FORECAST: Recovery in buying unlikely to send cobalt prices straight back to $40/lb - sources

Trader and consumer buying returned to the cobalt market in earnest last week for the first time in the best part of a year, but the restocking does not signal the beginning of a return to 2018’s multi-year highs, according to market participants spoken to by Fastmarkets.

Standard-grade cobalt prices, assessed by Fastmarkets, rose for the first time since October last week, as a result of a recovery in spot demand.

Benchmark prices stand at $13.75-14.40 per lb, in-warehouse, up from $13.30-14.20 per lb a week ago, according to Fastmarkets data.

But they remain down 68.5% from near 10-year highs of $43.70-44.45 per lb hit in late April last year, and are unlikely to return to such a level over the rest of 2019 due to changing buying preferences and a still cautious approach to metal purchases from consumers in a market prone to big moves.

Fastmarkets’ battery raw materials research team forecasts the standard-grade cobalt price will average $13.95 per lb in 2019, down from $36.80 in 2018.

Underlying apprehension
Cobalt consumers and traders have been reluctant to come in to restock since prices started to slip last May.

Some of them lost out through aggressive purchasing as prices rallied higher over 2017 and the start of 2018, in a market many felt was at least well supported in the $40s, or headed to $50 and above. Since prices turned in May last year, they have been working through their high-priced inventories, and buying minimum necessary tonnages in case of prices moving lower the next week or day.

“Customers have been anticipating that they can get immediate release when they come in to buy [and in some cases] they’ve saved themselves $5-6 per lb by waiting a few weeks,” a trader said.

“The entire value chain has been shrinking its inventory; you’re just not thinking that you’ve got to buy loads because it’s on its way to $30,” a consumer added.

Such a comment alludes to a clear shift in cobalt buying preferences among end users, which means that, despite last week’s spate of buying, the demand profile of cobalt is quite different this year to last, limiting its immediate capacity for a sustained rally.

The increase in cobalt prices to nearly $45 per lb in 2018 was borne out of anticipated demand from the battery and electric vehicle sector.

But as benchmark reference prices for cobalt rallied, production of sulfate and hydroxide increased. Effective paid prices for the latter two, in comparison to metal, suffered, cementing their position as the raw material of choice for the battery sector, in preference to metal.

That shift had a profound effect on 2019’s contract negotiations for cobalt metal. Sellers battled it out to agree long-term contracts to supply metal to the more traditional end uses, agreeing discounts of 10% (against the Fastmarkets’ standard-grade benchmark) in some cases.

An overhang of metal not committed to long-term contracts, much of it in producer hands, has contributed to weaker sentiment and falling prices for much of the first quarter of 2019.

“The consumers have had a sense of security that there’s a lot of metal around,” a European trading source said.

Market sources spoken to by Fastmarkets have put the cobalt metal surplus for 2019 at about 2,000-3,000 tonnes. While that is material that could, admittedly, be absorbed quickly by investor buying or trader positioning, a largely unchanged picture of real consumption – irrespective of last week’s buying – is expected to put a cap on a rally.

So too, will the underlying threat of increased output should prices show a sustained rally. While weaker prices have discouraged Chinese production of metal, a meaningful increase could encourage their restart, another trader added, serving to cap a recovery.

“A lot of bearish stuff is still out there, but [the market] is taking a breather,” a producer said.

The London Metal Exchange launched a new cash-settled cobalt contract, settled against Fastmarkets’ benchmark standard-grade cobalt price, on March 11. Join us for a few web seminar on Monday April 8 as we introduce our cobalt price discovery and the cash-settled contract. Register here.

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