I had a very enlightening conversation on Wednesday morning with the experts at Darton Commodities Limited, a U.K.-based metals trader that specializes in cobalt and serves as an intermediary between cobalt producers and European users. A couple days before the call, Darton sent me a copy of their 42 page “2015-2016 Cobalt Market Review.” It was one of the most impressive and data rich industry overviews I’ve ever seen.
Our wide ranging hour and a half conversation confirmed my developing thesis that cobalt is an immense supply chain risk that lithium-ion battery manufacturers and users have blithely dismissed in a headlong rush to build production capacity for markets that may not develop, or may develop more slowly than anyone anticipates. It left me more convinced than ever that my initial risk assessments were understated.
The Cobalt Cliff is upon us and there is no reasonable probability that the battery industry will have the muscle to outbid other essential industries that must have cobalt to make far more valuable products.
While the statistics embedded in the “Cobalt” page on Darton’s website are a bit dated, the page provides a solid summary overview of the sources and uses of cobalt.
Sources of Cobalt
“Cobalt is not found as a native metal but in nickel-bearing laterites or nickel and copper sulphide deposits. This means that cobalt is usually produced as a by-product of nickel and copper mining activities. Of current production sources, approximately 64% of cobalt production is copper related, 33% is nickel related and only 3% is produced by primary cobalt operations. The main reserves are found in the southern part of the Democratic Republic of Congo (DRC), an area which currently holds close to half of the world’s cobalt reserves. Australia, Cuba, Zambia, New Caledonia, Canada, Russia, Madagascar and Brazil hold much of the balance of global cobalt reserves. In 2011, global refined cobalt output was estimated at just over 80,000 MT [metric tons], of which approximately 52% was in chemical form and 48% in metallic form. Approximately 49,000 MT or 61% of this global output was originally mined and (semi) refined in the DRC and of the worlds five largest cobalt refiners four are heavily dependent on DRC sourced refining materials. China’s share in global cobalt production has grown dramatically in recent years, contributing some 33,000 MT or 41% of global refined output in 2011.”
Uses of Cobalt
“Cobalt has a diverse range of important metallurgical and chemical uses which varies from aircraft engines to rechargeable batteries. It is also found in industrial chemical processes where its unique catalytic properties can be used for such applications as desulphurisation of hydrocarbons, the removal of nitrous oxide and the emerging technology of converting natural gas to liquid hydrocarbons. Base industry also utilises the advantages that cobalt can bring to the hard metal industry where hard wearing metals and alloys allow the manufacture of highly effective cutting tools for a broad range of industrial applications. The high temperature resistance, hardness and wear characteristics of cobalt when alloyed with other metals can also be put to good use not only in gas turbines but also as hard surfacing in critical applications where working environments are aggressive. By improving wear and durability this can also improve operating efficiencies by extending the operating life and reducing friction. Furthermore, cobalt’s versatile physical and chemical properties make it a vital ingredient in the colouring of pigments and ceramics, electroplating and the manufacture of vehicle tires, paint driers, permanent magnets, synthetic diamonds and animal feed.”
Supply trends since 2006
According the USGS, cobalt ore production soared from 57,500 MT of contained metal in 2006 to 124,000 MT of contained metal in 2015. Roughly 62% of the supply growth came from new mines in the DRC, a country that produced 22,000 MT in 2006 and 63,000 MT in 2015. Other major contributors to supply growth during the decade were China (5,800 MT), the Philippines (4,600 MT) and Madagascar (3,600 MT).
Demand trends since 2006
Just as the DRC has been the primary driver of cobalt supply over the last decade, the lithium-ion battery sector has been the primary driver of cobalt demand. According to CDI and Darton, battery industry demand for cobalt soared from 12,300 MT in 2006 to 44,600 MT in 2015, a compound annual growth rate of roughly 16%. Other industrial uses of cobalt remained remarkably stable throughout the period ranging from a low of 42,600 MT in 2009 to a high of 52,500 MT in 2011. According to Darton, most industrial cobalt users who can substitute another material for cobalt have already done so, which makes non-battery demand incredibly inelastic. In 2015, non-battery demand was 45,600 MT.
Historic Synergies
Over the last decade there has been a remarkable synergy between increasing cobalt supply and increasing battery industry demand. The supply increase was driven by new copper and nickel mines that were brought into production to satisfy soaring demand for those metals, principally from China. If the battery industry had not been around to absorb the increased cobalt production, cobalt prices would have tanked because non-battery demand is remarkably stable. Since supply and demand were effectively increasing on parallel but independent tracks for the last decade, the market price of cobalt remained remarkably stable post-2009 as supplies soared from 56,000 MT to 93,000 MT.
