TORONTO (miningweekly.com) – Cobalt has undergone somewhat of a transformation over the past five years, in step with the new emerging applications in the booming battery business that have driven a three-fold demand increase.
Despite being a smaller industry than its battery raw material counterparts – roughly half the size of lithium and 20% the size of flake graphite – its use in lithium-ion batteries had rocketed and there were lessons in cobalt that should be taken into the lithium and graphite sectors, Benchmark Mineral Intelligence analyst and MD Simon Moores told Mining Weekly Online.
Supply to the 100 000 t/y market was expected to quickly move into deficit with the rise in demand from the battery sector, as a wave of new battery megafactories were expected to come into production over the coming years.
“How the industry deals with an expected surge in demand will be critical over the coming years. We expect this to begin in 2016 and it is likely to intensify in 2017/18, with limited new supply on the market and battery producers increasing their consumption,” Benchmark consultant Andrew Miller explained to Mining Weekly Online.
The London-based research house said it was aware of five significant lithium-ion battery manufacturing capacity expansions that were likely to enter production by 2020. The most significant of these was the Tesla Gigafactory, which was being built in collaboration with Panasonic in Nevada, where Tesla expected to produce more lithium-ion batteries in 2020 than were produced globally today – about 500 000.
Outside North America, information technology, automobile and new energy specialist BYD expected to add a further 20 GWh of production capacity. Boston Power and LG Chem were also expanding production capacity.
“We also expect a number of other producers to pursue capacity expansions over the coming years. Whether these will be on a gigascale is yet to be seen, but together they will also offer significant new volumes to the market over the coming decade,” Miller advised.
New York-based House Mountain Partners founder and co-author of The Disruptive Discoveries Journal Chris Berry told Mining Weekly Online that there currently existed at least a dozen battery manufacturers with numerous others rushing to join and capture growing market share.
According to him, the lithium-ion battery business was essentially ‘owned’ by Asia, with major producers including LG Chem, Samsung SDI, BYD and Panasonic. These companies were established players in the sector and were ramping up capacity by varying degrees.
Last year LG Chem announced its intention to establish a joint venture with two State-run companies in Nanjing, China, with the goal of producing 100 000 electric vehicle (EV) battery packs by the end of 2015. Boston Power and Alevo were two other emerging companies in the lithium-ion battery space.
“Though, individually, these companies have sales goals smaller than that of Tesla, when viewed collectively, it is clear that security of supply of raw materials – cobalt, lithium, nickel and graphite – will be a major issue going forward,” Berry added.
He said there were two likely scenarios that could play out over the coming years.
“I think there is a more significant issue and that is the general downward trend in metals prices. Cobalt is almost exclusively a by-product of copper and nickel mining. With copper prices down 17% year-to-date (YTD) and nickel prices down 29% YTD, this raises the possibility of curtailing production or closing uneconomic mines.
“In any of these instances where cobalt is a by-product, any decrease in copper or nickel production could mean a decrease in cobalt output. It appears for now that the cobalt price will likely trade sideways as the news of capital expenditure and production curtailments in copper and nickel has not yet begun in earnest,” Berry explained.
Conversely, the stronger US dollar and lower energy prices could be a boon to miners and refiners outside of the US, making it cheaper to produce finished product as their home currencies weakened. Coupled with lower energy inputs, this could exacerbate a supply glut and keep a lid on prices.
“I think the most likely scenario is a mix of the two with a bias towards the latter. There will be production cuts, but not likely anything big enough to outweigh increased production due to lower energy costs and foreign exchange tailwinds,” Berry noted.
In terms of existing suppliers, the only area that could potentially increase production in the short term was in the politically unstable Democratic Republic of Congo (DRC); however, with much of this dependent on nickel and copper mining, the industry was at risk of having insufficient supplies for the emerging sector, as cobalt was likely to grow at a faster rate than industrial markets. The DRC produced about 61% of global cobalt output and China accounted for about 43% of refinery production.
Continued slack in global cumulative demand pushing metals prices down further was another primary risk. Low prices discouraged investment in additional capacity, while EV sales falling short of expectations also represented a challenge to cobalt market upside.
The world’s number-three ranked cobalt producer, as reported by the Cobalt Development Institute in April, diversified miner Sherritt International, expected growth for the rare metal to continue at between 4% and 6% a year, as cobalt continued to play a critical role in lithium-ion rechargeable battery applications for EVs, hybrid electric vehicles (HEVs), cellphones and handheld electronic devices, as well as off-peak renewable-power storage initiatives.
“Cobalt in rechargeable battery chemicals currently represents about 45% of total demand for cobalt and this is expected to continue to rise over the coming years,” Sherritt president and CEO David Pathe told Mining Weekly Online.
