Categories: Energy / General Market Commentary / Precious Metals
Topics: General Energy / General Market Commentary / General Precious Metals

Sprott's Thoughts

     
Sprott's Thoughts: Why Cobalt (Not Lithium) Could Be The Battery Boom's Big Commodity Winner

 

You've probably given little thought to a perennially overlooked metal called cobalt, even though chances are you’re reading this very article on a device powered by a battery containing a significant proportion of the metal.
 

I'm going to spend most of this article outlining an emerging narrative that argues that we could be in the early stages of a significant revaluation in the cobalt space. But before I do, I want you to cast your mind back a couple of years to a time before the recent speculative mania that overtook a previously obscure commodity called lithium.

The Lithium Boom - A Case Study For What Could Be Ahead For Cobalt

Before joining Sprott, I worked as an engineering geologist in Australia, and back in 2014 I was involved on a project for a struggling hard rock lithium miner. Among a host of issues, the mine was struggling with low prices of the resources with which it produced, primarily lithium. Even though the "battery revolution" was well underway and other battery related commodities, namely graphite, had been booming, lithium prices remained stubbornly low.

That all changed toward the end of 2015 as fears about a looming supply shortage caused the price of lithium to embark on the rather dramatic rise that we've seen over the past 18 months. To cut a long story short, the result has been a significant re-rate across the industry as the bulk of lithium exposed miners and explorers experienced sometimes staggering share price appreciations - the chart below showing the greater than 2,000% rise of ASX listed lithium miner Galaxy Resources being one of the more spectacular examples.

The move in lithium prices has largely been driven by “new age” companies such as Tesla and its aggressive CEO, Elon Musk, cultivating a growing, mainstream belief in the narrative that electrification and thus batteries are going to act as the "new oil" in powering our cars, devices, homes and businesses. Even legendary natural resource investors such as Robert Friedland have been getting in on scene, taking strategic positions in the sector.

This has led many analysts to call for compounding annual growth rates for the Li-ion battery industry of between 10% and 12%1 over the next 5 to 10 years which, if realized, would see the market grow from US$30 billion to over US$70 billion by 20241. The biggest growth is expected to be in the automotive and grid/renewable energy storage subsectors3.

Lithium, being a key raw material in the manufacture of the current crop of battery technologies (typically lithium-ion), has been the main benefactor, thus far.

The Demand Side Of The Cobalt Equation – The Battery Revolution

However, taking a deeper dive into what raw materials actually go into Li-ion batteries shows that lithium typically makes up a much smaller percentage of the overall raw material inputs than people think (as low as 2% by weight in some batteries, according to Elon Musk in this recent interview). In comparison, cobalt is used in significant quantities in the cathode component of batteries, which make up approximately 35% to 40% of the total material costs of a lithium ion battery cell2.

Depending on the type of battery, cobalt can comprise between 0% to 100% of the non-lithium material that goes into a cathode, something explained visually in this infographic. The pertinent figure from the infographic is presented below - note the significant percentage of nickel and cobalt in three of four main lithium ion cell types.

Given the amount of nickel in electric batteries, it’s worth asking the question, “should we be looking at nickel too?” There's certainly a bullish case to be made for nickel as well (an article for another day), but the primary reason to be more interested in cobalt over nickel from a speculative investment viewpoint has everything to do with where the vast majority of cobalt production comes from.

The Supply Side – The Potential DRC “Black Swan”

Staggeringly, over 60% of global cobalt production comes out of a single country, the Democratic Republic of Congo (DRC) where it occurs as a byproduct in the huge copper deposits that the country is endowed with. This is hugely important because whilst the DRC has been relatively stable for the past 10 to 15 years, in the medium to long term the country has been the antithesis of stability and has a long and checkered history tarnished by internal conflict and civil wars.

So when the current president, Joseph Kabila, failed to step down after his two terms as president late last year (and even tried to amend the country’s constitution to allow him a third term in office), all eyes have been on the country in anticipation of escalating tensions and a potential return to violence.

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