Cobalt & Lithium
Cobalt:
Cobalt futures are traded in the London Metal Exchange (LME). The LME works closely with the Fastmarket MB, which is an international specialist and publisher of information about the global steel, non-ferrous and scrap metal market.
Forward curve for the LME Cobalt (Fastmarket MB) from Sept.2020 (they didn’t release the OCT. and NOV. yet). Prices are in USD per MT compared to the other Cobalt physical price which are in Tonnes (1000kg)
Image source: https://www.lme.com/Market-Data/Reports-and-data/Monthly-overview , consulted in Nov.2020
The forward curve graph shows a contango situation. As previously mentioned in class, a contango situation means that the futures price of a commodity is higher than the spot price. In the case of our Cobalt graph, the slope shows that the market is stable and nothing dramatic is affecting it. The almost straight line shows that the futures price is directly linked to the price of cobalt plus its cost of carry each and every month.
image source: https://tradingeconomics.com/commodity/cobalt; consulted Nov.2020
The LME only started to trade Cobalt in 2010, so this is the furthest we can go historically. Today (11.11.20) the price of Cobalt is 32’835$/T. What is interesting for Cobalt is what happened in the past: if we look at the graph, we can see that in 2018, the price went up to 95’000$/T, which is almost 3 time of today’s price. The reason behind this is especially because of a huge jump in EVs market growth between 2016 and 2018. The International Energy Agency (IEA) projected that by the end of the current decade, the EVs being used on roads would triple to reach 13 million in total and that by 2030, we would see about 125 million vehicles. Such growth projections have spurred very strong demand for lithium-ion batteries, which we know now, use cobalt for the batteries’ cathode components. Let us remember that such batteries are used not only on EVs but on smartphones, like the iPhone, PCs and so on. The demand had been then very anticipated to grow rapidly over the coming decades[1]. This created a high demand for cobalt, pushing the price higher and higher. This phenomenon inspired the miners to mine more in order to capitalise on higher price. What happened next was an increase in mining for cobalt: DRC, which stands for more than 60% of the global Cobalt mining, was suddenly mining a lot more to catch up with the demand, by the increasing creation of local artisanal mines. Moreover, Glencore, was building a massive cobalt mining infrastructure in Katanga, DRC ( https://goo.gl/maps/H4WmTGEJMy36d6GBA ), which would increase global Cobalt supply to 26’000tonnes/y[2]. These sudden supply rush created an oversupply in the market which pushed the price down.
On top of that, something that contributed to the crash was that Tesla, the leading company for EVs, stated in 2018 that they were “reducing cobalt content” in their new batteries for the next cars[3].
Another point was that Chinese manufacturers were stockpiling cobalt by buying more than needed, thinking that prices would keep going higher every month. They finally ended up buying less after the price dropped because they already had stocks.
All these points contributed to the 70% price crash that occurred in 2018-2019.
The price is still much correlated to these points but there were not such a high price up to today. In the graph below, we can see that price drop in March is very much correlated to the Coronavirus pandemic, which slowed the industry down.
We can see that in the second part of the year, the price resurged because of the summer de-confinement and restart of the businesses but also an increase due to the several news of the EV market. If we look at Tesla and Nio stock price, it sky rocked after news on new batteries technology (1mio mile Tesla battery[4][5).
Source: https://www.lme.com/Metals/Minor-metals/LME-Cobalt-FASTMARKETS-MB#tabIndex=2 consulted Nov.2020
Tesla stock and NIO stock price graph
Images source: https://www.macrotrends.net/stocks/charts/
Lithium:
Lithium has no futures contract yet but the LME, partnering with Fastmarkets MB, is projecting on creating the very first one, the LME lithium Hydroxide CIF futures contract, in H1 2021 (first half of the year), so we will have to wait for the Forward/futures curve.[6]
The lithium market is also much linked to the EV market and other consumer electronics. If we look at a historical price from the same dates as cobalt above (in the small graph), we will see the same trends:
This is the chart of lithium Carbonate 99.5% LiCO3, battery grade, spot price China. Warning: this chart is in ChineseYuan/tonne (39’000CNT = 5890.70USD dated 12.11.20)
Image source: https://tradingeconomics.com/commodity/lithium
2. Supply and demand dynamic
A quick reminder: Why is cobalt important?
Cobalt is a main component used to produce batteries. The biggest growth in the batteries sector will come from electrical cars. The sector is forecasted to grow from 3.2 million electric vehicles in 2017 to 130 million by 2030. The forecast is that by 2030 65 percent of cobalt demand will be needed for the electrical cars market. Additionally, the growth in the electrical cars industry will be heavily influenced by different countries’ regulations.
Supply and demand dynamics
The European Commission published a rapport in 2018 where they forecasted how the supply and demand dynamic of cobalt will evolve.
