Are recent reports of a glut of cobalt misleading?

It wasn’t long ago that many talked of an imminent “cobalt cliff” or “cobalt crunch”. The logic was that demand was set to boom (EVs, Li-ion batteries etc.) while the supply outlook was precarious (Cu/Ni by-product, mining mostly in the DRC, logistics issues in Africa, artisanal supply etc.) – and that, therefore, the world was at serious risk of cobalt shortages. 

While certainly overstated at the time, these concerns were grounded in reality. The outlook for cobalt demand growth was, and continues to be, very positive. Project Blue expects demand to increase at 7%py over the next five years. Meanwhile, the risks associated with cobalt supply, and particularly DRC production, endure.  Cobalt is still mostly a by-product (93% in 2022), the DRC’s share of mine supply remains high (76% in 2022), there have been logistics issues (notably in South Africa) in recent years, and the outlook for artisanal supply is uncertain given the emergence of the DRC state-owned Entreprise Générale du Cobalt. 

Fast forward to today, and the consensus seems to be that we’re facing a period of prolonged surplus. Last week, the Economist ran the headline Cobalt, a crucial battery material, is suddenly superabundant – and argued that demand is waning while Indonesian supply is ramping up. Meanwhile, earlier this week, Bloomberg reported that A $1.5 Billion Hoard of Copper and Cobalt Is Piling Up in Congo – referencing the growing stockpile of cobalt hydroxide mounting up at CMOC’s Tenke Fungurume operation, owing to an export ban caused by a dispute with its Congolese state-owned partner over royalty payments.

Both the Economist and Bloomberg articles are correct. Demand growth has been sluggish in recent months, mainly owing to zero-COVID in China impacting consumption in the world’s biggest market. Meanwhile, the ramp-up of Indonesian HPAL (high pressure acid leaching of laterite ores) is startling and could see huge increases in cobalt intermediates hitting the market (see chart). What’s more, hydroxide stocks are very much building up – not just at Tenke, but at other producers in the DRC (e.g., Glencore) as well as in storage facilities in Zambia and South Africa. 

But in spite of all this, suggesting that cobalt is “superabundant” is somewhat misleading. As is the case for many metals, the idea of just one “cobalt market” can be unhelpful when looking to understand supply, demand, and price dynamics.  While still a simplification, it makes better sense to think of the “intermediates market”, the “metals market” and the “chemicals market.” Each of these interlinked markets have different drivers and pressure points. Imbalances in any of the three can translate into price increases/decreases.

The intermediates market is fed mainly by Central Africa. By far the most important cobalt intermediate is cobalt hydroxide, produced mainly in the DRC from material extracted as a by-product of copper mining.  The hydroxide is trucked via Zambia, usually to the port of Durban in South Africa, for onward shipment to China. Glencore, via its Katanga and Mutanda operations, is by far the biggest producer and thus holds considerable sway in the market. Chinese players also own vast swathes of the DRC’s cobalt assets. 

A slowdown in availability of hydroxide and/or unusually high demand, can push prices up. This happened in 2017/18. Demand from China was high, material availability was low – and payables for cobalt hydroxide quickly exceeded 90%. Eventually, a supply response from artisanal miners in the DRC (the market’s swing producer) helped balance the market and soften prices. 

Mixed hydroxide precipitate (MHP) is set to become the second most important cobalt intermediate. Huge (mainly Chinese) investment in Indonesian HPAL will see large amounts of nickel and cobalt produced and sent to China for onward refining into sulphates.  The scale of these new operations is very significant and unlike earlier iterations of HPAL operations, these new facilities are being developed and ramped up to capacity quickly.

In our base case, which assumes only 50% of the announced capacity enters production over the next five years, MHP accounts for 18% of supply in 2028, while in the high case (where all Indonesian HPAL comes online and ramps up) MHP accounts for 29% of supply. This could have the effect of limiting the requirement for expansion of intermediate capacity in the DRC, although this remains uncertain.

Mounting stockpiles of hydroxide in Africa, coupled with an expectation of an MHP boom in Indonesia, suggests plenty of cobalt units in intermediates around for the foreseeable. This should keep payables low, and the market well supplied. But things are not always that straightforward. Shutdowns, logistics challenges, or regulatory changes could move the dial quickly. Time will tell.

Importantly, it isn’t all about intermediates: tightness in refined cobalt metal and chemicals can also move the price. 

Refined cobalt metal is produced in several forms. The most popular is cobalt cathode, which is used as an alloy element for special steels, stainless steels or magnetic materials, important in aerospace, power generators, and tool steel. 

Production levels have remained generally consistent over the 2013-2022 period, albeit with a drop when COVID-19 disruption impacted demand. At present, capacity is sufficient (yet not overwhelmingly so) to meet demand and Project Blue expects this to remain the case over the coming years. But in time, new capacity will be needed. China is the biggest producer of cobalt metal and accounts for ~30% of global supply. Canada (~15%), and Finland, Japan, and Norway (all ~10%) are also important producers. 

Cobalt metal market dynamics are not without complexity. Certain forms are preferred for specific applications. And some consumers cannot accept certain brands. For example, not everyone can receive Sherritt material because the cobalt was mined in Cuba, and some consumers will refuse to take Russian material owing to the war in Ukraine. Availability concerns regarding certain forms, or in certain regions, creates premia/discounts between standard and alloy grade prices. Importantly, cobalt metal can be converted to chemicals when there is economic sense to do so. Levels of metal-to-chemical conversion ebb and flow with market conditions. 

The metal market is heavily influenced by trader activity, with a small number of actors able to have influence over prices. This is not unimportant as most contracts for cobalt chemicals etc. use the cobalt metal price as their basis. Cobalt metal can be warehoused/stockpiled by state actors like China’s SRB, by industry or by institutional investors. Such activity can move prices. State buying in China usually takes place at times of low cobalt prices and offers support to producers by removing material from the market and forcing prices higher (or stopping declines). 

Refined cobalt chemicals also take several key forms. By far the most important are sulphate (used in NCM and NCA cathodes used in EV batteries) and tetroxide (used in LCO cathodes used in portable electronics). China dominates supply of chemicals, with most production based on cobalt hydroxide imported from the DRC. Chemical supply has increasingly become more integrated in China. As noted earlier, chemicals can be produced from converting cobalt metal. This takes place in Korea and Japan. As with intermediates and metal, tightness in the chemicals market (driven by purchasing by battery producers or limited supply) can also move prices. 

To summarise, in spite of a positive outlook for demand, an oversupply of intermediates is likely to weigh on prices and payables – although things change quickly in the cobalt market (and often do). But there is more to the cobalt market than feedstock. Refined capacity (metal and chemical in various forms) also needs to keep pace with demand growth, else price volatility is a possibility.