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General Market Commentary
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General Market Commentary
The Critical Need for Cobalt Supply Diversification
Cobalt is used for everything from cell phone batteries to superalloys in jet turbines, making it an important technology metal — an element in high demand in today’s high-tech economy. Recently, that demand has accelerated, outpacing other elements in the lithium-ion electric vehicle (EV) battery space.
Tesla (NASDAQ:TSLA) has garnered media headlines for its ambitious plans to mass market electric vehicles by building a staggering 500,000 vehicles by 2018 and 1 million by 2020 at its gigafactory in the Nevada desert. But there are over a dozen other EV battery megafactories in the world, and each has similar plans to ramp up production. That includes the UK, which plans to ban all diesel and gas cars starting in 2040.
All of those new EVs will require a lot of new cobalt supply for use in battery cathodes. As Benchmark Mineral Intelligence analyst Caspar Rawles told the Investing News Network in an early 2017 interview, “to put that into numbers, in 2016, megafactory demand for cobalt was about 46,000 tonnes. By 2020, that’s going to be 76,000 tonnes. So there’s going to be a lot of growth in coming years.”
The Democratic Republic of Congo (DRC) is home to the world’s largest-known cobalt reserves and is responsible for roughly half of global production. Increasing demand and the fact that so much cobalt supply is concentrated in the historically volatile DRC has the market concerned that a single crisis or disaster could cause cobalt prices to spike, hamstringing dreams of mass EV conversion.
Risky business: DRC’s domination of global cobalt supply
The DRC’s dominance of cobalt supply is astounding. Of the 123,000 tonnes produced globally last year, the DRC produced 66,000 tonnes, although the true number is probably higher when including the black market and China’s production. Why include China? Because most Chinese production is from ore and partially refined cobalt from the DRC.
Cobalt isn’t rare. It’s found in abundance in the Earth’s crust in trace quantities. The difficulty lies in finding it in purities high enough to justify production — a problem compounded by historically low cobalt prices. Today, most cobalt is mined as a by-product in copper and nickel extraction. The Bou-Azzer mine is the only mine operating globally with a primary focus on cobalt; it is located in Morocco and produces 2,000 tonnes of cobalt annually.
And therein lies the crux of the issue: studies forecast that cobalt consumption will increase by 5.1 percent annually, from 96,500 tonnes today to 124,000 tonnes by 2020. Total global production in 2016 was 123,000 tonnes.
Will there be enough new cobalt supply to meet increasing demand? “That’s the question everyone is wringing their hands about,” Chris Berry, renowned analyst and co-author of the Disruptive Discoveries Journal, told the Investing News Network. “Current cobalt chemical demand is set to outpace supply should electric vehicle adoption really become a significant portion of the global auto fleet — perhaps 10 to 15 percent by 2025.”
There are several large projects racing to improve cobalt production, including Glencore’s (LSE:GLEN) Katanga mine and Eurasian Natural Resources’ (LSE:ENRC) RTR project — both in the DRC. “In the near term, quite a lot of supply will come into the market, perhaps up to 50,000 tonnes a year,” said Berry. “But after that we start seeing a potential deficit.”
Berry’s cobalt price forecast is moderate compared to others expecting a severe cobalt deficit. He predicts prices will remain stable at $20 per pound over the long haul — as opposed to the $30-or-higher figures predicted by cobalt pessimists.
Nevertheless, Berry’s prediction doesn’t discount the possibility that sharp price spikes will cause chaos for battery manufacturers. If manufacturers struggle to get the cobalt they need, “you are looking at major manufacturing issues,” said Berry. “It doesn’t matter if your cobalt chemicals are manufactured in Finland, China or Japan. If you don’t have the purity, you don’t have the product.”
Part of the problem stems from the fact that cobalt is a by-product. Thus, often the decision to start or halt production is untethered from cobalt prices. “Cobalt can help overall economics of a deposit,” said Berry, but “the decision to build a mine will depend on the operating and capital expenses with copper or nickel rather than cobalt. From a price perspective, cobalt has always been an opaque market characterized by oligopoly.”