Mid-Tier Mining House Mark II, page-120

A note on cobalt (please note that I have cobbled together points made in previous posts, so apologies for the repetition).

With cobalt prices in the toilet of late, metal writers & the usual doom and gloom suspects have been writing the goblin metal off. I contend that they are wrong.

Nothing exists in perpetuity. Cobalt prices are volatile - as we have seen over the past 12 months with prices falling from almost $40 l/b to $15 l/b. This fall can be explained by demand and supply factors.

On the demand side, China’s lockdowns crushed consumer demand for electronics. After seeing overall demand growth of 19-20% in 2021, this slowed to around 8% in 2022. While EV demand is growing, it still only comprises 1/3 of total cobalt demand at this stage. So, cobalt demand is very much a non-EV/industrial demand story. And this non-EV/industrial demand is expected to remain fairly flat in future years, whereas EV demand will command the lion’s share of the pie. That takes time, but is accelerating.

On the supply side, Glencore brought Mutanda back online after mothballing it during the last cobalt price slump. In addition, Indonesia produced around 18,000t (or 10%) of the total 177,000t produced in 2022. This additional supply came online as demand had fallen off a cliff. China dumped surplus supply on global markets and it is taking time to be absorbed. Fastmarkets are predicting the market to be in a small surplus this year, so prices will be constrained for a while.

Co hydroxide feed is slightly under $10 l/b now. If you remember back to 2019, Glencore closed Mutanda when the price went to $7 l/b. The issue at the moment (compared to back then) is that copper and nickel prices are high & with a lot of cobalt being mined as a byproduct of these two - marginal profits on cobalt can be sustained for a while. Saying that, mining companies/commodity traders can manipulate prices by adjusting their processing output and have previously shown that they will do this to drive prices off lows.

I have recently noticed a lot of issues involving opaque contract pricing (esp with the LME and the nickel saga of last year). I note via Bloomberg that the Carlyle Group is planning to sell commodity trader Traxys to high-frequency firm, Optiver. The idea here is that Optiver and Traxys will develop a new derivatives market for niche metals like cobalt, tin, REEs, etc. This should help improve transparency with regards to pricing. The CME has seen a huge uptick in customers. And hedging is likely to feature more prominently in the future to deal with volatile price fluctuations which aren’t good for producers or consumers. This should help improve price stability across the board.

ESG. With 75% of the world’s cobalt coming outta the DRC, the spotlight has been shone on this abhorrent jurisdiction. Child slave labour is an appalling tragedy. Awareness is growing. One would think that western customers will increasingly prefer as much non-conflict material as possible. Brand protection is important for many companies. A Reuters piece the other day pointed out that it may be possible to have a structural oversupply of conflict material in the ST, but an undersupply of “socially acceptable metal” - in other words - creating a market divergence in cobalt. The real question then is: will Western customers pay a premium for non-conflict material to support their ESG credentials? Follow the money and deals for possible answers.

OEMs are looking to lock in large supply deals for battery metals from 2024 onwards in order to ramp up production. Some are making moves now. Every time I ask Bryce Crocker, CEO of Jervois Global, about cobalt prices, he keeps repeating the same mantra “We are far more bullish on cobalt than is being written about in the media”. While not reflected in the current cobalt price, producers have commercial insight that most don’t. JRV have met with 6 OEMs, so they would be privy to future supply deals. Make no mistake, EV demand for cobalt will most likely surpass the total amount of cobalt produced in 2023 by the end of this decade.

LFP/NCM debate. There will be an ever-widening range of battery chemistries suited for different market segments/customer preferences. NCM811 has exceptional energy density. LFP batteries will not displace NCM811. Even if you thrift cobalt or introduce different chemistries, the total number of cars being produced that use nickel chemistries containing cobalt is still rising - even if LFP is growing much faster. In other words, if the total number of cars with nickel chemistries containing cobalt is larger in future years than today - it stands to reason that the total demand for cobalt will increase (not decrease). The pie is infinitely larger. Try not to buy into the binary argument of one chemistry dominating the other. The market is large enough to accommodate multiple battery chemistries. And cobalt is critical to stabilise nickel in the cathode and prevent thermal runaway. Yes, you can eliminate cobalt if you ramp up manganese, but you need a 3:1 ratio of nickel to manganese (75%/25%). So, by dropping the nickel content, you compromise some energy density. NCM811 has a greater energy density than an NMX battery - and that means more power.

Looking at the 10Y cobalt price chart, you will notice two large spikes (2017-early 2018) and (2021-early 2022) followed by subsequent slumps. Both these spikes were premature speculative runs. They were not driven by demand and supply fundamentals. The next cobalt price run will reflect growing EV demand for the metal and supply struggling to keep up. The so-called cobalt cliff. And those holding the metal and importantly - the ability to refine it into battery grade material - will be kings. Cobalt will have its time in the sun again.