Cobalt oversupply brings change to long-term contracts

The emergence of a large oversupply in the cobalt market over the past 18 months has helped drive further evolution into how long-term supply agreements will be structured going into 2024

A ramp-up in cobalt hydroxide mined supply has led to a focus for producers to examine alternative pricing options to the traditional Rotterdam standard grade cobalt metal price as a basis reference. Alternatives have included the use of cobalt hydroxide payables, outright hydroxide prices and cobalt sulfate prices.

Some producers have opted for a basket of such to mitigate risk.

Mined supply of cobalt hydroxide was estimated at 171,500 tonnes in 2023, up from 156,047 tonnes the previous year and up from 110,143 tonnes in 2019, according to Fastmarkets’ research team.

In comparison, metal + powder production was estimated at 42,700 tonnes in 2023, up from 34,790 tonnes the previous year and up from 34,026 tonnes in 2019. These estimates are subject to revision.

The percentage of metal refining as a total of hydroxide production has fallen from 31% in 2019 to 25% in 2023, according to Fastmarkets’ research team, highlighting a change in usage for hydroxide with sulfate production reportedly a favorable option.

Cobalt sulfate is a feed input for electric vehicle (EV) battery production and is manufactured using cobalt hydroxide.

One reason behind the switch to using cobalt chemicals as feed for battery manufacturing rather than melting cobalt metal for use as feed has been the price premium metal has held over chemicals in the last twelve months while the supply of hydroxide increased.

Fastmarkets’ daily price assessment for cobalt standard grade, in-whs Rotterdam was $12.70-14.20 per lb on Monday January 22, unchanged since January 18.

Fastmarkets’ daily price assessment of cobalt hydroxide 30% Co min, cif China was at $7-7.15 per lb on Monday, unchanged since January 16.

Having a China-centric price reference is also preferred, with China accounting for 78% of global cobalt refined production in 2023, according to estimates by Fastmarkets’ research team. A growing spotlight on the China hydroxide market prompted Fastmarkets to increase the frequency of its cobalt hydroxide outright price to a daily basis in September 2023.

Reportedly some major battery manufacturers and original equipment manufacturers (OEMs) have opted to change their focus from metal to hydroxide pricing in the last eighteen months to better align to the changing market dynamics.

Cobalt hydroxide contracts move away from the metal price

As a result, some of those agreeing long-term contracts for the supply of cobalt hydroxide and other cobalt chemicals have sought to move away from a contract based on a formula completely involving the cobalt metal price.

Fastmarkets’ cobalt hydroxide payable indicator, min 30% Co, Cif China was calculated at 54-56% on January 19, narrowing upward from 53-56% on January 17. This indicator is a percentage payable of the standard grade low-end.

“To me, the switch over [to hydroxide and sulfate reference pricing] is inevitable, China are the main buyers in a rough market that has been that way for a long time now so they will want a say,” a cobalt trader said.

But market participants that are focused on metal have not seen similar influences as producers have to refocus the basis for long-term contract references.

Relatively high metal prices have come as a result of the impact of alternative demand usages for metal and tightening supply of some brands. Demand sectors including aerospace, foundries, medical and magnets for example.

In China, a trend of using domestic pricing of cobalt sulfate as a contract basis was adopted by some cobalt producers in late 2022 due to a preference for a China-centric price reference.

“It’s only right that some moved a portion of their contracts over, Chinese buyers will want to use a domestic Chinese price,” a second cobalt trader said.

“But there’s a world for both indices and that’s evident by the lack of a full switchover, it spreads out the risk exposure. I think there is a hesitancy to solely rely on a domestic China published price” the second trader added.

“In late 2022 and early 2023, some sellers chose cobalt sulfate prices for hydroxide sales, but from the end of 2023 to 2024, most miners now prefer to use a hydroxide payable system as they had seen significant losses through the cobalt sulfate price mechanism,” a cobalt buyer said.

A downturn in sulfate prices in 2023 caused sellers on a sulfate-based price mechanism to be locked-in to selling hydroxide for below market value for an extended period as a result.

Fastmarkets assessed the price for cobalt sulfate 20.5% Co basis, exw China at 32,000-32,500 yuan ($4,452-4,521) per tonne on January 19, unchanged since December 27 but down from 46,000-47,000 yuan per tonne on January 4, 2023.

As a result, a preference to include hydroxide and metal reference prices in contracts was a topic reportedly in contract negotiations for 2024, with some opting for a 50/50 split between sulfate and hydroxide.

The conversation regarding the focus on hydroxide reference pricing looks set to continue with hydroxide production forecast to ramp up by 15,600 tonnes in 2024 to 187,100 tonnes, according to Fastmarkets’ research team. Cobalt metal by comparison is forecast to increase by 8,120 tonnes to 50,820 tonnes. These figures are subject to revision.

Metal still has an important role

Despite producers looking at alternative options to cobalt metal for contract pricing, other market participants remain focused on metal due to its long storage capabilities.

Investors have been reportedly building up their own metal inventories as financial vehicles for physical exposure to the energy transition market.

“I can stick a hundred tonnes or so of metal in a warehouse for years and not worry about it degrading, cobalt intermediates have a shelf life of a few months in some cases,” a market participant said.

The large open interest on some cobalt metal futures contracts has brought financial investors into the cobalt market, who view metal as a physical hedge against their financially settled options and futures contracts. This open interest has also enabled the metal contracts to act as a ‘proxy hedge’ for hydroxide, with both metal and hydroxide futures contracts serving as risk management tools.

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