Cobalt: set for a battery-demand rally?

Macquarie's Colin Hamilton says the perennial underformer looks well placed to shine.

14 Apr 2017

Cobalt may be set to take over lithium this year as the star performer in the niche metals market amid a recovery in battery sales and stagnant supply.

Macquarie estimates demand for cobalt-cathode batteries may jump 10 per cent this year. Cobalt has been one of the worst performing commodities since the global financial crisis, and in 2016 lagged behind its peer lithium due to oversupply and a slowdown in demand for its batteries, which mostly power portable electronics.

If last year was lithium’s time, for 2017 cobalt may be the one receiving more attention."

Prices for cobalt, slumped from around $50 a pound last decade to $10 in January 2016. Between 2009 and 2016, no other metal covered by Macquarie fell as much. Prices started to recover in 2016, however, and ended the year at $14.50 a pound. By contrast, the average Chinese import price of lithium carbonate jumped 66 per cent in 2016 and even doubled at one point.

"If last year was lithium’s time, for 2017 cobalt may be the one receiving more attention," says Colin Hamilton, Global Head of Commodities Research, Macquarie Group. "Risks remain, mainly technological ones on the demand side and geopolitical ones on the supply side, but for now the perennial underperformer in metals markets looks well placed to shine."

Wider industrial recovery

Underpinning demand for metals more broadly is a worldwide industrial recovery that gained pace in 2016. Industrial production worldwide grew in November at the fastest pace in two years, with simultaneous expansion in all developed markets. Cobalt tends to benefit during the final stages of industrial recoveries, when confidence has spilled over to the consumer.

While lithium cathodes are used in batteries powering a wider range of products, the more common lithium-cobalt-oxide design is found in consumer electronics as it offers a longer lifetime and better power density.

Industry data points to a resurgence in consumer-electronics spending. Offsetting a recent decline in laptop and tablet sales, smartphone shipments rebounded in the last two quarters of 2016 after modest and even non-existent sales growth in the previous five quarters, according to IDC, a technology research firm. In the fourth quarter of 2016, phone sales rose an annual 7.3 per cent, the data shows.

This should help clear cobalt stockpiles and move away from a supply overhang that depressed prices in 2015. Macquarie forecasts demand for cobalt will grow 6 per cent in 2017, and rise further in the next four years, pushing the market from a mild oversupply this year to a growing deficit through 2021.

The forecasts assume little cobalt penetration in the rapidly growing electric and new-energy vehicle markets, a situation that could soon change. In countries like China, for example, government regulations may start forcing bus companies to prioritise higher-quality batteries employing cobalt to the detriment of zero-cobalt ones.

Long term risks

Beyond its strengthening short-term fundamentals, the relatively small cobalt market is vulnerable to risks further down the road. Firstly, because cobalt is mined as a by-product of copper, high prices for the latter can lead to excessive cobalt output. Then there is the possibility that smartphone companies start investing in alternatives to cobalt. 

Finally, ethical standards around mining conditions in the Democratic Republic of Congo (DRC), where the majority of cobalt is mined as well as political and economic instability in the central African nation, remain key sources of concern.

"If you are a buyer of cobalt, supply conditions in DRC are your most concentrated risk," Hamilton says. "However, eventually we could end up with a two-tier cobalt market, with a non-DRC cobalt segment commanding a premium."

For now, "the stars seem to be aligning for cobalt," Hamilton says. "In a market with a strong demand outlook and limited output, the cobalt market could easily prove to be the recovery story of 2017."

For more information on the report 'The 2017 battery metal story might well be cobalt,' contact Macquarie Research.

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