As part of the paid subscription Breakaway Mining Research Daily and Monthly Reports, Dr Stephen Bartrop - Director Breakaway Research, has written a report on cobalt and other metals - the supply/demand equation, including recommendations of which cobalt companies are good investments. To receive these recommendations, you will need to subscribe to the Breakaway Mining Research Daily and Monthly by clicking here. Here is an extract of this report from December 2017 (without recommendations).
Cobalt and Other Metals - Supply/Demand Equation - Overview 8th December 2017
Cobalt and other metals – in the supply/demand equation, actual supply details are now important
The cobalt price has experienced a stellar performance this year as future demand expectations for electric vehicles has highlighted potential supply deficiencies and questionable reliability with the existing producers.
As a key member of the of the “green” metals and minerals, which along with copper and cobalt include nickel, lithium and graphite, is adding to renewed excitement about investing in mining firms notes the Economist earlier this year. These firms are emerging from the wreckage of a US$1 trillion splurge of over-investment during the China-led commodities super cycle, which began in the early 2000s. Importantly, the most bullish argue that clean energy could be an even bigger source of demand than China has been in the past 15 years or so. Indeed this bullish stance has been taken by fund manager Bernstein which estimates that the rapid adoption of electric vehicles between now and 2035 will create an uplift for commodities demand eight times larger than that generated by China’s boom in the early 2000s.
Cobalt itself can be a by-product of copper and nickel production although approximately 70% is mined in the Democratic Republic of the Congo (DRC) with a significant a quantity is produced by unregulated artisanal miners creating concerns about “conflict cobalt.”
Early in 2017 Glencore purchased a 31 percent stake in Mutanda Mining, the world’s biggest cobalt mine. The purchase also included a 10.3 percent stake in Katanga Mining Ltd. which operates a nearby copper and cobalt mine.
The total purchase was from the Fleurette Group, a company owned by Gertler’s family trust and cost US$534 million including the repayment of debts.
As with many DRC transactions, there are always questions as to how these investments were made in the first place notes Bloomberg.
Cobalt production at Mutanda increased by 50 percent last year to 24,500 metric tonnes reports Glencore in a market with a total global output of 110,000
to 120,000 tons in 2016. Glencore is also due to bring the Katanga mine back on line after a US$430m overhaul of its processing system next year with
the potential to add a further 22,000 tonnes of cobalt to this market.
So while there have been some hiccups in DRC cobalt production including the suspension of cobalt production at the Lubumbashi operation (international court proceedings against state miner Gecamines SA), there is a real push to increase in DRC production in response increasing cobalt prices and forecast increasing eV demand.
As noted earlier, the bullish outlook is a result of changing expectations on the penetration of electric vehicles in the vehicle market. German automobile
manufacturer BMW AG is reported to be in talks with suppliers of cobalt and other materials needed for producing batteries ahead of a pickup in demand
due to greater projected numbers of electric vehicles, reports Bloomberg.
Separately, German industry association BDI warned that local automobile manufacturers may face shortages of materials needed for batteries in electric vehicles, flagging the "risk of running into bottlenecks in raw material supply. Recently German carmaker Volkswagen’s meetings to secure long-term supply from top cobalt producers have ended without success reports Reuters.
However there is another factor emerging which has an impact on the supply of cobalt (and other metals from the DRC) and this is the fact that the world’s largest car companies are facing greater scrutiny about the ethical and environmental effects of their supply chains. The Financial Times reports that from battery metals such as cobalt to the industrial commodities of aluminium and copper, the market is starting to pay a premium for sustainable and traceable metals. Indeed it speculates that such a development may well prompt a permanent price divergence across commodity markets, with higher prices for low-carbon products as well as highly processed forms of metal for electric-car batteries.
The Financial Times also reports that the London Metal Exchange is working on new contracts that reflect a likely premium in price for battery metals. Recently, 10 of the world’s leading carmakers including BMW and Volkswagen met in Brussels and pledged to address the ethical and environmental issues around their use of raw materials.
“We expect that sustainability will play an increasing focus in raw materials procurement, particularly when the raw materials are aimed at products that are intended to be environmentally and socially responsible, such as electric cars,” said analysts at Investec as quoted in the Financial Times. The move parallels China’s efforts to clamp down on polluting commodity producers. That has been marked by campaigns to cut air pollution in big cities this winter and crackdowns on illegal aluminium capacity that has rippled out across the entire commodity value chain. The environmental clampdown has helped boost aluminium prices more than 24 per cent year to date.
Pressure to be more efficient and reduce emissions has also caused steelmakers to favour higher-grade iron ore. The spread between high-grade and low-grade
iron ore has widened to more than $20 a tonne this year, from between US$5 to US$8 a tonne 18 months ago. Australian lower-grade iron ore producer
Fortescue said last week it would shift its production to high-quality iron ore. “There’s been a shift to higher quality across the board,” according
to Colin Hamilton, an analyst at BMO Capital Markets. “When you’re being monitored every day you will pay to have better-quality raw materials.” Supply
of battery metals is coming under greater scrutiny as electric car sales are up 63 per cent in the third quarter from a year earlier, with half of
the sales coming from China, according to Bloomberg New Energy Finance.
In particular, more than half of the world’s cobalt comes from the Democratic Republic of Congo, where up to one-fifth is mined by hand, by children in some cases, according to Amnesty International. Miners who can prove a clean and traceable supply chain may begin to get more aggressive on pricing, according to traders. This year the difference between cobalt hydroxide that was from “clean” sources such as large mining companies and untraceable sources was on average 4 to 6 per cent, according to Benchmark Mineral Intelligence.
So from our investment perspective, what are the ‘takeaways’ from these trends? Breakaway Research believes that:
- The supply credentials will play a fair more important role due to the pressure placed on vehicle manufacturers to be ethical and green and which is in line with the electric vehicles that they are selling.
- Supply from the DRC will continue to come under scrutiny and alternative sources of metals like cobalt will be actively sought by the manufacturers.
- The DRC itself will try and ‘clean up’ its position and companies like Glencore will continue to impose world class mining practices at its mines. However some DRC metals supply will continue to be tainted from artisanal works and child labour due to impoverished conditions.
In summary, the disparity in attributed market value to projects is going to increase across the sector depending where a company’s project is located.
An example is that the same copper/cobalt in Australia or Canada is now worth substantially more than if the same project was located in central or
western Africa and which is beyond the discount that would be simply attributed to country or sovereign risk. In addition, with the right project,
vehicle and other manufacturers will aggressively seek supply agreements which are likely to offer premiums to market prices provided the project meets
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