FOCUS: Chinese cobalt demand under pressure on new EV subsidy policy

As the market had expected, China’s 2018 EV subsidy policy prioritizes pure EVs with a higher driving range and energy density. Yet, instead of cutting subsidies for EVs with a low driving range immediately, the government is allowing a transitional period to phase out corresponding subsidies.

To be eligible for the subsidy, EVs must have a minimum driving range of 150km, up from a minimum of 100km in 2017, according to the new subsidy policy launched on February 12.

Subsidies for EVs with a range below 150km will be phased out after a transitional period between February 12 and June 11. During this period, producers making EVs with a range below 150km will receive 14,000 yuan ($2,214) in subsidies per vehicle.

As a result, buying appetites for cobalt sulfate – one component used to produce the cathode materials in EV batteries – which had dampened as a result of the concerns over EV subsidy policy uncertainties ahead of the Lunar New Year holiday (February 15-21), resumed and were followed by strong momentum in cobalt sulfate prices.

Chinese spot cobalt sulfate prices are currently quoted around 130,000-135,000 yuan per tonne this week, compared to around 110,000-120,000 yuan per tonne in mid-January, according to market participants.

“After the transitional period for the EV subsidy is announced, ternary materials and cathode materials producers have had better order books, which has led to better demand for cobalt sulfate,” a ternary precursor producer said.

“There has been an extensive restocking from consumers who had been running operations under low inventories,” the first trader said.

“Rising international cobalt metal prices also help to underpin cobalt sulfate prices during this period,” he added.

Metal Bulletin assessed the low-grade cobalt price, which serves the benchmark to calculate the import costs of cobalt raw materials by Chinese producers, at $39.50-40.75 per lb on March 9 an increase from $37.75-38.90 per lb about one month ago.

Yet, neither battery material or cobalt sulfate producers have been immersed in the resumption of buying interests, instead, they are wary of the demand for cathode materials and cobalt sulfate after the EV subsidy transitional period ends in June.

Shifting to a high nickel-content nickel-cobalt-manganese (NCM) battery is one way to ensure EVs have a higher energy density and a resultant higher driving range, while also reducing the amount of cobalt in the battery materials.

NCM hydroxide is the most widely used precursor material applied to the production of lithium NCM oxide, the cathode materials for the production of batteries used in EVs. Major NCM materials include NCM523, NCM622 and NCM811, which have an increased nickel content and lower cobalt content, accordingly.

The amount of cobalt contained in standard NCM523, NCM622 and NCM811 batteries is about 12.6%, 10-12%, and 6% respectively, according to ternary precursor materials producers.

Although batteries with NCM523 materials – the most well-established battery type for the EV market – can also achieve a higher driving range (up to 300km), advanced technologies are required for battery producers, according to battery materials producers.

“It is not an easy job to improve the technologies that allow [NCM523 batteries] to be eligible for a higher driving range in a very short period of time,” the ternary precursor producer said.

“If battery producers couldn’t achieve the required technologies in the near term, they will be forced to produce high nickel-content batteries,” a cathode materials producer said.

“Therefore, we are expecting a decline in cobalt sulfate demand from May,” he said.

Yet, it is far too early to have an extremely pessimistic opinion of cobalt sulfate consumption because cobalt sulfate demand for battery cathode materials or ternary precursor materials production, which are exported to overseas market, won’t be affected by the new EV subsidy policy.

“It won’t have much impact on demand from cathode materials or precursor materials producers who have more export sales shares,” the cathode materials producer said.

China exported 7,541 tonnes of lithium NCM oxide in 2017; meanwhile, whole year export levels for NCM hydoxide totalled 23,651 tonnes, according to Chinese Customs data.

China produced 118,300 tonnes and 154,500 tonnes of lithium NCM oxide and NCM hydroxide respectively in 2017, according to market participants.

Cobalt demand longer term
The push for EVs with a high driving range will inevitably reduce the amount of cobalt per battery unit; however, given the expected EV boom over the next few decades, total cobalt demand is expected to increase, which may make-up for the reduced cobalt content in high-nickel batteries.

“In the longer term, cobalt demand is still predicted a steady pace of growth,” a second trader said.

Another scenario could be if the Chinese EV subsidy policy is cancelled in the future.

As high nickel-content NCM batteries, such as NCM622 and NCM811, are being introduced into the market, the production technologies and know-hows are not mature enough to establish them well. Therefore, if the EV subsidy policy in China is cancelled or the subsidy amount is reduced, there is a chance that the market would switch back to the NCM523 battery due to its maturity in both production technologies and applications to EVs.

“At the moment, car makers are forced to use NCM811 batteries because of the incentive of subsidies. If the subsidy policy is cancelled, say in 2020, they are likely to resume using NCM523 batteries that are more mature in the market,” the ternary precursor producer said.

Cobalt sulfate price momentum to falter in May
As the robust international cobalt price rally continues, the cobalt sulfate market will see a steady upside in prices; however, the price momentum may falter in May ahead of the termination of the EV subsidy policy transitional period, market participants said.

Demand for cobalt sulfate would become thinner again in May, many market participants have said. This will be the key factor to subdue any potential cobalt sulfate rally, even when international cobalt prices continue with the upswing.

Furthermore, the constraints on cobalt raw materials supply in China, which is resulting in the tightness of cobalt sulfate production at the moment, are expected to be eased in May when raw material output increases at the end of the rainy season in the Democratic Republic of Congo (DRC).

China is the major destination of cobalt raw materials from the DRC, which is the largest cobalt supplier in the world due to its ample copper-cobalt reserves.
China imported a total 100,727 tonnes of cobalt ores and concentrates as well as 214,807 tonnes of cobalt intermediates from the DRC in 2017, according to Chinese Customs data.

“When the rainy season in the DRC comes to an end during May and June, cobalt raw materials may flow extensively into China and put a lid on the cobalt sulfate price rally,” the first trader said.

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