Cobalt prices: something is not right
Between 21 March 2016 and 26 March 2018, the price of cobalt soared from 23,000 $ to 94,800$ per tonne. During that period, global demand, standing an estimated 95K tonnes per year, was still largely secured by a greater production (about 110K tonnes). However, over the past three months and so very suddenly, the price nosedived, after a good semester of stability. The same tonne of blue gold is now selling at 40,000 $. Why this bell curve trend? Analysis

PRICE SOARING BETWEEN 2016 AND 2018...

THE POLITICAL CRISIS IN THE DRC

It is the political crisis in the DRC around mid-2016 which probably kick-started the pressure on cobalt.  During that period, industrialists were worried about the risk of a worsening of the political situation in our country and anticipated a possible destabilisation. This destabilisation could result in disturbing the national production.  Yet, the DRC possesses 50% of global reserves, according to the US National Mineral Centre and supplies about 58% of the production, according to the same source. Furthermore, the cash cost of Congolese copper i.e.  the unit cost related to its extraction (extraction, processing, administration, dues, taxes) is particularly low.  Which in turn results in low prices for cobalt as it a by-product of copper.  

Prudence being applied by industrialists and traders, the reflex consisted in stocking up for cobalt to guarantee the supply side.  

POST COP 21 HISTORICAL CONTEXT

Cobalt is largely used to make lithium-ion batteries for electrical vehicles.  Based on the commitments made by 190 States at the Paris Conference on climate held in December 2015, these countries vowed amongst other things to accelerate the transition from fossil fuel powered vehicles to electrical vehicles.  This choice was, for the most part, endorsed by these governments and their parliaments during 2016.  Yet, given the current state of research and cobalt global reserves, it is obvious that this mineral is and will remain critical for achieving that objective.

”sometimes it only takes so little for tensions to exacerbated and for the risk of shortages to threaten.  This situation was only made worse by the media.”

SPECIFICITY OF “OFF-TAKE” MARKET    

Despite cobalt prices being listed on the the LME (London Metal Exchange), the majority of contracts are negotiated directly between the producers and users, outside of stocks-exchange markets.  Manufacturers buying cobalt prefer “off-take” contracts which allows them to purchase any given production of the metal at a fixed cost and negotiated directly with the seller.     

The increasing number of these contracts concluded by traditional buyers, investment companies incorporated for the purpose as well as by new electrical batteries giants, led to a drastic reduction of cobalt supply available on stocks-exchange markets.   Sometimes it only takes so little for tensions to exacerbated and for the risk of shortages to threaten.  This situation was only made worse by the media.

LONG-TERM SPECULATION    

Contrary to received ideas, markets appreciate long-term gambles. And experts reviewed the ratio between reserves, production, and annual demand and ended up reducing the supply guarantee from 102 years (based on 2016 consumption) down to 26 years (based on demand projections over the next decade). As a result, the markets simply went crazy.  

PRICE DROPPING FOR A YEAR NOW…    

It is a fact that the political crisis in DRC was a major trigger of tensions on the prices. But this situation didn’t worsen and for some weeks now, it is even believed that the country entered a period of sustainable stability. This country-risk led manufacturers and investment funds to stock up for cobalt.  We might have entered a de-stocking cycle though.

Given the price rises, manufacturers have increased their efforts to reduce the cobalt percentage in their batteries, investing significantly inR&D. The first results, which are mostly being tested or even at industrial manufacturing stage, allow for a stark reduction of the cobalt ratio in batteries. Which re-secures long-term supply, including the projected production of 10 to 15 million electrical vehicles per year, planned for the next decade. This is compounded by the growing strength of Chinese, Indian and African economies.  

Significant efforts were made by states to support batteries recycling initiatives in order, amongst other things, to recover the cobalt found in the batteries.  Processing units at operational or advanced development stage are growing in number. This in turn obliterates the risk of shortages from the supply side.    

Besides, the DRC country-risk boosted projects in other countries (such as Australia, Canada, Cuba...). These projects are on their way to reaching operational stage.  

The trade war pitting the US against China, is evidently slowing down the pace of Chinese economy, which reached its lowest point in 10 years.  And any slow-down of the Chinese economy means a drop in cobalt prices.  This slow-down of the world’s second largest economy is making investors risk averse.  In these times of great turmoil of the global economy, markets that are traditionally focused on the medium and long term gambles, tend to fall back to the short term gambles.  

Yet, logically, cobalt supply should be largely higher than the demand over the next years, bearing in mind that the DRC is planning to increase its production by adding cobalt circuits in its factories. On the other hand, China is closing refineries that are considered to be polluting. Which makes it more difficult to sell out stocks.

Finally, there is no hedge on cobalt and losses registered over the past months could not be covered by derived financial products.  One can easily imagine that life has not been easy for some investors.      

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