FOCUS: Preference for spot, short-term cobalt hydroxide procurement supports spot liquidity

Cobalt hydroxide buyers’ preference for spot and short-term procurement will persist, adding spot liquidity to the cobalt raw materials market next year, Fastmarkets understands.

Chinese cobalt consumers demonstrated continued appetite to commit to long-term contracts during Antaike’s annual International Nickel & Cobalt Conference in Yichang on November 5-6, which is an event where suppliers and consumers traditionally negotiate long-term contracts for cobalt hydroxide.

The contract talks took place just ahead of Glencore’s planned closure of its Mutanda mining operations in the Democratic Republic of Congo (DRC) by the end of this year. The closure will remove some 24,000 tonnes per year of cobalt from the market in 2020 and 2021.

Interest to secure long-term procurement also emerged after Glencore agreed to supply Chinese cobalt producer GEM with 13,200 tonnes of cobalt contained in hydroxide in 2020, and 12,000 tonnes of the units per year in the following four years.

The Glencore-GEM deal will destock at least 61,200 tonnes of cobalt hydroxide supply from the former’s outlet in the next half decade, reviving other consumers’ fears of tightened availability from the hydroxide producer giant.

Yet amid the heated negotiations for long-term hydroxide contracts, some Chinese consumers – both large and small sized – as well as suppliers have opted to maintain some exposure to the spot market alongside their traditional yearly contracts, market sources told Fastmarkets on the sidelines of the conference.

A buyers’ market amid adequate spot supply
Chinese consumers have been broadly stepping back from long-term contracts for cobalt hydroxide in the past year after supply started to increase in 2017, outpacing real consumption growth from the electric vehicles. The resulting oversupply dynamics since 2018 led to sharp declines in cobalt prices.

Fastmarkets’ benchmark cobalt standard grade, Rotterdam in-whs price dropped to a nearly three-year low of $12.10-12.75 per lb on July 31, down 67.3% from an almost 10-year high of $43.70-44.45 per lb on April 23, 2018. The benchmark price was most recently at $17.20-17.80 per lb on Friday November 8.

Similarly, the cobalt sulfate, 20.5% Co basis, exw China price fell to 35,000-36,000 yuan ($5,001-5,144) per tonne on July 12, the lowest level since Fastmarkets launched this assessment and down 75.9% from a record high at 145,000-150,000 yuan per tonne on April 11, 2018. The battery raw material price stood at 49,000-51,000 yuan per tonne on Friday.

Since the fourth quarter of 2018, almost all Chinese consumers have started to restock their inventories on a spot or short-term basis to manage the risks in a falling market.

With available supplies not committed to long-term contracts in 2019, Chinese consumers have had a stronger hand in hydroxide price negotiations. Cobalt hydroxide buyers have been able to push payables down to a level close to the netback from downstream cobalt salts prices, such as those for cobalt sulfate thus increasing their operating margins.

Cobalt suppliers and consumers traditionally agree contract prices for cobalt hydroxide at certain percentage payables against the low-end price of the benchmark Fastmarkets standard grade cobalt price, especially for seaborne units which have not been loaded at the originating ports.

Smart spot procurement yields better margins for consumers
Chinese cobalt hydroxide consumers also managed to achieve better margins at certain periods this year, taking advantage of volatile prices. This was especially the case in June and July when cobalt hydroxide prices dropped to a multi-year low which incited a wave of restocking among consumers and caused the Chinese cobalt price to bottom out quickly in late-July. The Mutanda closure announcement in early August prompted more price volatility.

Fastmarkets’ assessment of the cobalt hydroxide payables, min 30% Co, cif China dropped to 59-60% on July 15, the lowest level since Fastmarkets launched this assessment. The subsequent rise in the payables built momentum until late October when demand thinned. The cobalt hydroxide payables were most recently assessed at 65-68% on November 6.

Exposure to the spot market around mid-year meant some cobalt salts producers were able to make decent profit in August and September. Meanwhile, those cathode materials producers who conducted dip-buying managed to keep a better production cost performance by tolling, exempting themselves, to some extent, from the price rally of upstream cobalt sulfate.

Risk management encourages spot trades
Chinese cobalt consumers, especially small-to-medium-sized smelters, are preferring to maintain exposure to the spot market because of the flexibility spot procurement provides. Market sources noted the cobalt hydroxide market is far from tightening given heightened inventories in the past two years and fresh feedstock from new suppliers.

Fastmarkets’ battery raw materials research team expects the cobalt market to be in a surplus of 14,000 tonnes in 2020.

“The majority of consumers in China would still prefer spot or short-term procurement. The supply of cobalt hydroxide is plentiful therefore spot procurement provides more flexibility to [manage down the risks],” a consumer told Fastmarkets during the conference.

A second consumer shared the view, citing deceleration of electric vehicle production growth next year.

“We are not considering signing any long-term contracts for cobalt hydroxide,” the second consumer said. “Adequate supply is just one reason behind the decision. On top of it, demand is a major concern.”

“If cobalt sulfate smelters have demand of 200-300 tonnes [of cobalt contained] per month, they will have to lock in 200-300 tonnes of cobalt contained in hydroxide. However, if smelters get an order for only 20-30 tonnes per month, why would they bother to lock in units in long-term contracts?” he said.

Spot exposure helps suppliers achieve sustainable sales
Suppliers also plan to set aside a proportion of their sales volumes for the spot market to reduce risk from non-performance of contracts during acute price volatility and sharp changes of market dynamics, and as an alternative strategy when they cannot reach an agreement on prices for long-term contracts with consumers.

Where some buyers have opted to sign long-term contracts on a fixed payables basis, suppliers have found it difficult to reach a price consensus with the buyers. Therefore, suppliers would rather negotiate on a spot or short-term basis than agree to the relatively low payables consumers propose for long-term contracts, supplier sources told Fastmarkets this week.

The use of floating payables assessed by a third-party pricing reporting agency in long-term contracts for 2020 was a popular point of discussion at the conference and was favored by several suppliers and consumers. Both parties also acknowledged the importance of healthy spot liquidity for robust assessments of the spot payables.