COMMENT: Cobalt market finds new ways to do hydroxide business as autos put EV plans into action

A string of long-term deals for cobalt hydroxide show that bullish forecasts for cobalt consumption from the electric vehicle (EV) sector are coming into play.

Glencore will supply battery manufacturer SK Innovation with up to 30,000 tonnes of cobalt contained in hydroxide over six years, it said last week – a deal worth about $1 billion in today’s market. And other deals also point to original equipment manufacturers (OEMs) moving to secure their cobalt requirements as their ambitions for cleaner fleets come to fruition.

The picture has moved on from a year ago, when customers had stepped away from long-term intermediate contracts. Buyers and sellers were struggling to find mutual ground on which to agree the terms and structure of hydroxide deals, which had typically included a year-long, fixed payable (the percentage of the cobalt metal price paid for intermediates).

Buyers retreated to a newly-formed and plentifully-supplied cobalt hydroxide spot market for their purchases, which was all well and good when the next supply-squeeze was at least four years away.

But the closure of Glencore’s 25,000-tpy Mutanda cobalt mine in the Democratic Republic of the Congo (DRC) has brought forward expectations of a cobalt deficit, leaving buyers less comfortable relying on the spot market.

At the same time, volatility in cobalt prices and payables – which do not necessarily move in tandem with one another – means that fixed long-term payables often have no more appeal today than they did a year ago.

Since its launch at the beginning of this year, Fastmarkets’ cobalt hydroxide payable indicator, min 30% Co, cif China, has recorded payables as low as 59% (in July) and as high as 70% (in October), as a percentage payable of the standard-grade metal price (low-end). 

That translates into even greater volatility in terms of the effective prices consumers have had to pay for their intermediates this year.

Fastmarkets’ cobalt hydroxide index, 30% Co min, cif China, settled at a year-to-date low of $7.44 per lb at the end of July, when both payables and metal prices were under pressure. The index then hit a high of $12.26 per lb three months later – a 65% increase – on the back of the news that Mutanda would be closing.

Prices for standard-grade cobalt, in-whs Rotterdam, rallied 43% over the same period, from $12.10-12.75 per lb at the end of July, to $17.50-18 per lb at the end of October.

Battery-related demand and the supply response that it triggered, have been intrinsic to that volatility and to the disconnect between metal and intermediates prices. At the same time, it has become more pressing for automakers to lock in their hydroxide needs, or for battery manufacturers to demonstrate to their own customers that they have security of hydroxide supply.

With fixed, annual payables having lost their shine, two options have emerged.

In some cases, an assessment of cobalt hydroxide payables by an independent third-party has offered a way out of the deadlock. An increasing number of hydroxide contracts include a floating payable, fixed to the low- or mid-point of Fastmarkets’ payable indicator, which is then settled against the benchmark standard-grade low.

This option offers some of the familiarity of the previous payable system, the flexibility and market responsiveness enjoyed by market players with pure metal exposure, while at the same time acknowledging that the needs of the metal and hydroxide markets do not necessarily move in parallel with one another. 

Other market participants have left at least a portion of their tonnages open to the spot market, where payables will be negotiated based on market fundamentals close to the time of delivery.

And it is these tonnages that will continue to inform Fastmarkets’ cobalt hydroxide payable indicator going forward.

Both options show a remarkable shift in the mentality of a market that, until recently, had worked in annual cycles with fixed payables. The reality of contracts breaking down and long-term negotiations stalling, with neither side able to agree on terms that suited a volatile and fragmented market, is still fresh in the memory.

Where automakers’ cobalt needs are somewhat assured, but the next move of the cobalt market is unknown, the restructuring of these raw material contracts seems like a logical way to do business.

In effect, some hydroxide contracts now have two unknown elements: the payable; and the underlying metal price against which it will be settled.

Since the protracted battery supply chain exists in the absence of a liquid hedging mechanism, a payable that is pegged to an independent assessment of spot market activity can be passed down the supply chain more easily, because it accounts for the fundamentals of the intermediates market itself at a given point in time.

The same cannot be said of a fixed, year-long payable.