COMMENT: The battery boom and emerging spot cobalt hydroxide market
Cobalt consumers are increasing their exposure to the emerging hydroxide spot market in 2019 in response to rising supply volumes of intermediates and differing fundamentals at other points along the supply chain.
Traditionally, buyers have signed annual or multi-year contracts with suppliers to secure the supply of cobalt hydroxide. In most cases, payment was negotiated and agreed by both parties at a certain percentage payable against the low-end of the standard-grade cobalt metal price, as assessed and published by Fastmarkets.
This was especially the case during the mating seasons in 2016 and 2017, when buyers were eager to lock in supplies of feed in a tightening market, while optimism about the positive consequences from the adoption of electric vehicles (EVs) gathered pace.
Payables for supplies of cobalt hydroxide in 2018 were agreed at 80% of the metal price or higher.
But a lot has changed in the past 18 months.
Expectations created by the EV boom and the resulting price momentum - with benchmark cobalt prices increasing by more than 200% between January 2017 and April 2018 - gave rise to aggressive resumption of production and investment in mining projects, such as at Glencore’s Katanga in the Democratic Republic of Congo.
This has led to a meaningful increase in cobalt hydroxide production that has shifted the market from a deficit to a surplus.
The global cobalt market was estimated to be in a surplus of 2,000-8,000 tonnes in 2018 and 2019, according to Fastmarkets’ battery raw materials research team, which also forecast that the surplus will widen sharply to 17,000 tonnes in 2020. This compares with a deficit of 3,000 tonnes in 2017.
But while cobalt hydroxide supplies have increased, margins for producers of sulfate– the raw material used in the production of batteries – have tightened since early 2018 (or even completely disappeared, on paper) and salts prices have fallen while still exposed to high payables for raw materials feed.
Demand from cobalt producers weakened following the introduction of China’s EV subsidy policy in February 2018, encouraging the adoption of nickel-rich batteries, which require less cobalt.
This subsidy shift, combined with rising hydroxide supplies, was also the major driver behind unparalleled declines in prices in China last year.
Chinese spot prices for cobalt sulfate, min 20.5% Co, dropped to 65,000-68,000 yuan ($9,627-10,071) per tonne on December 28 last year, down by 54.9% from the 2018 high of 145,000-150,000 yuan per tonne on April 11.
International benchmark prices, which reflect spot trades of metal outside the China-centric battery sector, took some time to react.
Standard-grade cobalt prices assessed by Fastmarkets dropped to $26.50-28 per lb at the end of 2018, down by 38.2% from near-10-year highs of $43.70-44.45 per lb in April.
Indicative spot payables for hydroxide responded more immediately (than international metal prices) when growing hydroxide supplies hit the market. When the contract negotiating season started, consumers were ready to take a different approach to procurement for 2019.
With the damping of Chinese buyers’ appetites to lock large quantities of cobalt hydroxide in advance, they instead intended to secure feedstock in a “hand-to-mouth” style, stimulating spot trade that had not been present in the past.
Cobalt hydroxide payables for traceable units were indicated in December last year at about 60% of the low of Fastmarkets’ standard-grade cobalt price, reaching 62% in January, with offers about 64% more recently. This was a far cry from payables in excess of 80% agreed for 2018.
More importantly, an increasing number of Chinese consumers want to have more exposure to spot liquidity to minimize the risks that arise from locking in prices or payables at high levels.
As a consequence, Fastmarkets intends to start publishing two reference prices on a cif China basis for cobalt hydroxide next month.
Both take consideration of the fact that China accounts for about 70% of global demand for cobalt hydroxide, ores and concentrates, but that it is mostly dependent on imports of its raw materials.
The first price, a twice-monthly assessment of cobalt hydroxide payables, will take account of what has been the conventional way to agree the price of intermediates, prior to the battery and electric vehicle boom.
The second price, a monthly index of fixed-price spot market activity, will reflect buyers’ emerging preference for fixed-price offers. Many buyers from the battery sector will typically purchase intermediates out of preference, with no theoretical requirement for exposure to the metal market at all.
For further details about the launch of the two reference prices for the cobalt hydroxide, and to provide feedback to the consultation, click here.