Norilsk and the changing shape of the cobalt market

Metal Bulletin – by Charlotte Radford

Production of cobalt ingots has ended after the only producer, Norilsk Nickel, halted output earlier this year to focus on cathodes.

With total volume produced by Norilsk staying more or less the same in the long term, negotiations over the next weeks and months will dictate where the stocks of metal will be heading and whether they will end up in the hands of traders or consumers.

Norilsk, one of the major players in the cobalt industry, is now turning its attention to cathode production at its new facility in Kola, after shutting down Nickel Plant at its Polar operation.

Norilsk plans to produce a similar total volume of cobalt metal to past amounts but supplies of material going into the alloy industry look set to tighten, at least in the medium term, while Norilsk establishes itself as a cathode producer and marketer.

Sellers of cobalt ingot have therefore been targeting higher numbers.

Norilsk ingots, typically 99.25% cobalt content and above, are popular in the alloy industry and have often been competitively priced due to their low cobalt content compared with traditional super-alloy-grade material.

The problem alloy buyers face now is that, of all the brands they could use – primarily five, including Russian – ingots were typically the cheapest, cobalt trader Nick French says

Furthermore, these had been to date the most readily available on the London Metal Exchange. Of the 608 tonnes of cobalt sitting in LME-listed warehouses in mid-October, nearly half were in ingot form.

Sources say Norilsk will be open in terms of its target audience for the new cathodes and will look to sell where there are the most commercial opportunities.

While Norilsk may choose to sell some cathodes, eventually following approval, onto the LME – Norilsk has already said it is in the process of listing its cathodes on the exchange – this is unlikely to be its main target. It may be hoping for new consumers where it could achieve a premium, sources said.

Sources say that Norilsk sees synergies across the alloys but because cobalt is a very trader-focused industry the company could sell to traders or even branch out by selling into the battery sector.

Cut cathodes and rounds typically command a significant premium over low-grade products such as broken cathodes and ingots. Over the past month, high-grade cobalt has been trading at a 16-cent premium on average on the low end.

The new shape and cobalt content, likely to be upwards of 99.8% minimum cobalt, is likely to win Norilsk a premium compared with ingots in terms of pricing.

CERTIFICATION HURDLE

But if sold into high-end applications, Norilsk will face the obstacle that all new producers face: certification.

This takes time and money; it is also a battle other high-grade producers such as Sumitomo Metal Mining have faced in the past when tackling the superalloy industry.

While Norilsk is likely to target many of the same consumers with its cathode as it did with its ingots, if it’s looking to take the largely US and European based high-end superalloy industry – and particularly the aerospace sector – by storm, it will need to focus on marketing the new product in an industry that rarely sees new brands.

Sources say Norilsk might be eying up the lucrative superalloy market, which has long held a premium over battery applications. If so, Norilsk will be competing with products such as Falconbridge, Sumitomo and Jinchuan cut cathodes as well as Vale’s rounds. One of the main challenges Norilsk will face in the coming months is convincing customers, old and new, to go through the often costly process of getting the new cathodes approved for use.

French says that these customers will probably be interested in principal in the new high-quality product from a reliable, well-liked and well-known producer, particularly because cobalt supplies look set to tighten.

But many sources ask how many consumers will be in a position to, and will choose to, part with the cash required to use it. Some sources familiar with this process estimate the cost of getting a new cobalt brand approved at upwards of $100,000 for rotating parts.

While Norilsk is likely to find that many of its ingot customers are interested in the new cathode, what about new high-grade alloy customers? Will they be keen to secure a new 99.8% cut cathode?

One consumer told Metal Bulletin that it is the minor elements in the cathode that are of interest to alloy buyers rather than the cobalt content so the spec will be crucial, as will a consistent quality. The more critical the use, the more complicated the approval process, he said.

The approval process in the medical sector, for instance, is estimated at six to twelve months. But sources estimate that rotating engine parts in the aerospace sector require a long approval process often in excess of two years.

