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Cobalt market blues

23 january 2024

Cobalt usage saw a resurgence in the last three decades, give or take. A metal that was mostly known to produce blue pigments and special alloys entered a golden age when scientists uncovered its potential to improve lithium batteries. But despite the rise in electric-powered cars and electronics production, the cobalt market now faces a supply glut, while mining companies are struggling to make a profit on every ton of this metal produced.

Prices peaked in April 2022 when a metric ton of cobalt cost around $82,000, and they have since dropped to just about $33,420 in December of last year. Some experts argue that the slump is attributed to lithium battery manufacturers switching to other chemical compounds that are more affordable, others attribute it to a sharp increase in production or even the negative publicity of the cobalt mining primarily conducted in the Democratic Republic of the Congo (DRC).

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All of these factors may have played a certain role, but the cobalt market structure may not be in such dire straits as it seems after all. However, let us begin with a little bit of history.

Goblin ore

Cobalt blue pigment has been used by artists, glassmakers and jewelers since antiquity, although it was believed that the color was produced by bismuth instead. The metal's name is derived from German where it was called 'kobold ore' (or goblin ore) - it had little content of metals useful for manufacturers at the time and gave off poisonous arsenic-containing fumes when smelted. Interestingly, cobalt became the first metal since the pre-historical period to be discovered by a scientist, as opposed to having no recorded discoverers. In 1735, Swedish chemist Georg Brandt showed that cobalt was a previously unknown element, distinct from bismuth and other traditional metals.

For the most part of the 19th and 20th centuries, cobalt found limited applications in chemistry and metallurgy, apart from pigment production. Petroleum and chemical industries make catalysts based on the metal. In metallurgy, it is used for the so-called superalloys (extremely corrosion- and wear-resistant alloys) primarily for jet engines and turbines, and its isotope cobalt-60 found an application for radiological treatment.

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In early 21st century the cobalt market entered a new era however - first, with a boom of portable devices and then, with an ongoing switch to the "green" economy and a rapid increase in battery-powered electric vehicles (EV) production. Some argue that cobalt will be one of the main objects of geopolitical competition in a world running on renewable energy and dependent on batteries.

DRC is currently the world leader in cobalt mining, accounting for more than 63% of the world's supply, with Indonesia in the second place and ramping up production. Other notable producers are Russia, Australia and Canada. It is worth noting that isolated cobalt deposits are rare. This metal is usually found alongside copper and nickel ores and then separated from them to create a finished product: either the refined cobalt metal that has been typical for decades, or a cobalt sulphate, the chemical form used in batteries. China, being the biggest battery manufacturer in the world, imports about two-thirds of cobalt mined globally.

"Green" metals glut puts pressure on cobalt market

Some of the metals that are considered essential to the global transition to the "green" economy characterized by an increased demand for batteries and alternative types of energy storage like hydrogen, have become cheaper over the course of 2023. This might seem counterintuitive when major powers herald the “Beginning of the End” of the fossil fuel era, but with the current state of world economy against the backdrop of looming recession and a slower-than-expected pick-up of Chinese post-Covid economy, the prospects of crucial metals like lithium, copper, nickel and cobalt on the market seem to be waning.

Lithium, the main component used in EV batteries, has plunged more than 80% from a late-2022 record, as the market whiplashed from shortage fears to a mountain of surplus inventories.

Copper futures have slid more than 15% in the 10 months to November last year. New energy sources, batteries and power lines are demanding more copper, but they still account for less than 10% of global usage, Citigroup researcher said, and prices could flag in the coming months because of incoming new supplies and softness in the 90% of demand unrelated to the "green" transition.

Meanwhile, nickel production in Indonesia, a country which emerged as a major supplier just a few years ago and now accounts for a half (!) of global supply, is not showing signs of decline despite negative macroeconomic landscape for battery metals. The country invested billions of dollars in efficient plants that benefit from inexpensive labor, cheap power and readily available raw materials, and can continue producing in an oversupplied market. Citigroup Inc. sees nickel prices falling to $15 500 a ton in the next three months. The nickel market will remain in surplus this year, a S&P analyst said.

