COBALT INSTITUTE CONF 2019: Intermediates contracts should be more responsive to hydroxide fundamentals – sources

Increased hydroxide supply over the past year has meant diverging fundamentals between cobalt intermediates and cobalt metal.

Chinese buyers moved to the spot market to purchase raw materials at the end of 2018, and both sides of the market are looking to embed changes to the way contracts are structured, market sources told Fastmarkets on the sidelines of the Cobalt Institute’s annual conference in Hong Kong this week.

Short-term approach to cobalt hydroxide procurement continues
Buyers and sellers continue to prefer short-term supply agreements for cobalt hydroxide. Consumers are agreeing purchases for around one month’s supply each time, but for a maximum of three months ahead in most cases, market sources said.

Such an approach has appealed to both sides of the market, who are keen to be able to have flexibility to let prices respond to changing fundamentals. Payables – the percentage of Fastmarkets’ cobalt price paid to procure cobalt hydroxide – have fallen from 85-90% of the standard-grade low at the beginning of last year, to 67-69% as of the end of April, according to Fastmarkets’ assessments at the end of April. Payables are up from 60-62% at the beginning of the year.

For buyers, a more flexible, hand-to-mouth approach to buying, also reduces their obligation to take on units in an environment where demand from the battery and electric vehicle sector is still ramping up.

Fixed price only feasible for short-term contracts
Where spot negotiations are concerned, parties have two options: they can agree a fixed price, or settle on a payable of the metal price.

Late last year, market participants indicated a preference to agree to a fixed price, but suppliers and buyers are now reluctant to commit to a fixed price for a long-term contract due to uncertainty over price outlook, Fastmarkets understands.

“We don’t want tie our long-term contracts to a fixed price as it involves big risks. The fixed-price [mechanism] is more feasible for a short-term contract,” a producer source said.

Market participants are more confident in anticipating the short-term market trend, but no further forward than a couple of months, Fastmarkets heard.

“A fixed price is preferred for short-term contracts because you know the price would go up [or go down]; you can lock in your procurement costs as much as you can if you negotiate with suppliers on a fixed price contract,” a hydroxide consumer said.

Buying patterns a pre-cursor to contracts with a ‘floating price’ element
Such behavior is believed to be a forerunner to hydroxide deals being agreed with a reference to a third-party reference price discovered by a price reporting agency (PRA).

Some consumers have indicated a preference to price their hydroxide units on the basis of a cobalt sulfate reference price, though some are concerned sulfate prices are more a reflection of Chinese sentiment than its fundamentals.

“If the cobalt sulfate price is really lower [compared to the cobalt metal benchmark price], market participants would want to change the basis of the pricing,” she added.

Fastmarkets’ cobalt sulfate adjustment to its standard-grade cobalt price (low-end) on a full metal basis was at a discount of $1.89-2.47 per lb on Friday May 10, compared with a discount of $0.75 to a premium at $0.13 per lb a month ago.

In any case, in light of last year’s volatility in prices, and the disconnect between the metal and battery markets, market participants prefer a floating element to their hydroxide price, rather than fix a payable that is fixed and unable to adjust to volatility.

Join members of Fastmarkets’ cobalt price reporting and research team for a web seminar on Tuesday June 18 at 9.30am London time to discuss recent price moves in the cobalt market and how industry developments might affect the market going forward. Click here to register now.