THE RIPPLE EFFECT
Since Glencore announced intentions to close its Mutanda Mine in the Democratic Republic of the Congo (DRC) by the end of 2019, cobalt prices have started to rise – but while the existing stockpile should meet demand next year, supply out of the DRC is an
ON August 7 this year, Glencore announced its plans to close the Mutanda mine, citing reduced economic viability and the low prices as the main drivers behind the decision.
Glencore chief executive officer Ivan Glasenberg said the company had planned to transition the Mutanda operation to temporary care and maintenance by year end, “reflecting its reduced economic viability in the current market environment, primarily in response to low cobalt prices”.
According to Benchmark Mineral Intelligence analyst Caspar Rawles, the announcement actually had a ripple effect in the market, which had experienced a downward trend from the first quarter 2018 through to the beginning of August 2019 (when Glencore released its half year report), mainly due to fears over oversupply.
“We saw some big supply commitments from incumbent producers in the DRC, and when all of those numbers came together, it became quite evident that there was a concern around security of supply for cobalt and that drove the downward market,” Mr Rawles said.
“In August 2019, the market turned, and prices started to rise again.”
It’s worth noting that the Mutanda mine is the world’s largest cobalt mine (by production) sitting at about 20pc of global production – or enough cobalt for 2.5 million EVs with today’s technology.
“Now they cited the low cobalt price and increased operating costs as the main drivers – particularly sulphuric acid which they need a lot of to operate that mine – but they left a five month window between the announcement and planned closure by the end of this year which could mean that they could reverse the decision,” Mr Rawles said.
“DRC supply is anything but certain going forward - which has a big impact on sentiment with producers.”
“But it seems very likely that it’s going ahead, and information I have suggests that they are already ramping down production and getting rid of some of the expat workers.”
Glencore also has another DRC operation – Katanga Mining – which while still operational, has some issues with uranium at the mine.
“They need to install some equipment to remove that uranium before they can begin to export cobalt from there,” Mr Rawles said.
“That was due to be installed and commissioned by the end of this year, but they announced that it wouldn’t be ready until at least 2020.
“So that means they’re expecting to have no production from both mines during the first six months of next year – so they’ll be reducing their stockpiles.”
This means the stockpiles accumulated over 2018 and 2019 have been key in driving the downward trend in prices and starting to reverse and rebalance the market.
“We expect the mine to be closed for about two years and over that time the demand will grow enough that switching it back on won’t then flood the market,” Mr Rawles said.
Ongoing impacts
Prior to Glencore’s announcement and with low prices, Benchmark didn’t expect any new projects to coming online to get financed, and Mr Rawles believed that the cobalt market would be over supplied until 2022 or possibly 2023.
“Following the Glencore announcement that picture changed, taking that 25,000t of material out of the market for two years,” Mr Rawles said.
“It looks as though next year we’re going to be in a big deficit but there are big stockpiles, so I don’t think that’s going to be the case,” he said.
“We think in 2020 the market will be supplied with ongoing production and stockpiled material, but from 2021 onwards there’s a question about how well supplied the market will be.
“Obviously prices will react as a result and the only other unknown factor is how quickly other DRC operators can respond but there have been problems with that.”
Eurasian Resources Group (ERG) is one company currently ramping an operation to pump tailings from a conventional dam which has been dumped as a result of historic mining, but Mr Rawles said it had operational problems and hasn’t performed as well as expected this year.
“There’s another company called Schema, who are building a new cobalt hydroxide refinery in the DRC which was expected to come online this year but now that’s looking like that won’t be online until 2021,” Mr Rawles said.
“So, DRC supply is anything but certain going forwards - which has a big impact on sentiment with producers.”
Mr Rawles said noted that, prior to the Glencore announcement, large downstream buyers in negotiations for next year’s annual supply contracts for cobalt felt they had a good chance of getting fixed payables on their supply deals for cobalt hydroxide, or even in some cases a fixed price.
“They’ve now said they don’t think that will be the case and producers have already asked for more favourable terms in their contracts,” he said.
“So, it’s looking like we’re going to have a higher priced environment going in to 2020.”