FOCUS: Supply uncertainties lead cobalt-hydroxide market to fixed-price spot deals
Spot cobalt hydroxide deals are being concluded on a fixed-price basis while buyers and sellers seek to shield themselves from market volatility expected to come from measures taken to curb the global spread of the coronavirus.
News late last month that South Africa would enter a 21-day lockdown created uncertainty over the supply of cobalt hydroxide in the coming weeks and months. About 65% of the world’s cobalt supply is mined in the Democratic Republic of Congo (DRC), much of which is then transported to and shipped out of Durban in South Africa.
Given the potential for extended lockdowns to affect regional production and logistics, market participants are bracing themselves for possible disruptions to cobalt supply while measures to manage the pandemic are enacted, sources said.
For suppliers, so far this has meant looking at alternative shipping routes. Some consumers are also looking to diversify their inflows through buying non-DRC-mined cobalt intermediates or picking up spot hydroxide units from stocks in Asian bonded warehouses or surplus refinery inventories.
Spot purchases such as this often come with nearby-delivery dates that can attract a fixed-price negotiation, rather than the negotiation of a payable (a percentage of the standard-grade metal price).
A fixed raw materials cost means the buyer can pursue back-to-back deals with their own customers, with a known raw material cost in mind.
“The fixed-price purchase enables cobalt producers to check profits immediately when their downstream customers make bids to them for forward cargoes,” a trader source said.
Uncertainty in forward QPs
Definitive loading times for forthcoming spot DRC cargoes are hard to come by, meaning nearby units have even greater appeal, beyond price certainty, sources said.
On the surface, fixed prices also point to a hydroxide market that is firming, after coming under pressure in in March.
Spot hydroxide sales were reported to Fastmarkets last week at $10.40 per lb - about 65% of the metal price taking the low-end of that day’s assessment for cobalt standard grade, in-whs Rotterdam at $16 per lb on Monday March 30.
Sellers are targeting higher numbers, offering in a range of $10.60 to about $11.60 per lb in most cases, according to data collected by Fastmarkets. Such offers would equate to payables of around 66.25-72.5%, again taking a metal price of around $16 per lb.
Fastmarkets’ cobalt hydroxide payable indicator, min 30% Co, cif China settled at 64-65% of Fastmarkets’ standard-grade cobalt price (low-end) on April 1, up 1.6% from 62.5-64.5% a week earlier.
In practice, however, market activity linked to a payable settlement also includes a reference to a quotation period (QP) to determine the metal price against which the payable will ultimately be settled, then providing the final price the customer pays for the hydroxide.
That QP will reference the average of Fastmarkets’ standard-grade metal price assessment in the current month (M) or in the future months (M+1, M+2, etc).
Since that underlying reference point is unknown at the time of the deal being agreed, buyers are unable to lock in their raw materials costs, which becomes even more unappealing when metal prices’ next move is more difficult to forecast.
Fastmarkets’ assessment for cobalt standard grade, in-whs Rotterdam stands at $15.70-16.25 per lb as of April 6, down 7.2% from $17-17.50 per lb on March 10.
Government efforts to stem the spread of the coronavirus have already suspended cobalt metal production at CTT in Morocco and Ambatovy in Madagascar. The supply disruptions that the intermediates market faces should also filter through to the metal market down the line, and may limit further pressure on metal prices, sources said.
Alternatively, metal consumption has taken a hit from plant closures, with market participants expecting the virus-led slowdown in the global economy to hit demand from the aerospace and battery sectors. Despite recent declines from prices as high as $18.40 per lb for alloy-grade cobalt, international cobalt metal prices (at around $16 per lb) are still running higher than prevailing metal prices in China.
Fastmarkets’ price assessment for cobalt 99.8% Co min, ex-works China stands at 235,000-250,000 yuan per tonne, ($15.05-16 per lb) or about $13.30-14.15 per lb if local VAT at 13% is removed, as of April 3, unchanged since March 25.
Copper, nickel and oil prices have also come under greater pressure than cobalt, with some market participants suggesting cobalt prices cannot be immune to further price declines stemming from macroeconomic weakness.
Market participants in the cobalt intermediates market, which is acutely dependent on the production and export of material out of the DRC, expect supply to tighten, meaning payables should move higher. Although, because the metal market’s next move is unclear, it is difficult to ensure that an increase in payables will account for a possible further decline in metal prices.
“I already know my purchase costs [for cobalt hydroxide]…with a fixed price, I can be certain of my profit,” a second trader source said. “I need to ensure the effective sales price is higher than my purchase cost. If I sell with a payable, given the current downtrend in metal prices, I might end up losing money.”
Despite an increase in fixed-price business and offers, some consumers still prefer to wait for more concrete signs of tightness coming from the DRC.
“I’m not sure payables will go up quickly any minute now; not everybody shares the eagerness to buy hydroxide yet,” the second trader said.
Concurrently, the extent of the current weakness in metal prices, and the timing and gradient of its turn, is hard to factor into discussions, leaving both buyers and sellers reluctant to transact on the basis of a payable.
“People expect [payables] to go up, and they don’t want to be exposed to another unknown [underlying] element,” a producer said.