Due to its critical use and strict safety standards, the testing process can involve a chain of companies, each of which need to conduct their own testing. Companies further downstream will sometimes specify which cobalt metal brands are acceptable for use as a raw material, lengthening and complicating the process.

For a control part in a rotating disk, a spin test is required, the consumer explained – very few companies have the necessary machinery to conduct this and the process is extremely expensive at $100,000-150,000.

Just the testing of a new brand to make the alloy will use some capacity. In an industry where capacity is often filled up years in advance, consumers will need to set aside capacity for testing and will be expecting this cost, at least initially, to be reflected in the price they pay for the cathode, sources suggest.

On top of the cost and time constraints, in the aerospace sector material is typically sold on a fixed-price forward basis, something which some producers can be reluctant to commit to. So will buyers go down this route?

“It will depend on the urgency of needing a new supplier and the amount of testing,” the consumer said. “We have three suppliers. Do we need a fourth?”

While the journey, if Norilsk does focus on super-alloys, may be a long and costly one, it is certainly possible to achieve acceptance in the superalloy market with a new brand such as this.

In the mid-2000s, Chinese producer Jinchuan was in a similar position to Norilsk. It was starting out marketing a new high quality cut cathode in an industry used to using just a few limited brands. Jinchuan cut cathodes are now a staple of the super alloy sector, with all major super alloy makers approved to use it, partly thanks to some successful marketing agreements with trading firms.

 

Marketing

If Norilsk chooses to target the high-end alloy industry, sources suggest that it will need to devote time and money to its marketing operations, particularly in the US. It will need to ensure its cathodes are competitively-priced if it hopes to gain market share from other well-established cut cathode and round suppliers.

It may instead focus on other alloys or other cobalt applications entirely.

Norilsk may not choose to go down this route alone. It may choose to set up a marketing agreement with a trading house, as ERG has with Traxys in the USA, Ambatovy has with Darton in Europe and Phoenixx has in the US. But sources say this seems unlikely at this stage.

Norilsk may instead simply sell much of its material directly to traders. While Norilsk sells its ingots to consumers, it is understood to also sell its ingots to traders.

Selling to the trade is rarely a popular option for cobalt producers because it can mean selling at a discount if a producer is under pressure to offload when demand is limited. It also means that material is not being consumed directly by the buyer and can consequently come back to the market as competition at a later date.

But, as French notes, selling to a trader has its benefits: it can be simpler logistically and traders typically pay cash, while many consumers are able to negotiate payment terms resulting in a wait of up to four months before cash is on the balance sheet.

As Norilsk ventures into the cathode world, in its favour is the fact that there has been a well-documented tightening in cobalt supplies, especially with a reduction in supplies coming from some sites in the Democratic Republic of Congo (DRC).

The DRC is the world’s biggest cobalt producer, and while the material leaving the country from traditional mining operations is non-artisanal in nature, material mined by the artisanal mining community in the country has come under scrutiny recently.

 

Buyers are increasingly focusing on ensuring all their cobalt is non-artisanal in nature and Russia is not linked to any artisanal mining concerns.

On top of this, an expected increase in demand for, and production of, electric vehicles, as a result of environmental targets, could see demand for cobalt surge in years to come. This has led to a big jump in speculative interest, with hedge funds operating in the US and Asia stocking up on the blue metal in the last few months.

The tightening in supplies has already driven low-grade cobalt prices up to $12.70-13.45 per lb as of October 26 from $10.50-11.10 in June. Although the market is still reasonably well-supplied, this is likely to change – most analysts forecast a continued tightening in years to come.

Whatever Norilsk chooses to do, it seems likely that stocks of cobalt, and particularly ingots, will be initially drawn down, and LME stocks could drift lower. But with the total volume coming from the Russian producer remaining stable in the long term, it will be long-term negotiations in the coming weeks that will dictate where those stocks will be at this time next year.

(This article has also appeared on sister publication Metal Bulletin)