FOCUS: China’s SRB cobalt stockpiling could set metal price floor
China’s reserve authority has finally approved fresh stockpiling of cobalt metal, casting some hope for the pandemic-weathered market, especially for cut cathode amid aerospace negativity.
In the evening of Wednesday September 9, Chinese cobalt producers successively received invitations from the country’s State Reserve Bureau (SRB) informing them to collect the tender document the next day - September 10, kicking off the long-expected stockpiling in the aftermath of Covid-19.
Based on past experience, the type of cobalt metal the SRB usually targets is cathode, including cut cathode and broken cathode, according to market sources.
With the standstill of industrial activities during the peak infection period and relatively slow economic recovery across the globe in the fallout of the virus, uncertainty over demand from the aerospace sector - one of the biggest consumers of cobalt metal - has haunted the market for most of the first half of 2020.
Alloy grade cobalt, which comprises cut cathode and rounds, is a critical material to produce super alloys, and the latter is widely used by the aerospace sector.
Alloy grade cobalt prices had been mostly under pressure between mid-March and late July before a strong China rally revived some strength in the international market. But gains were capped in late August while the expected recovery of demand in the international market after the summer lull has not occurred at any notable scale.
Fastmarkets’ assessment for cobalt alloy grade, in-whs Rotterdam fell to a near one-year low at $13.80-14.10 per lb on July 15, from $17.80-18.40 per lb on March 2 when the downturn began. The metal price was most recently at $15.30-15.70 per lb as of September 11.
The benchmark standard grade cobalt price, which includes broken cathode and briquettes, has followed a similar path. Fastmarkets’ assessment for cobalt standard grade, in-whs Rotterdam was $15.30-15.70 per lb on September 11, rising only 0.8% in about three weeks.
The aerospace industry is still finding it challenging to kick off any significant demand uptake amid intermittent regional lockdowns and travel restrictions, and some market participants have downplayed the recovery in cut cathode demand in the near-to-medium term.
But the recent news on SRB stockpiling in China has tempered some bearish sentiment, with some market participants saying purchasing activities will change the supply dynamics to an extent.
“The gap left by the aerospace market would be partially mitigated by an SRB purchase. In a situation that’s generally tight for hydroxide, and with metal production in China dependent on that, SRB stockpiling takes a large volume out of the market where there also isn’t that much feed to go into metal production in preference to salts,” a trader said.
Cobalt hydroxide prices have been underpinned since May due to the lingering logistics disruptions following a 36-day lockdown in South Africa, where mainstream cobalt raw material is exported. Fastmarkets’ assessment of the cobalt hydroxide payable indicator, min 30% Co, cif China sits at 76-78% against the benchmark standard grade cobalt price as of September 11. The midpoint of the assessment is at a historical high.
Immediate impact limited
The scale of support the cobalt metal market could receive from the upcoming stockpiling is largely dictated by the amount China’s reserve authority takes in, according to some market participants. Market sources say the upward support will be modest if the total stockpiled is around 2,000 tonnes – an amount that had been widely rumored in the market before the stockpiling activity was confirmed.
“The stockpiling will help to consolidate the gains cobalt metal prices made in the past one month,” a second trader said. “But if it is just 2,000 tonnes purchase, it might not be enough to inject more strength to the market.”
“In other words, the cobalt prices are not likely to have a notable rally unless more metal is stockpiled than what people currently expect,” he added.
Meanwhile, one market source anticipates that a second round of stockpiling would logically come after the expected initial 2,000-tonne purchase on the basis that an order of that size would not be significant enough as a national reserve.
Nevertheless, consensus so far is that the news of the stockpiling is not as big as other market events, hence there has been limited immediate impact on pricing.
“Some people will buy into this and others won’t and there is a chance I can push my chemical prices up, but I think the sum impact will be zero. The news isn’t as big as Mutanda closing, which was 20% of the supply of the market and immediately impacted price,” a chemical producer said.
In 2019, cobalt prices jumped immediately following the news in early August that Glencore would close its Mutanda copper-cobalt mine in the Democratic Republic of Congo (DRC). The standard grade cobalt price then rose to $17.70-18.15 per lb in early October 2019, up from $12.25-13.95 per lb on the day the Swiss trader-producer announced the news.
A metal producer source said SRB stockpiling is the only hope to the market in the aftermath of Covid-19 and was longed for over the past few months, but as a result any optimism derived from it has already been priced into the market.
Speculators also adopted a watchful stance in the local futures platform on Thursday and Friday after the market experienced some short-lived excitement on Wednesday evening.
The most-traded October cobalt contract price on Wuxi Stainless Steel Exchange closes at 280,500 yuan per tonne in the night trading session on September 11, compared with 289,000 yuan per tonne at close in the night trading session on September 9. The price had hovered around 273,000 yuan per tonne during the day on Wednesday before the SRB revealed its intentions to stockpile cobalt.
Setting a floor
Although some market participants expect limited notable upward momentum in prices due to the SRB stockpiling, sources see the exercise as enough to set up a floor on cobalt prices in the near term.
“At the very least the SRB purchase cements the floor under the market at $15 per lb and had Covid-19 not happened the market should have been trading between $15-17 per lb,” a third trader said.
“This might only take the excess units out the market, but producers will go out to buy feedstocks and that will probably put us back in to the range to go $15.50-17 per lb,” the third trader added. “If the Chinese metal producers add to the ordinary demand for hydroxide, this will squeeze a tight market and also squeeze sulfate and oxide. This all combines to support the metal price.”
Once the base is set up in the metal prices with stockpiling, it may trigger more restocking activities over the cobalt supply chain, Fastmarkets head of battery materials of base metal research William Adams said.
“Demand for metal has been hit by the fallout from Covid-19 that has hit industrial demand, so stockpiling will help there,” Adams added.
“The price impact from the actually buying may not be that great [if it is just a 2,000-tonne stockpile], but if the SRB buying supports the view that a base is in place then it may encourage others to restock,” he explained.
Such restocking of materials will include not only metals but also other cobalt chemicals that find their ultimate applications in the battery sector, according to Vicky Zhao, Fastmarkets battery materials research analyst.
Other variables to consider
Market participants are also keen to understand the period in which the metal will be purchased.
If there is a two-month window then the effect of the purchase will be seen more clearly in the market, several sources have said. Whereas if the buying period is as long as six months then this will dampen the effect of the stockpiling on price action.
In addition, the ceiling price that the SRB will set for the tender will determine how many participants are willing to sell.
Market participants will also undoubtedly look at the effect of previous cobalt stockpiling on price movement for clues on what this round could bring. When the SRB conducted stockpiling in late 2015 and early 2016, cobalt metal prices barely responded with any significant rally at the time. Yet the metal market embraced a strong rally between late 2016 and early 2018 due to speculative buying amid bullishness on potential cobalt consumption for electric vehicles (EVs), with the earlier 5,000-tonne SRB purchase undoubtedly contributing to the tightness in the market later on.
All in all, market participants are taking a watchful stance of the upcoming stockpiling activity on any immediate impact and whether there could be a delayed reaction coupled with other drivers that are yet visible on the horizon.
Charlotte Radford in London contributed to this story.