The Synergies Are History
Since 2006, nickel and copper prices have been highly volatile because miners expanded production too rapidly and Chinese demand growth faltered. After peaking at $24 a pound in 2007, nickel began a multi-year slide to its current level of $3.75 a pound. While copper didn’t peak until 2010, the slide from $4.50 to $2.15 a pound has savaged mining profits.
According to Darton, about 70% of nickel miners and a substantial percentage of copper miners are losing money at today’s prices and the managers of those companies are grappling with mounting losses and increasing pressure to take mines out of production and put them into care and maintenance mode until demand and prices recover.
In 2015, global cobalt production was 92,900 MT. Based on closings that have already occurred, Darton expects 2016 cobalt production to fall by 5,900 to 10,400 MT. It also cautions that Glencore has openly discussed a potential closure of Minera Resources (2,900 MT per year); Queensland Nickel (1,900 MT per year) recently went into voluntary administration and could be closed within a few months; and several other large cobalt producers are weighing their loss minimization options. Therefore, production declines from future mine closures could be much larger.
Darton also reports that the Chinese State Reserve Bank has bought and stockpiled about 5,000 MT of cobalt this year.
Sizing the 2016 Shortage
Based on historic trends, it seems reasonable to expect that non-battery cobalt demand will equal or exceed 2015 levels of 45,600 MT. It also seems reasonable to expect that battery industry demand will climb into the 52,000 MT range, a 16% increase over 2015 demand of 44,600 MT. Without accounting for additional stockpiling by the Chinese State Reserve Bank, total cobalt demand of 102,600 MT is baked into the cake for 2016.
On the supply side Darton has identified 5,900 to 10,500 MT of production declines from mines that have already closed and 4,800 MT of production declines from mines that appear likely to be closed. Moreover, its 2015-2016 Cobalt Market Review cautions, “With miners facing the worst commodity rout in decades, further production cuts can be expected during 2016.” In combination, these facts point to 2016 cobalt production that can’t exceed 87,000 MT and could fall to 77,000 MT. Those figures represent, 85% and 76% respectively of identified cobalt demand for the year.
A 15% to 25% supply and demand imbalance in a market like cobalt is a big problem, particularly when half of global supplies are used in industries that simply can’t do without the metal. Given the critical importance of the non-battery uses, I think the substantial bulk of the production shortfall will come from the battery industry’s hide, fat, muscle and bone.
This is not a supply chain challenge that will evolve over a period of several years. It’s a here, now and in your face challenge. Since the conduit from mine to refinery to industrial user can give rise to time lags of several months, the 2016 cobalt production declines may not become obvious until the end of the year. In all probability, the declines won’t be fully manifest until mid-2017. But as certain as night follows day, reducing the ore concentrates flowing into the conduit will reduce the refined cobalt flowing out the other end.
While I’m very comfortable with my assessment that cobalt supplies available to the battery industry will fall by 30% to 50% over the next year, I don’t have enough experience to predict the likely trajectory of cobalt prices or the likely battery industry response to an overwhelming cobalt shortage. It’s easy to predict that LCO chemistry will fall out of favor because it needs four to five times as much cobalt per kWh of battery capacity. It’s also easy to predict that applications like smart phones and computers that only need 10 to 100 wh of battery capacity will fare better than applications like electric cars that need 24,000 to 90,000 wh of battery capacity. Beyond the easy predictions, my crystal ball is pretty murky and the only thing I know for sure is that it will be a learning opportunity.
Concluding Thoughts
I’ve been patiently watching lithium-ion battery supply chains evolve since 2011 when Roland Berger Strategy Consultants released a presentation titled “Powertrain 2020; The Li-ion Battery Value Chain – Trends and implications,” which included this graph that looked forward to 2015 and compared planned cell manufacturing capacity additions with planned cathode, anode, separator and electrolyte capacity additions. It’s important to remember that none of today’s gigafactory projects were contemplated in 2011.
In a November 2011 article titled, “Electric Vehicles; Ineptitude, apathy … and piles of taxpayer money” I wrote, “Since it’s impossible to manufacture cells without anodes, cathodes, separators and electrolytes, I have to wonder about the management teams that are building cell manufacturing facilities without first ensuring the integrity of their supply chains. The apparent lack of concern over supply chain issues is staggering. I can’t decide whether it’s reckless apathy or simply a childlike faith that the taxpayers, like doting first-time grandparents, are breathlessly waiting for any opportunity to provide whatever the golden child needs or wants.”
My neighbors in Switzerland were were fond of saying “plus ça change, plus c’est la même chose;” the more things change, the more they stay the same.
When it comes to the lithium-ion battery industry and the Cobalt Cliff, all I can say is amen.
Yogi Berra said it best, “It’s like déjà vu all over again.”
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