VANCOUVER (miningweekly.com) – Chinese zinc imports for August have increased by 145% year-on-year to 227 000 t, according to Metal Bulletin and Chinese customs data released on Tuesday.
Scotia Mining Sales noted in a report to clients that this was not surprising given the Shangai Futures Exchange and London Metals Exchange (LME) zinc price arbitrage was wide open from mid-May to the end of June, and again from mid-August.
The zinc price arbitrage refers to the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets, or in different forms.
Zinc and, to a lesser extent, nickel are the only metals right now with an open arbitrage, Scotiabank advised.
Adding to the supply shortage, cancelled warrants in New Orleans have shot up by about 19 000 t overnight – metal which is likely heading for China given the positive price arbitrage there. Currently, about 122 000 t of the 220 000 t of zinc held in New Orleans are cancelled. Globally, there are only 260 000 t of zinc in storage, of which more than half is cancelled or unavailable.
Meanwhile, zinc supply is expected to tighten, as China's Sichuan province could lose about 6 000 t of zinc output on the back of the suspension of several mines in the southwestern region for environmental inspections, according to a report by Metal Bulletin. The environmental inspections have resulted in the suspension of operations at more than 60% of zinc and lead mines in the province.
The inspections, which have been conducted by provincial governments since August 7, have led to suspensions of operations at more than 60% of zinc and lead mines in Sichuan, which is supporting prices. The benchmark three-month zinc contract on the LME was trading at $3 094.50/t at midday on Monday, in London, up about 35% year-on-year and 21% since the start of the year.
Meanwhile, cobalt fundamentals are strengthening beyond recent forecasts, as the main catalyst for cobalt demand growth remains lithium-ion batteries.
Cobalt prices are up 144% year-on-year on rising battery production and tightening supply of raw materials, specifically battery chemicals. According to a note sent to clients of brokerage house Eight Capital, a “perfect storm” was created when two megatrends collided – rapidly growing demand amid increasing supply shortage tensions.
Further, political instability in the Democratic Republic of Congo (DRC) continues to jeopardise half of the world's cobalt supply. “The electric vehicle (EV) revolution and cobalt's preferential use within lithium-ion batteries have transcended the commodity's demand profile and provide fundamental support for higher long-term prices,” analyst David Talbot stated.
Prices have recently topped $27.50/lb, compared with a five-year average of $13/lb. Cobalt remains very important despite trading at thin volumes relative to other elements. “Thus, we expect cobalt will move into a prolonged supply deficit, warranting our higher cobalt forecasts,” the analyst said.
According to Eight Capital, demand for cobalt is projected to grow at 5.9% a year, compared with supply growth estimates of only 4.1% a year through to 2025. The analyst forecasts a refined cobalt supply deficit to intensify from 2.5-million tonnes in 2020, to about 19.1-million tonnes of refined cobalt by 2025.
Talbot said the EV movement is transforming the automotive and lithium-ion battery industries and enhancing the outlook for cobalt and its unique power and energy density, durability, and low-cost profile. Improving battery economics and policy shifts by world governments have fostered a larger appetite by automakers to rush for a piece of the EV market share.
Roughly half of global cobalt consumption is as a main raw material used in lithum-ion batteries. The analyst estimated a near doubling of this demand to 175-million tonnes by 2025, representing a 7% compound annual growth rate.
Importantly, as the price of cobalt rises, the reliability of supply and battery cost reduction are chief concerns for battery- and automakers. For this reason, Eight Capital expects battery chemistry to continue evolving to reduce cobalt reliance.
“But we don't expect this anytime soon and cobalt demand growth should continue. Substitution is difficult, given cobalt’s high energy density, low thermal conductivity and alloys properties. We anticipate increasingly favoured nickel/manganese/cobalt and nickel/cobalt/aluminum lithium-ion batteries to gradually reduce cobalt content,” Talbot advised.
However, the outright substitution of cobalt, without jeopardising battery efficiency, would likely require a research and development cycle of at least five to ten years.
The DRC dominates supply and 99% of cobalt is mined as a nickel or copper by-product. Supplies are in jeopardy over the volatile political crisis over the failure of DRC President Joseph Kabila to step down from office in late 2016. “With the top five cobalt producing mines situated in the DRC, we see potential for major supply disruptions from the country that produces 53% of world production,” according to Talbot.
Eight Capital has revised its cobalt price outlook based on its supply/demand model, expecting the demand from growing lithium-ion batteries production to outpace current mine output and projected mine developments. The analyst expects that standard grade cobalt prices could rise from $32/lb in 2018 to $35/lb in 2025. Cobalt sulphate heptahydrate is expected to attract a 20% premium and high-grade cobalt metal will garner a $3.50/lb premium.