt, arguably that’s a positive sign, and the signs are more positive now than they were a few weeks ago.”