FOCUS: Uncommitted stocks, trader positioning see cobalt spot trade swell in 2019

Nearly 5,500 tonnes of fixed-price, spot cobalt metal business was reported to Fastmarkets’ benchmark cobalt price discovery in the first nine months of 2019, up by 91.8% year-on-year.

The increase in spot trade was a result of three factors: a greater portion of the metal market not being committed to long-term contracts in 2019; a preference among some buyers to top-up their inventories in the spot market rather than commit to monthly offtakes; and multi-year price lows which saw traders restocking in March and April in anticipation of a deficit when cobalt consumption from the battery and electric vehicle (EV) sector takes hold in the coming years.

Most recently, the news that Glencore will close its Mutanda copper and cobalt mine in the Democratic Republic of Congo at the end of this year has brought forward expectations of a deficit in cobalt supply to feed the EV boom, triggering further buying.

In January-September this year, 5,456.25 metric tonnes of spot, fixed-price business was reported to Fastmarkets’ price assessments for standard and alloy-grade cobalt metal. In comparison, 2,845 tonnes of transaction data was reported in the first nine months of 2018.

Data reflects trades of material meeting Fastmarkets’ specifications for brand and quality, and other terms such as delivery window (or that could be normalized back to the base specification) and minimum and maximum tolerances for tonnage.*

The annual mating season, which sees buyers and sellers meet to agree the terms of long-term contracts for the following year, started early in 2017, with buyers concerned about the availability of cobalt units to meet demand from the burgeoning battery and EV market. That resulted in far less metal being available in the spot market in 2018.

The rally in prices – benchmark standard-grade prices rose by 140% over the course of 2017 and reached almost ten-year highs of $43.70-44.45 per lb in April 2018 – encouraged a supply response, pushing the market into a surplus ahead of real consumption from the battery sector gathering pace.

Prices subsequently fell with market participants along the battery supply chain able to procure their necessary units in the form of cobalt sulfate rather than metal, while also facing lackluster cobalt demand when Chinese government subsidies were cut.

They, and other cobalt consumers, were working through inventories acquired on the basis of higher prices.

Improved availability of sulfate and cobalt hydroxide, combined with high stocks, meant far less of a flurry to secure metal units for 2019, leaving more material uncommitted to long-term contracts this year.

More transactions have been carried out in the spot market as a result.

The total number of in-spec deals reported to Fastmarkets in January-September 2019 was 682, up by 41.5% from 482 deals in the first half of 2018.

The average deal size was therefore also higher in the first three quarters of this year.

The average spot deal for standard-grade cobalt metal was 4.5 tonnes in the first quarter of 2019, down from 5.5 tonnes in January-March 2018, and in line with consumers’ “hand-to-mouth” style of procurement while prices were falling.

In the second quarter, the average standard-grade deal size rose to 10.1 tonnes, compared with 3.9 tonnes a year earlier. The increase in the second quarter was probably attributable to trader stockpiling that started at the very end of March and continued into April, and was characterized by larger tonnage purchases, when standard-grade cobalt prices were $13.30-14.20 per lb, at that time a 26-month low.

March/April’s restocking absorbed much of 2019’s uncommitted stock, so while 34-month price lows at the end of the July, and early August’s news that Glencore would close Mutanda at the end of the year, encouraged more restocking and position-taking in the third quarter, it was not possible to do so on the same scale.

Average standard-grade deal size in the three months to September 30, 2019, was 6 tonnes, down quarter-on-quarter, albeit up from 3.7 tonnes in the third quarter of 2018.

In the alloy-grade market, the average spot trade was 9.7 tonnes in the first quarter, 7.9 tonnes in the second quarter, and 10.2 tonnes in the third quarter of 2019. Those figures compare with 8.4 tonnes, 8.5 tonnes and 5.6 tonnes in the first, second and third quarters of 2018, respectively.

In the cases of both standard and alloy-grade, extra volumes were available to be traded in the spot market in 2019 compared with 2018, and consumers’ cautious approach to procurement saw them come into the spot market to make purchases more often than in previous years.

Sellers also offered greater optionality on 2019 contracts, in an effort to entice long-term business. Where buyers declared minimum volumes, sellers again had material to sell to spot inquiries this year.

Simultaneously, price weakness (until recently) and volatility, combined with still-optimistic forecasts for cobalt demand from the battery and EV sectors long-term, have made for an appealing environment for larger-scale strategic purchasing.

But rather than increased spot activity serving to support the market, in January-June 2019 it highlighted the volume of material available, leaving buyers in the position to bid aggressively for material or hold out for cheaper prices week on week.

Fastmarkets’ assessment of the price of cobalt, standard grade, in-whs Rotterdam, ended June at $13.15-13.95 per lb, down by 49.6% from $26.50-28.00 per lb at the start of the year, taking the benchmark low of the range.

The price for cobalt alloy grade, in-whs Rotterdam, performed similarly, ending the first half at $14.15-14.60 per lb, down by 46% from the beginning of January.

Rising cobalt hydroxide supply was a key factor behind the bearishness of last year’s contract negotiations. Total refined cobalt production was 118,000 tonnes in 2018, up by 14.6% from 2017, according to data from Fastmarkets’ battery raw materials research team.

A projected 2,000 tonne cobalt surplus in 2019 will swell to 14,000 tonnes in 2020, according to Fastmarkets’ research analysts, but the market should then fall back into balance at least two years earlier than expected, in 2021, due to the closure of Mutanda.

Mainly in response to this news, the standard-grade cobalt price rose by 43.7% and alloy-grade by 45% from the end of July to the end of September.

The impending closure of Mutanda, which will take capacity for 25,000 tonnes per year of cobalt production out of the market, has kick-started contractual discussions for 2020, with buyers keen to gauge the availability of material.

That in itself is in contrast to last year, when supply was considered more than comfortable, leading to a protracted mating season and, ultimately, uncommitted stocks.

A volatile cobalt market, however, in which sentiment changes quickly, leaves both sides of the market keen to hold out for a while longer before committing to next year’s contract terms, including tonnage.

* Trades form the basis for Fastmarkets’ price assessments in the first instance, supported by well-informed and supported bids, offers, deals heard at second hand, and other indications during periods of low liquidity.

(Detailed specifications for all of Fastmarkets’ cobalt price assessments can be found here.)