FOCUS: Financial constraints could impede Chinese cobalt sulfate price rebound

Despite the recovery in international cobalt prices, Chinese market participants are not confident of an immediate subsequent pick-up in Chinese cobalt sulfate prices due to persistent tight credit lines making it difficult for cobalt companies to access cash.

Weak demand had been a key driver of plummeting Chinese cobalt prices in the past few months. Although many market participants indicated cobalt consumption would tick up in the third quarter, tight credit lines and the resultant low liquidity may continue to keep producers’ attempts to push up quotations in check.

Metal Bulletin’s Chinese cobalt sulfate price was unchanged week on week at 90,000-94,000 yuan ($13,126-13,709) per tonne in the latest assessment on Friday September 7. The assessment had slid slowly over the past month from 100,000-105,000 yuan per tonne on August 1.

The curb on the downswing indicates the key battery material may have bottomed out against a backdrop of an anticipated rebound in international cobalt metal prices, market participants said.

The price for low-grade cobalt, which serves as a basis for Chinese cobalt producers to calculate cobalt raw materials import costs and a key indicator for Chinese cobalt prices, rose for the second consecutive pricing session to $33.35-33.95 per lb on September 7, reassuring the market of a steady recovery of cobalt prices outside China.

However, it is too early to tell whether Chinese cobalt sulfate prices will follow suit immediately.

“Some producers did raise their quotations as high as 95,000 yuan per tonne after Wednesday [when Metal Bulletin’s low-grade cobalt price edged higher], but if you take a look at actual spot transactions, you will see spot trades are still thin and the majority of business was still concluded at or just slightly above 90,000 yuan per tonne,” a consumer said.

“Weak demand and tight cashflows are two hurdles to price recovery; in my opinion, the latter may play an even more crucial role,” he added.

Cashflow concerns
Meanwhile, the prospect of an electric vehicle (EV) boom, and the need for cobalt in EV batteries, has encouraged major cobalt producers in China to either expand capacity or invest in the downstream industry – both of which require sustainable cashflows.

“Cobalt producers need cash to maintain their investments,” a producer said. “Meanwhile, it usually takes longer for [cobalt producers] to square their books given typical payment terms for the cobalt salts industry in China.”

The payment terms of cobalt sulfate sales in China is typically on a bank acceptance basis, which is most commonly a six-month bank acceptance draft. This means producers are paid by the banks six months after they sell products to the buyers.

If producers want to be paid immediately after they deliver their cargoes, they will need to pay discounting costs to the bank based on the bankers’ discounting rates.

“Nowadays, producers are willing to offer discounts if buyers make procurements on a cash basis,” a second consumer said.

Therefore, for as long as Chinese cobalt producers continue to have difficulties accessing credit lines, they could be forced to sell products cheaply to secure cashflows as soon as they can.

“As long as tight credit lines exist, Chinese cobalt prices can’t maintain a healthy recovery even when international cobalt metal prices continue to rebound,” a trader said.

Why have credit lines not improved for Chinese cobalt companies?
Although the overall tightness of credit lines in China has been improved since the middle of this year when the country’s Central Bank increased liquidity to commercial banks, Chinese cobalt companies are still reporting difficulty getting credit.

“The China Central Bank indeed allocated more liquidity to commercial banks, but the latter have been hesitant to grant credits quotas to certain companies to manage their risk,” a trade finance manager told Metal Bulletin.

“Commercial banks don’t want risk having bad debts, which would affect their ranking,” he added.

The above trader added that commercial banks favor state-owned companies and large corporations, because they are lower risk.

Commercial banks have been reluctant to grant or maintain credit to cobalt companies due to falling cobalt prices and cobalt companies’ share prices, Metal Bulletin learned from the market.

“Commercial banks require a pledge for credit quotas. Pledges could be products, stocks shares or real estate,” the trade finance manager said.

“If the value of the pledge falls, commercial banks would tighten credit lines for related companies,” he said.

“If cobalt companies’ share prices fall, their ranking will be degraded in commercial banks’ internal evaluations. And eventually, commercial banks will grant credit quotas based on the company ranking,” a second trader said.