Inflation exacerbating cobalt market volatility

Inflationary pressures are creating a period of high volatility across commodity markets that could impact cobalt supply and prices in the coming years, according to a panel at today's Cobalt Institute conference in Zurich.

Inflationary challenges are suppressing demand for many products that use cobalt as consumers shy away from buying new items, falling back on secondhand goods instead. "We know inflation is running hot in many economies, and inflation we know suppresses demand. We have to think of an environment where that natural demand we had over the past few years is starting to slow," Colin Hamilton, managing director of BMO Capital Markets, told delegates. "Mobile phones, while they're no longer the key driver of cobalt demand, are still very important. We'll start to see pressure on sales of these, for example, over the next couple of years."

The automotive industry is also feeling the effects of inflation, but Hamilton noted that pent-up demand from this sector is still likely to drive demand for cobalt in electric vehicle batteries in the coming years. In the aerospace industry too, the cost of flying is set to increase — the fact that today's conference has been held in person for the first time since 2019 signifies a return of demand for cobalt from that sector.

Other market participants warned that commodity price inflation in other markets risks bleeding into the cobalt market, particularly with regard to rising energy and fuel costs, which are contributing to supply chain bottlenecks and higher cobalt prices.

"The war in Ukraine has created a shortage in diesel," said David Brocas, head of cobalt trading at Glencore and chairman of the Cobalt Institute executive committee, adding that "there are concerns among most traders that the operators in Africa might not receive enough diesel to run their engines and their trucks to produce key metals. We know now that we must switch away from fossil fuels much more quickly."

Localisation and ESG exacerbate inflation

Two major macroeconomic trends are likely to contribute to commodity price inflation going forward — the gradual localisation of supply chains and a growing concern from customers to ensure higher ethical standards from their raw material supply chains.

"One comment on how banks are looking at this. In the old days it would be look at the project, let's see what the long-term price is and tick a box. Now there's a lot more around the social impact, questions around carbon and there's a lot more boxes to be ticked for sustainability," Hamilton said. "ESG is inflationary — there is a cost to decarbonisation."

Geopolitical risk is exacerbating a rush to localise supply chains, with the war in Ukraine forcing companies who previously relied on Russia to write down assets and lose suppliers. This is forcing those in other sectors to re-evaluate their own relationships with overseas suppliers, especially those reliant on China, because of its own adversarial relationship with western countries.

"There is always going to be a geopolitical risk. We're trying to change the main energy source of the world," added Hamilton.

Cobalt prices were assessed unchanged today at $39-39.50/lb for chemical grade metal and $39.25-39.75/lb for alloy grade metal, balanced between weak demand in China and tight supply due to bottlenecks in central and southern Africa.

By Thomas Kavanagh