FOCUS: Chinese buyers to shift to spot market for cobalt raw materials

Chinese buyers have been reluctant to commit to long-term contracts for cobalt raw materials for 2019 during this year’s mating season, Fastmarkets has learned.

Year-long or multi-year commitments are traditional, but Chinese buyers now intend to purchase cobalt raw materials, including concentrates and hydroxide, on a spot basis, because there is adequate spot supply and because their profit margins are being squeezed.

Chinese producers had been eager to secure cobalt raw materials in the past few years amid tight supply and rising cobalt prices. But they have taken a completely opposite position this year, after seeing the aggressive production ramp-up on the mining side.

“In the past two years, it was Chinese buyers who chased after miners to sign long-term contracts for raw materials. Now, it is miners who are pushing Chinese buyers – who have hesitated to commit to long-term contracts – to book units over a longer period,” a consumer said.

Last year, Glencore announced the restart of its Katanga mine in the Democratic Republic of Congo (DRC), with target output in 2018 of 11,000 tonnes, followed by 34,000 tonnes in 2019, and 32,000 tonnes the year after.

The miner produced 6,500 tonnes of cobalt from Katanga in the first three quarters of 2018, despite fears early in the year that it might not achieve its target.

Glencore’s cobalt hydroxide production has met some headwinds recently, with excessive levels of uranium being detected in the materials from Katanga. This forced a subsequent announcement that export sales would be suspended, but the overall supply surplus expected in 2019 will not be changed.

Separately, the Roan Tailings & Reclamation (RTR) project in the DRC, operated by ERG-owned Metalkol, is planned to come on stream by the end of this year, and is expected to produce 14,000 tonnes of material in 2019. This is more than enough to cover the volume of cobalt that Katanga will not be able to export because of the suspension.

Taking these developments into account, global cobalt supply is expected to reach 133,700 tonnes in 2019, when demand will be around 126,961 tonnes, resulting in a possible surplus of 6,739 tonnes, according to Fastmarkets’ battery raw materials research team.

The availability of sufficient spot supplies of cobalt at what, in comparative terms, are low payable percentages has contributed to the calm attitude among those Chinese producers that have barely secured any raw materials this year.

In most cases, cobalt raw materials are offered and sold at a specific payable percentage against Fastmarkets’ low-grade cobalt benchmark.

“Chinese producers are reluctant to negotiate long-term contracts with miners, because there are adequate cobalt raw materials in the spot market,” a producer said. Spot offers at Chinese ports for cobalt hydroxide containing about 30% cobalt were slightly above a 60% payable percentage against Fastmarkets low-grade cobalt price, he added.

Meanwhile, some market participants told Fastmarkets that spot offer prices for cobalt concentrates were at 50-55% payable percentage against Fastmarkets’ benchmark.

Squeezed margins hold back long-term procurement
Chinese prices for cobalt salts have been under pressure since the beginning of 2018, resulted in producers’ profit margins being squeezed and with some even operating at a loss recently. This in turn has led to their reluctance to commit to long-term procurement of raw materials.

Fastmarkets assessed the Chinese domestic price for cobalt sulfate at 76,000-80,000 yuan ($10,960-11,537) per tonne on Friday November 16. This was down by 47% from 145,000-150,000 yuan per tonne on April 11, which was the peak level reached since Fastmarkets launched this price assessment in March this year.

The introduction of China’s new electric vehicle subsidy policy in February encouraged the use of nickel-rich batteries, which in turn damped the spot demand for cobalt sulfate.

In addition, persistent tightness on credit lines and cash flows has further dented consumers’ desire to build up inventories of cobalt raw materials unless they are necessary, and forced producers to sell their products at lower and lower prices.

Fastmarkets’ low-grade cobalt price has remained at a relatively high level in the past ten years, despite some negative influences stemming from concerns about the supply ramp-up next year.

Fastmarkets’ low-grade cobalt price assessment was $33.50-34.20 per lb on November 16. Although this was down from the 10-year high of $43.70-44.45 per lb in April, it was up by more than 200% compared with mid-2016 when the price of the blue metal started to show upward momentum.

Consequently, Chinese producers have been struggling to maintain their margins throughout 2018, and have found it less likely that they will square their account books approaching the year-end, when they need to repay credit lines.

Chinese buyers hope miners add spot liquidity
Amid the gloomy outlook for the cobalt market in China, the country’s buyers expect major miners to allocate some cargoes to the spot market, and provide an alternative sales mechanism to the legacy long-term contracts.

“Even if miners agree to give Chinese buyers the lowest payable percentage they could offer, Chinese cobalt producers are still vulnerable to losing money if domestic cobalt prices continue to go lower,” a second consumer said.

“Miners could keep some stocks in Chinese warehouses, and conclude business at a payable percentage against the previous month’s cobalt metal price,” he added, noting that major miners are facing stiff competitions from traders and middlemen which have plenty of cobalt raw materials in stock.

Not all buyers would rely on spot procurement
In order to avoid risks and maintain decent margins, Chinese buyers have every reason to reduce their exposure to long-term contracts for cobalt raw materials.

That said, not all buyers could rely on spot procurement, especially those producers that focus on cobalt products, and which require large volumes of cobalt raw materials to feed their production.

“Consistent raw materials supply is crucial to producers which have large cobalt capacities and only produce cobalt,” a third consumer said.

In comparison, downstream cathode materials producers, which supply nickel-cobalt-manganese (NCM) lithium-ion battery materials, have more capacity to move between styles of cobalt raw materials procurement.

“I am even planning to rely completely on spot cobalt raw materials next year,” the first consumer said. “Spot cobalt sulfate prices are much lower than cobalt hydroxide prices, so I don’t even need to purchase cobalt raw materials.”