FOCUS: Cobalt hydroxide payables trend lower in June, despite turn in metal price

Cobalt hydroxide payables came under continued pressure in June, hitting new lows for 2019, even as the underlying benchmark price for cobalt metal surrendered the gains made over April and May.

The metal and intermediates markets have continued to move independently of one another amid a surplus and greater competition for sales of the latter, and weaker demand from the Chinese battery sector.

“Prices are down but it’s not stimulating demand; as far as I know there’s nobody stockpiling and putting large volumes away,” one trading source told Fastmarkets.

Fastmarkets’ standard-grade cobalt price averaged $14.23-14.86 per lb, in-warehouse, in June, down 11.4% from the previous month. 

Cobalt hydroxide payables – the percentage of the benchmark metal price negotiated between suppliers and buyers for the sale of intermediates – ended June at 60-61% of the standard-grade low in June, down from highs of 67-69% the previous month.

In effect, in cases where deals were agreed on the basis of June’s average metal price, hydroxide prices fell to about $8.58 per lb in June, from $10.45 per lb in May, according to Fastmarkets’ cobalt hydroxide index, a decline of 18% month on month.

In theory, when metal prices are falling, suppliers will try to negotiate with buyers to achieve higher payables to maintain their margins.

That was the case between March and May when payables rose from lows of 64% to highs of 69%. Effective hydroxide prices were relatively stable over that time, at $9.81, $10.40 and $10.45 per lb in March, April and May respectively, according to Fastmarkets’ index, again on the basis of a “current month” quotation period.

But hydroxide payables and prices came under greater pressure in June, now at their lowest since the beginning of the year, while metal is still trading slightly above the low set at the end of March, according to latest Fastmarkets data.

The weakness in hydroxide is again the result of oversupply that has beset the intermediates market and has forced it to move out of sync or in advance of the metal market at various points over the past 18 months.

In addition, buyers are attempting to use the growing competition in the cobalt hydroxide market to their advantage, especially as their own demand has becoming increasingly fragile in a transitioning subsidy environment.

Chinese electric vehicle manufacturers are transitioning production to benefit from shifting Chinese EV subsidies for 2019 that favor higher-density, longer range batteries.

The metal market, in contrast, is seeing weaker demand over the summer period, and faces the same pressure from stock uncommitted to long-term contracts as it did earlier in the year. But part of the metal overhang is tied up in traders’ hands and certain shapes are in tight supply. Furthermore, consumer buying habits are cautious, but fundamentally unchanged from earlier in the year.

Growing surplus, competition for cobalt hydroxide sales on the cards
Expectation that cobalt will be in a surplus this year has weakened suppliers’ negotiating power amid expected competition, weighing on the cobalt hydroxide price in the process.

Cobalt supply will be in a surplus of about 2,000 tonnes in 2019, growing to 16,000 tonnes in 2020, according to Fastmarkets’ battery materials research team. That surplus will not be absorbed until 2023-2024, according to Fastmarkets analysts.

The growing surplus has mostly resulted from the production ramp-up at Glencore’s Katanga mine in the Democratic Republic of Congo (DRC), and fresh supplies from ERG’s Metalkol Roan Tailings & Reclamation (RTR) project, also in the DRC.

Cobalt production at Katanga mine is expected to hit 26,000 tonnes in 2019, from just over 11,000 tonnes in 2018. RTR started production late last year, with output in the process of increasing to 14,000 tpy cobalt.

ERG is expected to start sales of the cobalt hydroxide produced at RTR during the second half of the year, with that new supply creating greater competition for sales than there had been between January and June.

“With the surplus becoming more obvious, suppliers have strongly sensed that greater competition is on the cards, not only from the traditional suppliers who had ramped up their output, but also from new suppliers, both large and small,” one battery materials producer said.

Such an environment has emboldened buyers to make aggressive bids to suppliers; according to one buyer, bids as much as 10 percentage points lower were not being turned down immediately.

“Surprisingly, after I made the bid, they said they would discuss internally and revert to me later,” the producer said, taking it as a sign of greater sales pressure and expected competition for sales in the future.

Changing battery chemistries hit buying interest
The surplus, created mainly by large increases from Katanga and RTR, has been expected by the cobalt market for some time, but a sudden shrinking in China’s buying appetite over the past two months has heightened the imbalance between supply and demand.

China’s latest electric vehicle subsidy policy announced in February further encourages the adoption of batteries with higher nickel content and less cobalt (cathodes which allow for greater driving ranges). Following its implementation, some operations producing cobalt-rich batteries were suspended, faced with a revival in competition from lithium-iron-phosphate (LFP) batteries, the latter found to be more economically viable by EV makers when faced with no subsidies for the former.

“Our cobalt-rich battery production has been halved, and it seems less likely that it will be resumed in the future,” a source from a battery producer said, confirming that some EV makers had turned back to cheaper LFP batteries.

EV makers and battery producers have slowed production awaiting greater clarity on the China’s EV subsidy policy in the future, since it is due to be phased out from 2020.

“The whole EV battery supply chain is slowing down, waiting for clarity,” one cobalt sulfate producer told Fastmarkets. “Even once the direction of the policy is clearer, it will take time for demand feedstock to resume from each link along the supply chain.”

Weak demand hits sulfate profitability
After a flurry of buying provided support to the cobalt market at the end of March and into April, consumers have returned to their hand-to-mouth buying preferences in a falling market, meaning weaker spot buying of late.

“Everybody got ahead of themselves and bought a bit too much; that ran right across the supply chain,” the first trading source told Fastmarkets

The hesitancy downstream has also filtered upstream, and production suspensions have been noted among cobalt sulfate and battery materials producers since May. As a result, some demand for hydroxide has been taken out of the spot market.

The structure of the battery materials supply chain in China also encourages competition for sales, and aggressive offers from newer or less well integrated players.

“It’s a closed loop, so you’ve really got to discount your sulfate if you want to break in,” a European source said.

Fastmarkets assessed the cobalt sulfate price, 20.5% Co basis, at 37,500-39,500 yuan ($5,462-5,753) per tonne, ex-works China, on Friday June 28, down from recent highs of 51,000-55,000 yuan per tonne in mid-April.

Falling cobalt sulfate prices have triggered aggressive bids for cobalt hydroxide from cobalt sulfate producers, in a bid to hold prices for their product above breakeven, as well as from pre-cursor producers who can use either sulfate or hydroxide as their feed.

Some bids on payables dropped to as low as 55% recently, putting significant pressure on suppliers who have material to get off their books, while craving greater stability and a slower downswing to help facilitate sales.

“I am not in a hurry to nail down an agreement with suppliers,” a second battery materials producer told Fastmarkets, adding that he is more willing to feed on cobalt sulfate rather than cobalt hydroxide due to former’s lower cost.