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December 16, 2015

Cobalt Outlook 2016: Near-term Deficit Still Expected

2014 was undoubtedly the year of Tesla Motors (NASDAQ:TSLA) for the lithium and graphite sectors, and cobalt was no exception. However, in 2015 market participants were forced to look beyond the hype.
That’s largely because despite excitement about lithium-ion battery megafactories from Tesla and other major companies, 2015 didn’t bring as much cobalt market tightness as was expected. Indeed, this time last year, some market participants were calling for a cobalt deficit in 2015 —- as yet, that deficit has not emerged.
To learn more about how cobalt fared in 2015, as well as what the cobalt outlook for 2016 is like, the Investing News Network (INN) got in touch with experts, including Andrew Miller of Benchmark Mineral Intelligence, and Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal. Here’s what they had to say.
2015 cobalt themes: Market tightness overestimated
Speaking about cobalt in 2015, Miller began by stating that heading into the year, Benchmark expected to see the cobalt space gain attention from the battery sector. That’s because “in many ways the cobalt industry has the most fragile supply structure of all battery raw materials.”
However, while market participants have certainly begun to recognize cobalt’s importance to the battery supply chain, “deals to supply the upcoming battery capacity expansions have been slower than initially thought.” The underperformance mentioned above was the result —- “supply wasn’t as tight as expected, and this saw prices continue to fall,” said Miller.
In a late November article, Metal Bulletin gives a good idea of exactly how much the cobalt price has fallen this year. In it, the news outlet states that while the cobalt price was “holding up quite well” until October —- particularly compared to copper and nickel, its compatriots —- it then “fell off a cliff.” At the time the article was written, low-grade cobalt was at a 35-month low of $10.35 to $11.40 per pound, down 25 percent since the summer.
In conversation with INN, Robin Goad, president and CEO of Fortune Minerals (TSX:FT), said that the dramatic price drop was caused by “Chinese liquidity pressures and new artisanal cobalt production in the Democratic Republic of the Congo.”
That said, while cobalt demand wasn’t stoked as much as some had hoped, 2015 did bring supply-side issues that could help to restore market balance and stoke prices moving forward.
On that note, Berry highlighted Glencore’s (LSE:GLEN) plan to cut 400,000 tonnes of copper production from its African operations. That “will also take roughly 15 percent of global cobalt production offline,” he said. Similarly, Miller highlighted that announcement from Glencore as something that the cobalt industry “has been following closely.”
That said, Miller said his firm sees Eurasian Natural Resources’ plans to supply the battery sector as “the most interesting piece of news” in the cobalt space in 2015. “This is the first of the existing majors seeking to address what could be a major bottleneck in the coming years,” he said.
2016 cobalt outlook: Deficit in store?
While 2015 was a little underwhelming for cobalt market participants, it appears that 2016 may bring the market tightness expected last year, and along with it, a higher cobalt price.
Case in point: Berry said that demand for cobalt should “continue to grow well above global GDP” in 2016, while supply should continue to shrink. Catalysts for that will be “more copper and nickel production coming offline where cobalt is a by-product.” All in all, these factors “should support higher cobalt prices.”
Berry also pointed out that “cobalt doesn’t have a very deep ‘bench,’” meaning that companies are not waiting in the wings to meet the “looming supply requirements” expected to emerge in the next few years. He also encouraged investors to remember that a lot of cobalt is mined in Africa, where geopolitical issues —- another threat to supply —- are common.
Laying it out even more directly, Miller said that Benchmark “expect[s] supply to move into deficit in 2016, particularly as demand from the battery sector increases.” He added, “we think this will see a rebound in prices throughout the year.”
Execs at cobalt-focused companies appear to agree. Commenting to INN, Goad and Global Cobalt’s (TSXV:GCO) Mitchell Smith both said that they see cobalt demand growing next year as supply becomes more precarious.
For his part, Goad commented that while the cobalt market “has been in surplus over the past few years … the market is transitioning to balance.” Echoing Miller, he said that the space is “forecast to be in a production deficit by 2016 or 2017,” also stating that this deficit “will extend into the foreseeable future.”
Meanwhile, Smith noted that “according to various market experts, the depressed cobalt prices at present are unlikely to persist into next year as the market expects to recover.” In particular, he pointed to the “overall positive outlook for increased demand from the battery sector” as a likely driver of that recovery.
Investor takeaway
The cobalt outlook for 2016 is certainly positive, but investors who remember the optimism of 2015 may be wary. After all, the excitement seen this year has not brought higher cobalt prices, and —- as Goad and Smith highlighted —- has not made it easier for cobalt-focused companies to raise money to move their projects forward.
So what will make 2016 a different story? Based on the comments from the market watchers above, it seems that it will be key to watch whether the predicted deficit actually emerges next year. Whatever the case, it definitely looks set to be an interesting year for cobalt.
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