Cobalt Market Review: Cobalt recognized as a critical mineral and battery demand drives price
My first trip to the DRC was cancelled as cobalt prices struck a new low of $4/lb, ruining unemployment rates and creating social unrest. Nobody cared when I’d grab a fist-full of the shiny metal from our Chiambishi smelter in Kitwe to adorne my office as let’s face it, it was pretty worthless. Yet cobalt is one of those metals that I have been touting for years. I presented my first investment case in 2007 and then again at the 2010 African Mining Indaba, because, even a decade ago, it was apparent that demand for cobalt in batteries would surge.
I’ve been doing this work long enough that to know that if you call an upswing and are willing to wait, your predictions are eventually proven true, but last year, a surge of interest in cobalt largely fuelled by increasing interest in battery materials pushed the metal to nine-year highs.
Now costing a princely US$36.40 / lb, it has brought a flurry of new projects, speculators and punters to a once neglected market. An increase in output is already well underway, with Glencore’s Katanga mine in the DRC purported to take the market into oversupply by adding 11,000 tonnes of cobalt this year, followed by 34,000 more in 2019. The company originally stated that the site would have a total capacity of 15,000 tonnes per annum in 2018 and 30,000 in 2019; according to our associate process engineers who are commissioning Katanga, while mining in the DRC is never simple, so far everything is on track and the production volumes look good.
Beyond the known projects, we count ten emerging producers, listed on the ASX, with a defined resource, a market cap above $50m with the potential to be in production before 2023, adding a further projected 30,000 tonnes per annum.
The issue I have with analyst views, and I say this as an analyst, is that we tend to forecast in straight lines. When cobalt was down, we could never envisage it jumping up ten-fold and now, at new highs, we are unable to envisage a scenario whereby cobalt reverts to 4 bucks. As much as we must make hay when the sun shines, new cobalt hopefuls must have low cost, good grades, and enough cash to see them through the other side.
Cobalt remains heavily tied to Africa’s copper production and to a lesser extent, South America’s nickel production, and has generally been mined as a by-product. As such, the fortunes of the cobalt market followed the fundamentals of these base metals rather than cobalt’s, inevitably leading to periods of extreme over and under supply.
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We need to bear in mind that cobalt is increasing in value on the back of hypothesised growth, leaving cobalt inventories to grow and prices to decline. This, however, should be a temporary dip as companies intending to mass produce batteries for the EV market will quickly snap up future contracts at lower prices, keeping the bull market supported until manufacturers begin to consume stockpiles.
However DRC has recently announced plans to hike taxes on exports of cobalt, presumably in recognition of cobalt as a critical mineral. Rent seeking and royalty taxes become the order of the day during price peaks, but so far, in the case of the DRC, we see no signs of any market deterrent and we expect that these royalties will simply be absorbed by higher cobalt prices.
Given the recent controversies surrounding cobalt mining in DRC, the burgeoning industry will require careful and experienced shepherding. Investors will need to ensure they seek seasoned guidance in Sub-Saharan African affairs to avoid unnecessary risks during this portion of the cycle.