Viewpoint: Coalescing factors may dent rising Co prices

Cobalt prices have reached a four-year high this month on tight spot supply, but Covid-19's impact on Chinese demand and bullwhip effects in the aerospace sector coupled with output ramp-ups pose potential downside risks to the market.

Cobalt prices are at their highest levels since 2018, with European prices assessed at $34-34.50/lb duty unpaid Rotterdam for chemical and alloy grade metal, while Chinese prices for 99.8pc metal grade metal are at 490-505 yuan/kg ($77.27-79.64/kg) and cobalt hydroxide prices were assessed at $28.3-28.8/lb cif China.

But profit-taking activity led to a fall in prices for cobalt metal on the Wuxi exchange to Yn488.5/kg from Yn491.5/kg on 13 January.

Some traders in China have pushed back against high tetroxide prices in recent days amid increased risk of more widespread supply chain disruptions that could weaken demand for cobalt salts and chemicals. The Omicron variant of the Covid-19 virus threatens to push localised areas of the country into lockdowns and restrict travel, which could hit demand. In December, the province of Zheijiang, where Huayou Zheijiang cobalt is located, entered lockdown, shutting down battery producers in the area.

"China has been so adamant on their zero Covid policy, there is concern that approach may impact production at certain plants," said one European trader. "If that becomes larger in scale, it will impact logistics and production. We saw before entire ports shut down. If the impact is on downstream side of things, battery value chain disruption. Its really tough to call what the real impact will be."

Drag on demand, supply expansions

Long-term demand for cobalt remains strong but other fundamental factors could drag on the rate of growth, including the semiconductor and raw material shortages along with production expansions.

The shortage of semiconductor chips led to a decline in European passenger car sales last year, which fell by 2.4pc in 2021 against a low base in 2020, while December sales were down by 22.8pc.

Although the share of battery-driven cars in Europe continues to grow and the electric vehicle (EV) segment posts strong sales, it is a larger percentage of a smaller, more sluggish market.

"It's still a bit early to see any impact from lower car output," said one cobalt producer. "The fact is, the semiconductor chip shortage is still having a negative impact on production, but I get the impression it is impacting the non-EV sector."

Demand for EVs in the third quarter grew by 56.7pc on the year, still high, but down from the 231pc on the year growth rate in the second quarter of 2021.

In China, EV demand growth may slow down as the government reduces subsidies at a time when EV battery prices are rising. Carmakers increasingly switching towards LFP batteries may also drag on cobalt demand growth.

Whipsaw effects as aerospace producers ramp up production this year could hit cobalt demand. Most consumers and producers have factored an aerospace demand recovery into their forecasts this year, but shortages of materials such as titanium, magnesium and aluminium may hamper plans. An unforeseen problem with 5G interference in flights may also suppress the commercial aerospace market this year.

Supply expansions in the Democratic Republic of Congo over the next two years are likely to weigh on hydroxide prices in the medium term. The world's largest producer Glencore increased its cobalt output guidance to 45,000-51,000t for 2022, up from 32,000-38,000t in 2021, as the Mutanda mine reopens.

China Molybdenum has also planned a 17,000 t/yr increase in output at the TFM mine in Kolwezi by 2023, up from an original 20,000 t/yr nameplate capacity. This week, Shalina Resources and its subsidiary Chemaf AG secured funding from Trafigura for the Mutoshi pilot mine in Kolwezi, which is expected to become one of the largest copper/cobalt mines in the world when production begins in the third quarter of 2023.

By Thomas Kavanagh