COBALT MONTHLY REVIEW – JULY: Metal, sulfate prices succumb to tight credit, cash flow-focused destocking

Cobalt metal and sulfate prices weakened last month, facing acute pressure from tight credit in China and associated cheap sales, with European consumers firmly in summer mode.

Monthly average cobalt prices

Price moves: 
Arbitrage plays helped to drive benchmark cobalt prices down over the course of July, while wide spreads opened up between the Chinese domestic market and prevailing spot prices in the international market. Faced with a squeeze on credit in China and a flurry to secure cash, weak summer demand and competition for scant sales, benchmark metal prices lost 8.5% over the course of the month.

“Falling prices themselves have encouraged the supply chain to destock, with restocking being delayed as buyers wait to see how far the price correction lasts. Traders holding cobalt stocks have sold and entered forward buying agreements to take cheaper exported material from China, and a tighter credit environment in China means it is proving more difficult to restock,” William Adams, Metal Bulletin’s head of battery raw materials research, notes.

As the arbitrage window between China and the international market opened, all eyes were on China’s domestic trades, and a hot topic at Antaike’s battery materials conference in Shaoxing, China, was when and where prices might bottom out. Local cobalt metal prices stabilized mid-month, but that did not rule out further pressure from tight credit lines, “invisible stocks” and lackluster demand. 

A wave of destocking also served to put pressure on prices for cobalt salts in July, with cobalt sulfate prices down 6.5% over the course of the month, and hand-to-mouth buying dominating while the market stays in a downtrend.

Notably, effective prices for cobalt intermediates have also fallen over recent weeks, again due to tight credit lines and weak demand, but also because of the availability of scrap as a feed source. Spot percentage payables for hydroxide against the low of the benchmark Metal Bulletin low-grade cobalt price were reported at 70-75% this month, versus 80% and above in the first quarter.

The benchmark in-warehouse metal price – on which the majority of salts and intermediates business is also based – has now been falling consistently since May, with a number of bearish factors emerging at a similar time, Adams says. In addition to the above destocking, changes to China’s new-energy vehicle subsidy policy, which now favors high-nickel batteries, came into effect in June, while rising prices in the first few months of the year brought increased volumes of scrap into the market.

Market news:
In July, market participants pondered the theft of over 100 tonnes of cobalt from the Vollers warehouse in Rotterdam, and whether it might bring some especially cheap metal units into the market over the coming weeks.

Cobalt also did not escape the US-China trade war, with the metal included on a proposed list of goods to be hit by a 10% duty when exported to the US from China.

The proposed import tariff from the US government would only affect a few suppliers in China who export cobalt to the US market. But, should tariffs be implemented, suppliers might in the first instance be inclined to pass that 10% increase on to their customers, but that in turn risks denting buying appetites for Chinese cobalt.

“It would be preferable to add that 10% tariff to the offer prices, but cobalt is not monopolized by China. Customers have other choices than Chinese cobalt,” one market source told Metal Bulletin.

Downstream, and specifically in the electric vehicle market, which has spurred much of the investor interest around cobalt over the past two years, Tesla found itself facing concerns that some of its batteries produced by Panasonic contain Cuban cobalt, contrary to US sanctions.

Panasonic has confirmed to Tesla that a small portion of Model S and Model X batteries produced after February 2018 may contain trace amounts of cobalt from Sherritt, which produces briquettes from Cuban feed. Panasonic has also suspended its relationship with Tesla, the latter told Metal Bulletin. 
A spokesperson for Sherritt declined to comment. Metal Bulletin has also contacted Panasonic for comment but it had not responded at the time of publication.

While the news has so far had no effect on prices, it has brought the matter of tight supplies for specific forms of cobalt preferred and better processed by battery manufacturers, particularly briquettes, into question.

Outside of Cuba, briquettes are produced by Ambatovy in Madagascar and Glencore’s Murrin Murrin nickel project in Australia.

Both brands come under Metal Bulletin’s low-grade cobalt specifications, which has historically traded at a discount to the high-grade specification. The gap has narrowed  – and had the two grades trading at parity for much of the year – as a result of the tight supply of the briquette and broken cathodes that are in high demand from the battery sector.

Looking ahead, “the prospect for additional supply from the DRC (Democratic Republic of the Congo), with the ramp-up of Glencore’s Katanago copper/cobalt mine and the start-up of ERG’s Roan Tailings operation, provide a slightly bearish two-year outlook because combined these operations will provide a significant one-off supply increase,” Adams says.

“As such we think the price declines have been justified, we think prices will head lower for the rest of 2018 and into 2019, but the overall decline is expected to be front-loaded over this period, hence we have seen a fast price correction already,” he added.

Fundamentally, however, the market remains strong. Subsidy shifts in China mean a shift from LFP batteries, which do not use cobalt, to NMC batteries, which do. Additionally, greater driving ranges also require bigger battery packs with more cobalt.

“Metal Bulletin Research’s outlook for cobalt demand remains extremely upbeat. Indeed we expect prices to rebound late in the third-quarter or early fourth quarter, once the market has adjusted to the subsidy changes, but we expect prices to then head lower again as the market has to absorb extra supply due to the unfolding supply response,” Adams says.