EU cobalt price direction hangs in the balance

European cobalt metal prices are caught in the balance between severe supply and demand shocks globally, with market participants now weighing up how best to position themselves as Europe's gradual easing of lockdown measures coincides with escalating supply concerns in Africa.

The rapid deterioration of European demand since February has eroded January's price gains, with Argus last assessing prices for chemical-grade material at $15.20-16.00/lb du Rotterdam on 17 April, and prices for alloy grade at $16.20-17.20/lb du Rotterdam.

This compares with prices of more than $17/lb for chemical-grade and $18/lb for alloy-grade metal in the lead-up to China's Lunar New Year holiday in late January, at which point the market was emerging from a period of destocking and the 2020 demand outlook from the aerospace and electric vehicle sectors appeared to be strong. Glencore, the world's largest cobalt producer, had halted its largest cobalt operation in Mutanda, the Democratic Republic of Congo (DRC), and signed several large long-term contracts, tying up much of its hydroxide output for several years.

After three months of turbulence, attention is now closely focused on shifting fundamentals in Europe and Africa, with trading firms reluctant to dissolve their positions, mindful that the market may be thrust into an acute supply shortage by problems in the DRC, which provides 80pc of the world's cobalt.

Africa supply fears escalate

Glencore has yet to confirm any production cuts at its DRC operations, although it has said it is taking measures to ensure worker safety at its Katanga subsidiary.

The company has delayed the construction of an acid plant on the site until the second half of this year.

Other companies are also taking precautions, with China Molybdenum's TFM mine now isolated and outsiders having been unable to enter since 23 March.

But the closure of transport routes out of the DRC could disrupt cobalt supply as much as an outbreak within the country itself. South Africa's national lockdown since 23 March has temporarily banned the transport of all but essential goods from ports — a major concern given that much of the cobalt hydroxide going to China from the DRC moves through Durban port. Some other metals are now moving through Durban port again after restrictions were eased on 31 March, but cobalt is facing a block, market participants said.

The challenges facing Africa's production and exports are compounded by tightness elsewhere in the global supply chain. The Taganito nickel and cobalt mine in the Philippines reopened just last week, having suspended operations since 28 March. The mine provides cobalt feedstock to Sumitomo Metal & Mining (SMM) in Japan, which produces more than 4,000 t/yr of alloy grade metal. But a source familiar with SMM said they expect the impact on Taganito's overall output to be minimal.

Meanwhile, SMM's joint venture with Korea Resources — the Ambatovy nickel and cobalt project in Madagascar — was suspended on 26 March. The project produces about 3,000 t/yr of cobalt briquettes.

Demand unlikely to recover this year

If set against a normal demand backdrop, this wave of supply disruptions would quickly boost cobalt prices.

But the Covid-19 outbreak has dented demand so severely that no immediate price response has yet been seen in Europe or the US. And many market participants are reluctant to speculate on the medium-term price outlook, preferring instead to wait and see how western economies stabilise once lockdown measures are lifted.

In China, prices collapsed in March as cash-starved refineries returned to the market hungry for sales. Metal prices yesterday were assessed at 235-255 yuan/kg ex-works, down from Yn270-285/kg ex-works on 23 January, the start of China's Lunar New Year.

Some market participants think the demand outlook looks subdued and have lowered offer prices in an attempt secure sales later this year. A deal was recently concluded at $15.40/lb for 100t of alloy-grade metal, scheduled for delivery in the third quarter of this year.

In the electric vehicles (EV) sector — which had anticipated that this would be a pivotal year for progress — key market indicators are not generating optimism. European passenger vehicle registrations were down by 55.1pc year on year in March, at 567,308 units. April's registrations are expected to be even lower.

Several European carmakers closed in March and plan to return to production later this month or in early May, albeit at reduced output while social distancing measures remain in place.

The European Automobile Manufacturers Association estimates that 1.9mn vehicles have not been produced because of the viral outbreak in Europe. Global sales of EVs could fall by up to 43pc, according to consultancy Wood Mackenzie.

The aerospace sector has also been affected. Some airlines have already cancelled orders with Airbus and Boeing, which will result in lower cobalt demand in super alloys further upstream. Airbus chief executive Guillaume Faury said he expects aircraft deliveries to fall by 30-40pc this year.

Boeing temporarily suspended its operations in the US state of South Carolina in early April and in the state of Washington on 23 March. Its January-February commercial plane deliveries slumped by 66pc year on year to 50.

By Thomas Kavanagh

Cobalt price data