He pointed out that the biggest risk for the cobalt market in the short to medium term was low energy prices. “Low fossil fuel prices would affect the adoption of EV and HEVs, delaying the growth of this key market for cobalt,” he highlighted.
Just how sustainable the expected growth would be depended on a multitude of variables. Berry explained that investors had in recent years been disappointed many times over by the narrative of “explosive demand”.
“The keys are watching the sales trends in EVs and in the stationary storage markets. They are growing fast, but from a small base. Additionally, monitoring the trajectory in price per kWh for lithium-ion batteries and the price per watt for solar power will be crucial.
“As an example, lithium-ion battery costs have fallen by 14% a year in recent years. This isn’t a Moore’s Law phenomenon, but it is respectable. As the costs of these technologies continue to fall, this should spur adoption and provide a floor for raw materials prices,” Berry said.
He added that investors should be mindful of recycling, as this would play a role in supplying the markets that could somewhat mitigate any pending supply crunch.
“Today, the sustainability of this growth remains the big question that the industry needs to address. There are a limited number of junior companies in the space and tighter conditions in financing markets are limiting their progress,” Benchmark’s Miller said.
However, the critical role of cobalt remained undiminished. While there were other lithium-ion battery chemistries being developed that did not use cobalt, Benchmark believed the market was unlikely to see a widespread shift away from its use in the next decade.
“Major battery producers have spent years refining these technologies, so to move away from cobalt-based chemistries would not only undermine the millions of dollars they’ve spent on research and development, but also jeopardise the progress they’ve made in terms of performance and cost,” Miller commented.
Historically, cobalt price fluctuations were frequent, never more so than in 2008, when price volatility was at its peak. Also more recently, cobalt had started trading on the London Metals Exchange, allowing speculators to enter the market and affect the price.
“In recent years, however, the market has stabilised at low levels and price fluctuations have slowed. At Benchmark we expect this to change over the next year or so as the market moves into deficit. Rising prices from 2016 onwards will likely see traders increase their exposure to cobalt, which will add to this volatility,” Miller said.
“As a producer of a significant amount of cobalt (about 8 000 t/y), we are pleased that the cobalt price has remained very stable over the past few years, supporting the use and development of cobalt in these important end-uses,” Sherritt’s Pathe noted.
At the moment, any new project looking to come on to the market would be forced to target growing battery demand. Traditional industries such as cobalt metal did not currently pose growth potential to entice investors to finance projects.
One such shovel-ready project affected by mellow investor interest was project developer Fortune Minerals’ Nico gold/cobalt/bismuth/copper mine and concentrator, in Canada’s Northwest Territories. All permits were in place to construct and operate the project, pending the finalising of financing. The ore would be processed in two stages at the Nico site and the company’s Saskatchewan metals processing plant, near Saskatoon.
President and CEO Robin Goad affirmed to Mining Weekly Online that the financing market was effectively closed.
“Historically, we were looking at funding the project through a partnership with large Asian companies, but now that market is also closed. We are now focused on private equity, conventional debt and offtake customers to finance the project and we are ramping up our efforts to secure financing, which would be the next catalyst,” he said.
He added that despite the global economy being in a bit of a unique situation right now, where all commodity prices were low, Goad believed that investors were starting to recognise the importance of minor metals, such as cobalt, where they were previously focused on base and precious metals. Being a polymetal deposit, Nico also stood to benefit from increased commodity prices as the global economy picked up momentum.
According to Miller, of the few development-stage companies around today, Formation Metals, Fortune Minerals and Global Cobalt were probably the best established.
Berry noted that he was currently more focused on the major producers, including Freeport-McMoRan, Glencore, Umicore and Sherritt. “It’s true that cobalt represents a miniscule part of these companies operating results, but they are responsible for the lion’s share of current supply,” he added.
As such, with a supply deficit and growing demand on the cards, analysts could only speculate as to how far upstream end-users would be willing to go to secure raw material.
“It’s possible that we could see end-users making investments as far upstream as the mines themselves over the coming years, particularly if you consider the potential supply side issues that could emerge over the coming years. Supply chain security will become increasingly important as supplies tighten and, if you consider the issues battery suppliers are going to have in sourcing not just cobalt but materials like graphite and lithium too, then it would make sense for them to lock in upstream supplies in some form,” Miller said.
Also, keeping a close eye on China’s overall growth trajectory and how the country transitioned its growth model from one based on exports to one more focused on internal consumption would be important.
“With respect to cobalt, we have to soak up the excess supply before things can get really exciting. A lack of funding for exploration and capital expenditures for expansion of current opportunities could be sowing the seeds of the next move higher in cobalt. It is very much a wait and see game now,” Berry advised.