An extract from Antho0ny milowskis letter to shareholders of Coblat 27 -the bit about the cobnalt market./
Finally, a comment on the two primary drivers of our NAV – nickel and cobalt. Over the course of 2018, cobalt saw a price of over US$44/lb. which has not been seen since 2008, and a nickel price that showed solid strength peaking at US$7.14/lb. Although cobalt prices retreated later in 2018, they remain above the long term average and, in our view of supply and demand fundamentals for cobalt and our business, remain strong.
The cobalt market remained energized in 2018 with strong demand for metal from the aerospace and alloy sectors coupled with continued demand growth from chemicals, primarily driven by batteries and electrical storage systems. However in 2018, we also witnessed the development of a bifurcated market as cobalt metal supply remained relatively flat in a growing market for these products while cobalt intermediate supply, typically utilized for chemicals and batteries, saw an increase in output from the Democratic Republic of Congo (DRC) driven by artisanal production and the anticipated ramp of up of Glencore's Katanga mine. The Congolese artisanal production is the swing supply that has resulted in a greater price differentiation between metal and intermediate products as cobalt metal prices remain at historically higher levels and cobalt intermediates, which are priced against metal, are seeing increased price pressure with surplus material available in the short term. Additionally, at certain points in 2018, we saw selling pressure on cobalt with the re-tightening of credit among Chinese consumers impacting inventory management strategies. The significant majority of Cobalt 27's value is derived from cobalt metal prices and therefore, we are somewhat insulated from the price differentiation between metal and intermediates, though not immune.
In addition, our research indicates that as auto manufacturers ramp up deliveries and production of EVs, the demand response for batteries will close the current gap that exists between the availability of intermediates and the demand for them, which is currently still playing catch up. However what the supply response from the DRC has highlighted is the precarious nature of the cobalt supply chain with roughly 70% of cobalt now coming from the DRC and numerous reports calling into question both the environmental impact of the non-mechanized mining and whether the material has been ethically sourced. Our view is that in the near future a "Kimberly Style" process for certifying cobalt origins will be necessary if battery makers are to be able to stand behind assertions that their cobalt has been ethically sourced. This is evidenced by the indications from both the Cobalt Institute and London Metals Exchange (LME) that ethical and responsible sourcing is no longer something that will be left to unofficial "self-certification" and more transparent and standardized certification systems are being contemplated. In 2018, we also saw a glimpse of the issues associated with such a concentrated cobalt supply chain when a major mining company with operations in the DRC announced it had to halt sales of cobalt due to uranium in the product. While it would appear the issue will be resolved in the second half of 2019, we are reminded that should any unexpected events take place in the DRC it could have a material impact on the market. Meanwhile, fears persist around what election results and a transition of power may mean for the DRC in 2019.
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