Energy crisis creates challenging environment for producers of key energy transition materials: LME Week

High global energy costs coinciding with potential macroeconomic headwinds are threatening the production of metals that are pivotal in helping countries meet decarbonization goals

Rising inflation and subsequent interest-rate increases leading to expectations of a global economic recession are leading to weaker demand for some metals key to energy transition, according to market sources.

At the same time, soaring energy prices, combined with various supply and logistical disruptions, have led to higher production costs, with sellers saying they are struggling to pass the costs downstream.

One metal where supply-side challenges are running into conflict with weaker demand is cobalt hydroxide, a key material for nickel-cobalt-manganese (NCM) batteries used in electric vehicles (EV).

The cobalt hydroxide payable indicator, min 30% Co, cif China, % payable of Fastmarkets’ standard-grade cobalt price (low-end) was calculated at 61-63% Wednesday October 12, down from 88-90% at the start of the year.

On the supply side, producers say key production chemicals such as sulfuric acid have seen an increase in prices due to high energy costs in production hubs such as Southern Europe.

“There will be tightness on cobalt metal supply; at the production site there’s less chemicals, there’s less sulfuric acid and soda,” a producer source told Fastmarkets. “It will impact us; we might have to drop the supply.”

In addition to higher input costs, logistical hurdles such as port strikes and conflicts with local governments also threaten cobalt hydroxide production.

Buyers of the material say they are struggling to accept higher prices due to weak economic conditions, especially in China – the world’s largest EV producer.

China’s zero-Covid policy, which had pushed prices for battery materials downward earlier in the year by reducing demand, remains in place. At the same time, Chinese gross domestic product is forecast to grow 3.2% in 2022, down from the 8.1% growth recorded the year before, according to the International Monetary Fund.

Weak prices for downstream cobalt products such as cobalt sulfate matched with high production costs are also squeezing intermediaries along the battery supply chain.

“They’re not buying hydroxide; the Chinese are very bearish for 2023-2024; the world economy is very bearish,” a cobalt trader told Fastmarkets.

Fastmarkets assessed the price of cobalt sulfate 20.5% Co basis, exw China at 63,000-64,000 yuan per tonne ($8,748-8,887) on October 14, down from 102,000-103,000 yuan per tonne at the start of the year. The price has staged a mild recovery since sliding to 54,000-56,000 yuan per tonne in early August, however.

“Chinese prices are on the way up for chemicals; it’s a bit less disgusting. Everyone is cautious about the real demand in China at the end of the day,” a cobalt market participant said.

Other metals pivotal to energy transition are facing similar challenges, with producers of metal trying to pass costs downstream.

Aluminium – energy intensive to produce and an infinitely recyclable metal and key metal when it comes to carbon reduction – also faces challenges stemming from high energy costs.

Roy Harvey, chief executive officer at Alcoa, said in September that the industry has a “great future” but faces short-term challenges.

High energy and electricity costs in Europe have taken a number of smelters offline this year. In August, Alcoa announced that it was going to reduce production by one-third at its Lista smelter in Norway.

The London Metal Exchange three-month official price stood at $2,360.25 per tonne on October 14, down by 16% since the beginning of the year.

Prices for secondary aluminium, a mainstay of the circular economy, have been under pressure due to soaring energy prices following Russia’s unprovoked invasion of Ukraine in February.

Fastmarkets assessed the price of aluminium pressure diecasting ingot DIN226/A380, delivered Europe at €2,250-2,300 ($2,216-2,265) per tonne on October 14, down by 2.6% since the start of the year.

“We in the secondary market also see curtailments and reductions in production. If you were reliant on Russian gas and can’t find a new supplier you have a big, big issue,” a secondary aluminium producer source said. “It’s really not a good feeling at all.”

In copper, producers are looking to pass higher costs downstream as well.

German copper producer Aurubis is implementing a premium of $228 per tonne for 2023 for its European clients, the company said on October 13 in a memo to customers seen by Fastmarkets.

This represents a significant increase on the benchmark premium of $123 per tonne set for 2022, although the company did add a $35-per-tonne surcharge to that figure in June, citing rising energy costs.

Copper premiums have been volatile in Europe through 2022 so far, due to soaring energy prices and “self-sanctioning” with regard to Russian units since Russia’s invasion of Ukraine.

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