Cobalt supply and demand dynamics
The forecast states that we will experience a shortage of cobalt by 2025. The deficit will keep on growing. Their study shows that even by adding back into the supply chain recycled cobalt, the forecast is that by 2030 the supply of cobalt will be short of 66 000 tonnes.
Cobalt market balance
What is being done to try to remedy the situation?
In the European Union the focus is on battery recycling and additional mining activities. Together they could increase endogenous supply, which could then cover about 15 percent of the European electric-vehicle sector demand in 2030.[7]
Australia is also expected to become an important cobalt-producing country, potentially accounting for 14 % of the world production in 2030. Today, 55 percent of the world production comes from the Democratic Republic of Congo.
And tesla in all this?
On September 22, Tesla held its annual meeting of shareholders and battery day. Tesla’s CEO promised all kinds of battery improvements geared at reducing costs per KWh, increasing range and lowering investment per GWh. Despite the company’s efforts to eliminate cobalt, many still believe the battery metal will be needed for some time to come. However, one thing is for sure the cobalt supply chain is critical and if new batteries without cobalt in them aren’t created soon, the world will run out of cobalt pushing the price of all electronic devices and electrical vehicules upward.
Inventory levels
China & COVID-19
China’s refiners, which dominate global output of cobalt are heavily reliant on material that comes from Democratic Republic of Congo mines via ports in South Africa. COVID-19 lockdowns in southern Africa have created bottlenecks, delaying cobalt shipments from Zambia and the Democratic Republic of Congo.[8][9]
China’s state stockpiling agency has drawn up plans to buy 2,000 tons of cobalt after the coronavirus pandemic highlighted the fragility of supplies of the strategic mineral. Bloomberg stated that the National Food and Strategic Reserves Administration in China could put its purchasing plan into action by the end of this year, according to two people familiar with the matter. The move is in response to supply disruptions from top producer, the Democratic Republic of Congo, and is in line with China’s future economic and strategic needs. [10]
3. Recommendations to be short (sell) or long (buy) for the next 3 or 6 months.
As far as it concerns the cobalt commodity, we can see that the forward curve is a contango. This is showing us the market as seen today. The Prices for future delivery is higher due to cost of carry and interest. Historically, cobalt production has been consistently growing in the last 50 years and in any event, accelerating since the 2000’s. The price has additionally been increasing. However, it has been firmly impacted by supply (crisis in DR Congo) and demand (from Asia) interruptions. China being the largest consumer, it’s been found that Lithium and cobalt refineries have sufficient inventories to sustain their production for the time being, with lithium refineries particularly well-stocked due to raw material overstocked in 2019.[11]The sharp increase in the demand was largely driven from Chinese consumption and EVs but also aerospace industry for whom the cobalt is an essential irreplaceable element as well as within power generation with gas turbines using cobalt. These all reasons explain the high demand for cobalt. Therefore, the demand would be much higher than supply meaning the producers will be increasing the price due to shortage of supply. In addition, looking at supply side, much before the year 2020, critical metals, such as cobalt and lithium, were growing concerns because of the uncertainty over their reliable supply for the technology and renewable energy industries.[12] Furthermore, it would give incentives to firms like Apple and Tesla securing their supply by investing directly in processing and mining or acquiring critical metals mines.[13] So, in the case of cobalt the message and recommendation is to go ahead and store.
BIBLIOGRAPHY
[1]https://www.iea.org/reports/global-ev-outlook-2020
[2]https://www.reuters.com/article/us-cobalt-prices-electric-idUSKCN1Q11EP
[3]https://internationalbanker.com/brokerage/why-have-cobalt-prices-crashed/
[4]https://www.cnbc.com/2020/06/30/tesla-and-the-science-of-low-cost-next-gen-ev-million-mile-battery.html
[5]https://www.ft.com/content/aa09dbcb-37ed-4010-a0ee-ab6cfab4d4b5
[6]https://www.lme.com/Metals/Minor-metals/Lithium-prices#tabIndex=0
[7]https://ec.europa.eu/jrc/sites/jrcsh/files/cobalt_infographics_one-pager.pdf
[8]https://investingnews.com/daily/resource-investing/battery-metals-investing/cobalt-investing/cobalt-market-update/?mqsc=E4118751
[9]https://www.reuters.com/article/us-cobalt-prices/african-supply-bottlenecks-fuel-cobalt-price-surge-idUSKCN2511XO
[10]https://www.bloomberg.com/news/articles/2020-08-19/china-plans-to-boost-cobalt-reserves-as-virus-spurs-supply-risks?sref=SAPiUD9B
[11]https://www.spglobal.com/marketintelligence/en/news-insights/research/metals-markets-to-rebound-after-coronavirus-epidemic-peaks-part-2
[12]https://www.reuters.com/article/us-cobalt-prices-idUSKBN201194
[13]https://theconversation.com/how-the-coronavirus-pandemic-has-disrupted-the-global-mining-industry-137384