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Cobalt – Chasing Electric Dreams

By Anthony Milewski, Chairman, Cobalt 27

A day hardly passes without news of the future of electric vehicles (EVs) and battery storage. Whether you read about countries mandating EV sales, the creation of entire fleets of EVs, or new electric grid storage innovations, there’s a lot to contemplate.

In fact, we are looking at a structural change in both the energy market and the automobile industry. Over the next decade we will see a decrease in terminal value of energy stocks and a complete upheaval in the car industry.

Investors often point out that they are confident about EV penetration rates over the next few years and the expansion of grid storage. However, they do not necessarily know who will win the race. Will Tesla or Ford sell the most EVs? Whose lithium ion battery will have the most efficient chemistry? Should I own a publicly traded chipmaker? Hard to answer, but there is one thing investors can be sure of. If you believe that consumers are going to buy EVs and home storage battery systems, basic materials will be a winner.

The key basic materials that comprise the lithium ion battery and the industrial revolution now underway include, copper, nickel, cobalt, graphite, and manganese. In the next decade the impact of EVs and battery storage on these commodities will unfold in dramatic fashion.

In the early years of the cycle cobalt and lithium are most impacted by the adoption of new technology. As battery chemistries change and penetration rates accelerate, nickel will become more exciting. We have already started to see a bifurcation of the nickel market that will accelerate and result in several distinct markets. Finally copper, the largest and most liquid of these commodities, will be affected due to increased need for both the grid and EVs. Of these metals, however, I’m going to look at cobalt.

WHY COBALT?

Annual cobalt production is approximately 100,000 tonnes, with over half coming from the Democratic Republic of the Congo (DRC). Half of it is used in the broader battery industry in one form or another (including the cellphone market). The amount of cobalt required to supply expected future demand is staggering. Analysts are not great at predicting future penetration and adoption rates for new consumer products. But, if we take their projected rates as a guide, the cobalt market will need to expand dramatically between now and 2025. Bank analysts have 2025 EV penetration rates at anywhere from a few per cent to upwards of 15 per cent. If we imagine a world in 2025 with 10 per cent EV penetration we may need double the world’s cobalt supply, with a majority of it going into EV batteries.

Perhaps this all sounds like the bull markets that precipitated huge spikes in the uranium price and the rare earths market at various points over the past decade. Should we worry?

First and foremost, a critical distinction between cobalt and uranium/rare earths is that unlike the “if you build it they will come” mentality that surrounded both of those latter commodities, the gigafactories of the world are currently being built. The industrial capacity that requires cobalt exists and is being expanded. This is in stark contrast to uranium where the planned reactors were not been built at the rates anticipated.

To understand the future of cobalt you need to understand its past. In 2008, war in the DRC caused the price of cobalt to jump to about $50 per pound. Immediately, anyone that could use cobalt more sparingly in their industrial process did so. Around the time of the spike in cobalt prices the global financial crisis struck, precipitating a significant decrease in the price of many metals, including cobalt. There were other reasons for the subsequent decrease in price, including the tail end of a Chinese boom that saw more nickel mines (which create cobalt as a byproduct), and more artisanal miners in the DRC.

The price of cobalt is currently around $30 per pound. Most of the reduction in usage that can occur with cobalt happened a decade ago. End users such as airplane makers that make up 20 per cent of the cobalt market are not interested in saving a few dollars to eliminate cobalt and make their hundred million dollar planes less safe.

Times have also changed for artisanal miners in the DRC. Companies such as Apple and Tesla are requiring suppliers to show sourcing data to avoid negative publicity associated with child labour. Even if the cobalt price goes higher it is unlikely that cellphone and carmakers are willing to buy and use conflict cobalt, so there will be a far smaller corresponding increase in artisanal mining compared to 2008.

Will someone invent a new battery and ‘engineer out’ cobalt, as sometimes suggested? This is nonsense. Carmakers say that even if a new battery was invented today we would not see it in an electric car for at least eight years.

That is not to say that scientists are not working on new battery technology. Instead, it highlights the time it takes to create a new battery, make it cost effective and then convince carmakers and regulators it is safe enough to be in a car. I am reminded of Betamax v VHS. The argument about which format was better was largely academic. VHS was the format of choice for the film industry and crushed Betamax. The same is true of the lithium ion battery. The market has chosen the lithium ion battery as the winner for a decade.

There are other aspects of the cobalt market to consider: battery chemistry changes; new projects coming into production; and the possibility of collecting additional material from existing operations and tailings.

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DOW 24651.70 0.58%
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Resource Commodities

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Silver 16.05 0.93%
Copper 3.11 1.98%
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Natural Gas 2.61 2.76%
Uranium 24.25 N/A
Zinc 1.44 0.00%

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