2018 REVIEW: Escalating cobalt production hits China sentiment, pushes arbitrage window open
Price variations between the cobalt markets in China and internationally reached all-time highs in 2018 when China reacted to rising volumes of cobalt supply from which the overseas metal markets were somewhat protected.
At times, wide differentials created appealing theoretical arbitrage opportunities for Chinese exporters, but it was the sentiment and outlook of overseas buyers that ultimately determined how quickly the gap would close.
Taking the low end of Fastmarkets’ price assessment for cobalt metal in China, without VAT at 16%, and the low end of the standard-grade benchmark price, a theoretical arbitrage reached as high as $8.21 per lb on July 6, over the summer, according to Fastmarkets’ calculations.
At that time, traders outside of China were happy to sell at cheaper prices, in the belief that prices were due for a revision during the summer, after a rally that had run for seven months with no interruption. But at the same time, they could stock up with material offered at appealing prices from China, in anticipation of a rebound in cobalt prices in September.
China exported about 1,149 tonnes of cobalt metal in the July-September quarter in 2018, compared with 866 tonnes and 135 tonnes in the corresponding periods in 2017 and 2016 respectively, according to Fastmarkets sources.
In addition, the country’s exports of the metal reached an all-time monthly high of 531 tonnes in September, following aggressive offers from China to Europe over the traditional summer lull, that overseas buyers were happy to indulge.
But the anticipated recovery in prices was no better than lackluster after the summer. Standard-grade prices had reached a near-10-year high in April of $43.70-44.55 per lb in-warehouse, but had fallen to $33-33.60 per lb by August, before rising again to $33.50-34.45 per lb in October.
Following a brief narrowing of the China-Europe price gap in September, in the fourth quarter of the year the arbitrage opportunities for Chinese cobalt metal opened even wider than in the summer. But buying appetite in Europe did not emerge in the same way they had a few months earlier.
In theory, cobalt prices in the international market were $11.57 per lb higher than prevailing Chinese prices come November 28, and at least $8 per lb higher between October 17 and December 14.
Chinese cobalt metal prices continued to fall through much of October and November while international prices were largely stable. But a risk-averse attitude left buyers unwilling to commit to the same scale of stockpiling as they had done in the summer, despite the arbitrage being more appealing on paper.
“I have offered [material at] $28 per lb fob China, but no one is interested in taking the cargoes,” one trader told Fastmarkets in mid-November when the standard-grade cobalt benchmark was $33.50-34.45 per lb. “There are quite a few cheap offers from China, but no European traders dare to buy now.”
This aversion to risk arose from a shared expectation that the price of cobalt metal will come under pressure in 2019. This would contrast with summer 2018, when the majority of market participants thought that the price would rebound in September.
“Everyone is terrified of overstocking. There is an arbitrage right now but you don’t want to build a position at $30 [per lb],” a second trader said in late November. He added that buyers might be more keen to do so on a formula basis with a January or February quotation period, to mitigate the risk that prices would fall between the times of shipment and the material’s arrival in Europe.
“There’s a 60-day risk, realistically, once you’ve got the material into a warehouse,” he added.
In fact, instead of stockpiling, most suppliers in Europe intended to clear their positions, especially in late November and December, and to lock in sales for 2019 at fixed prices or wide discounts.
Buyers were keen both to offload stock from their books before the end of the year, but also to anticipate weaker prices in 2019.
“There’s a big backwardated curve issue,” a producer said. “People see a long-term, fixed price as a way out of their position.”
Persistent China discount
It is quite common to see arbitrage opportunities between the Chinese and European markets opening and closing for most metals, but it is quite rare to see a metal such as cobalt have such a persistent export arbitrage in China, which has also been consistently expanding.
(It should be noted that when arbitrage opportunities arise, they do not always put China at a discount to the rest of the world. In late 2015, for example, cobalt metal traded at a premium in China compared with the rest of the world when the State Reserve Bureau (SRB) undertook aggressive stockpiling, while cobalt sellers elsewhere offered aggressively to mitigate their losses at the end of the year while global metal prices crashed.)
China, with its dominance in the battery and electric vehicle sectors, and its exposure to the cobalt sulfate and cobalt hydroxide markets, clearly dictated the direction of the market in 2018, while its demand for cobalt metal has been relatively stable for the past two to three years.
In comparison, Europe has been more exposed to the specific fundamentals of the traditional metal market, but was ultimately left to respond to China’s weak sentiment, which led to an unparalleled downtrend in cobalt metal prices in the two markets over the past year.
China supply ramps up
China’s production, and trade flows relating to cobalt, help to illustrate why the market has weakened as a whole, but also why the Chinese and international markets have diverged.