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As we already know, most cobalt is produced during copper or nickel mining as a by-product. Fluctuations of mine supply of these metals can directly affect the cobalt market and pricing. Divesting in exploration and mining due to low prices now can lead to spikes in supply and demand in future, when the world is finally ready to embrace the "green" economy.

"Blood cobalt" and surplus

Miners were quick to respond to signals of future cobalt demand with a massive ramp up in production even before the Covid-19, during which the population bought more portable battery-powered devices than ever before. In the aftermath of the pandemic, consumer spending initially increased, while automakers ramped up production of battery EVs.

However, cobalt production increase came alongside a shift by some automakers toward replacing cobalt in their batteries, turning to cheaper alternatives. At the same time, negative publicity surrounding cobalt mining, the majority of which is located in DRC (some even referred to it as “blood diamond of batteries”), induced a move away from the metal to avoid human rights issues and environmental problems. Apple Inc. among others announced measures to switch to recycled cobalt in its devices, although their impact on cobalt market may be limited. On the other hand, China, the largest battery producer, is likely to shun these allegations and secure the supply of the critical metal no matter the cost.

And the cost in going down, with Chinese manufacturers taking the lead in market dynamics. There was a cobalt deficit of 8,000 metric tons in 2021. However, mining companies started ramping up production to meet demand, and the cobalt market recorded a surplus of 3,000 metric tons in 2022, according to S&P Global Commodity Insights research. In 2023, global surplus may have exceeded 5,000 metric tons.

Meanwhile, top cobalt producers CMOC Group Ltd. (China) and Eurasian Resources Group (with operations in Kazakhstan, Brazil and Central Africa) have agreed to sell more of their material against the local Chinese price of cobalt sulphate, a significant shift from pricing against refined cobalt metal that has been typical for decades. Another top producer Glencore is trying to resist the shift. Thomas Matthews, battery metals analyst at CRU Group in London, said on the matter: “Refiners would prefer sulphate pricing, and the glut of material reaching the market means that they are in the driving seat.”

One of the major factors for demand is the substitution of cobalt (and nickel) for other components in batteries. Lithium-iron-phosphate (LFP) chemistry has surpassed nickel-cobalt-manganese (NCM) applications in the battery EV sector. LFP batteries do not require cobalt. Market participants expect LFP to continue to dominate the power battery market globally in 2024, with global LFP output reaching 1.9mn-2mn tonnes this year, up by 30% from 2023 and far above the 1.1mn tonnes of NCM output forecast for 2024, up by 10% on the year.

The EV sales themselves may play a significant role. Those may remain on a steady upwards trajectory in 2024, albeit with a lower (23%) YoY growth rate forecast than in 2023 (36%), as the uncertain economic climate, particularly relatively high interest rates, continue to weigh on buyers’ decisions. Looking forward to 2024, the uncertain macroeconomic outlook coupled with continued growth of cobalt-free chemistries mean the threat of lower-than-expected demand remains.

Cobalt's silver lining

Fundamentals look bleak for the cobalt market at the moment, especially short- to medium-term. The world economy is stagnating, and the "green" future of the energy sector is as distant as ever. But was the spike in battery metal prices justified in early 2022 or was it a move by investors and market participants trying to jump onto the "green" economy hype train? With current dynamics and subsequent market correction, it seems to be the latter.

The truth is that CMOC, Glencore, ERG and Norilsk Nickel will continue to produce cobalt as a by-product of their main activities - either copper or nickel mining. If selling cobalt is unprofitable now, they may stockpile the produce for later. Of course, mining companies producing cobalt exclusively from rare isolated deposits will be hit the hardest - take, for example, a mine in Idaho, USA, that closed down just a couple of months after commissioning.

The dependence of cobalt supply on copper and nickel mining may be a blessing in disguise, as proliferation of "green" technologies may elevate the demand for all battery metals, leading to increased exploration and mining in the long term.

The cobalt-based battery chemistries will likely remain the most advanced technology for EVs, said a representative of the Fair Cobalt Alliance, a cobalt supply chain trade group. According to him, the price stabilization around increased production volumes should promote the economic viability of continuing to use cobalt. Batteries of choice for longer range EVs typically contain cobalt.

All in all, cobalt seems to have found a way into our everyday lives, and it is not going away any time soon.

Theodor Lisovoy, Editor in Chief of the European bureau, Rough&Polished