Following the rapid rally in cobalt metal benchmark prices from late 2016 to early 2018, and the intensive stockpiling activities by China’s SRB from late 2015 to early 2016, Chinese cobalt metal production and imports ramped up quickly, with a historical high point for annual output recorded in 2017.
Fastmarkets’ standard-grade cobalt benchmark price hit a near-10-year high of $43.55-44.45 per lb in April 2018, up by more than 300% compared with two years earlier.
In 2017, China produced 9,140 tonnes of cobalt metal, all in the form of cut cathode, compared with 7,200 tonnes in 2016, according to Fastmarkets’ battery materials research team. Fastmarkets analysts also forecast that the total production of the blue metal in China in 2018 would be 8,750 tonnes.
China exported 2,648 tonnes in 2017, while imports totaled 2,785 tonnes, the country’s customs data has shown.
So the theoretical supply of cobalt metal in China was 9,277 tonnes in 2017, while market participants told Fastmarkets that the country’s annual consumption of cobalt metal had been steady year on year at about 6,000-6,500 tonnes per year.
Although some market participants pointed out that the actual amount of cobalt metal imported in 2017 should be much less than indicated by customs data (because more than half of the metal was estimated to have been re-exported from bonded warehouses), the Chinese cobalt metal market has undoubtedly been in surplus, accelerating the fall of the domestic Chinese price for the metal.
At the same time, China’s rising production of cut cathode has dragged on the European market to some extent, particularly where buyers have broad purchasing specifications and competition for sales is fierce. But there are undeniably large consumers which do not have approval to accept the newer production, and others which generally prefer broken cathode and briquette, the supply of which remains restricted. Therefore, Europe has been somewhat protected from the increase in Chinese metal supply.
But, increased Chinese exports (see table) have had an effect, in addition to putting pressure on headline prices.
That new production was one of the factors that resulted in alloy-grade cobalt, which mostly consists of cut cathode and rounds, trading for much of 2018 in parallel with standard-grade cobalt, which mostly consists of broken cathode and briquette. It was even at a discount at some points during the summer and in the fourth quarter.
Battery raw materials sentiment
There was also the matter of sulfate and hydroxide production, with both products more closely linked to the battery segment, on which China has ultimately grounded its investment in cobalt.
Supply of both has increased in response to the forecast demand from the battery boom, but increased availability and subsequent lower prices have resulted in dramatically weaker sentiment. This has manifested itself in lower metal prices, which traditionally is the indicator of the health of the cobalt market.
Hydroxide payables, agreed as a percentage of the standard-grade cobalt metal price, were agreed for 2018 at 80% and above, but were now being discussed around 60%.
Fastmarkets assessed the cobalt sulfate price at 65,000-68,000 yuan ($9,459-9,896) per tonne ex-works on January 2, down from a high of 145,000-150,000 yuan per tonne in April 2018.
Wide China-Europe arbitrage narrows
Recently, with the fall in the standard-grade cobalt benchmark price becoming quicker, and cobalt metal production being cut in China, the market seems to believe that the lingering wide arbitrage between the Chinese and European markets may narrow quickly.
Fastmarkets assessed the standard-grade cobalt price at $26.50-28.00 per lb on December 21, showing a fall of 15.6% in just three weeks, with four of six pricing sessions showing a drop of $1 per lb or more.
At the same time, the Chinese cobalt metal market slowed its decline in December against a backdrop of reduced supply.
Fastmarkets assessed the Chinese cobalt metal price at 340,000-360,000 yuan per tonne on December 28, down by 9% month on month, compared with a 12.5% monthly drop at the end of November.
“That stabilization will be a significant driver [for the extent of the decline in] the international price. It was the big declines [in China] that triggered the aggression among metal producers to sell,” a second producer source said.
Amid weaker demand, some emerging cobalt metal brands in China have largely eliminated metal production recently. They had been considering such a move since the start of the fourth quarter, according to multiple market sources.
The operating rates for most cobalt metal producers in China were 50% or less, market participants told Fastmarkets.
“In the steel industry, if the operating rate of the whole industry moves below 40% after persistent price drops, it usually means that the market is likely to bottom out,” the first trader said, adding that this rationale might also be applied to the cobalt industry.
“In the long term, the arbitrage between the Chinese and European markets will be closed,” the same trader said.
And a final trader said: “A $10 [per lb] difference [in price] is never going to last.”
Fastmarkets changed the names of its benchmark in-warehouse Rotterdam cobalt price assessments on January 2, 2019. The name ‘standard-grade’ has replaced the name ‘low-grade’. The name ‘alloy-grade’ has replaced the name ‘high-grade’. Click here for further details about the name changes and consultation process.