Glen­core’s ra­dioac­tive shock for the cobalt mar­ket

Gulf Times Business - - BUSINESS - By Andy Home Andy Home is a colum­nist for Reuters. The opin­ions ex­pressed here are those of the au­thor.

Glen­core’s Katanga mine in the Demo­cratic Re­pub­lic of Congo (DRC) was sup­posed to trans­form the cobalt mar­ket. Af­ter two years of be­ing off­line, Katanga’s ramp-up was go­ing to add 11,000 tonnes to global sup­ply this year. The surge, equiv­a­lent to 10% of world pro­duc­tion last year, would flip the global mar­ket from sup­ply short­fall to sur­plus. That was the idea any­way. Katanga’s cobalt, how­ever, has turned out to be ra­dioac­tive. Glen­core’s op­er­at­ing sub­sidiary, Katanga Min­ing, has found ura­nium with “low lev­els of ra­dioac­tiv­ity” in its cobalt hy­drox­ide prod­uct.

Not enough to pose a health and safety scare, but enough to pre­vent the ma­te­rial be­ing han­dled by ports. Katanga will keep pro­duc­ing but it has sus­pended cobalt sales un­til it has built an ion-ex­change plant to re­move the ura­nium.

The cobalt sup­ply wave has been post­poned un­til the sec­ond half of next year.

That may be good news for in­vestors who have watched prices slump from more than $90,000 a tonne in the sec­ond quar­ter to $55,000 to­day. But it’s hardly re­as­sur­ing for buy­ers, un­der­lin­ing the fragility of a sup­ply chain that still over­whelm­ingly depends on the mines of the DRC. Katanga’s Kamoto mine pro­duced 6,450 tonnes of cobalt in hy­drox­ide in the first nine months of this year, seem­ingly on track to hit Glen­core’s 2018 guid­ance of 11,000 tonnes be­fore a fur­ther build to 34,000 tonnes next year.

Pro­duc­tion will con­tinue, with ma­te­rial be­ing stored on site be­fore be­ing treated in the new ion-ex­change plant, which will be con­structed at a cost of $25mn by the end of the sec­ond quar­ter next year.

As of Katanga’s an­nounce­ment on November 6, there were al­ready 1,472 tonnes of cobalt prod­uct grounded by the sales sus­pen­sion.

The com­pany ex­pects to be able to process all ac­cu­mu­lated stocks over the sec­ond half of next year.

That is as­sum­ing ev­ery­thing goes ac­cord­ing to plan.

An­a­lysts at Wood Macken­zie note that the ion-ex­change treat­ment “should not be par­tic­u­larly chal­leng­ing on a tech­ni­cal level”. But Re­search Di­rec­tor Gavin Mont­gomery and Re­search An­a­lyst Mi­lan Thakore go on to warn that the var­i­ous lo­gis­tics prob­lems in the DRC could in­crease the risk of de­lays.

Katanga is by no means the only com­pany ramp­ing up cobalt pro­duc­tion in the DRC to feed fast-grow­ing de­mand from the elec­tric ve­hi­cle bat­tery sec­tor, but it is by far the big­gest.

By the end of next year it will rep­re­sent 21% of Wood Macken­zie’s base-case global mine sup­ply fore­cast.

The im­me­di­ate im­pact of Katanga’s sales sus­pen­sion on the cobalt mar­ket is likely to be sub­dued.

A surge of cobalt in­ter­me­di­ate prod­ucts, such as hy­drox­ide from the DRC, is caus­ing in­di­ges­tion in China, where it is pro­cessed into bat­tery-grade cobalt salts. Cobalt sul­phate prices have been un­der pressure, ac­cord­ing to Fast­mar­kets MB, “with dis­counts against metal prices widen­ing as a re­sult of weak de­mand and the con­tin­ued im­pact of in­creas­ing salts pro­duc­tion” (“Bat­tery Raw Ma­te­rial Mar­ket Tracker”, November 6, 2018). Cobalt metal prices, mean­while, have been knocked by a sell-off on the Wuxi Stain­less Steel Ex­change, Fast­mar­kets MB says, with some pro­duc­ers even con­sid­er­ing cutting pro­duc­tion rates to pro­tect mar­gins. In­ter­na­tional prices have held up bet­ter, but $55,000 quoted on the Lon­don Metal Ex­change is a far cry from its March high of $95,250.

A soggy phys­i­cal mar­ket was neatly summed up by Cana­dian nickel-cobalt pro­ducer Sher­ritt in its third-quar­ter re­port. “Low phys­i­cal de­mand and cur­rent cobalt over­sup­ply is likely to keep mar­ket con­di­tions sub­dued through the end of 2018,” it said. The cobalt mar­ket, in other words, can live with­out Katanga’s pro­duc­tion for now, with the an­nounce­ment po­ten­tially serv­ing to sta­bilise slid­ing prices.

The cu­mu­la­tive im­pact, how­ever, will build over time and dis­rupt pric­ing along the cobalt prod­ucts chain. “The im­por­tance of Katanga to the cobalt story can­not be over­stated,” WoodMac says.

“Just as the com­pany’s guid­ance is­sued late last year quickly cast a cloud of over­sup­ply over the medium term, so has this lat­est news sud­denly cre­ated the threat of near-term tight­ness.” And, of course, the con­comi­tant threat of a de­layed sup­ply surge in the sec­ond half of next year once Katanga re­sumes sales.

The Katanga an­nounce­ment has merely in­stilled a new dose of volatil­ity into a mar­ket that is still re­cov­er­ing from its last su­per­charged rally.

It’s an­other re­minder that when it comes to cobalt, most sup­ply roads still lead to only one coun­try.

The DRC ac­counted for more than 60% of the world’s mined cobalt last year, ac­cord­ing to S&P Global Mar­ket In­tel­li­gence. Maybe more, de­pend­ing on how much ar­ti­sanal cobalt seeped out from the coun­try. It is also ac­count­ing for most of the new sup­ply be­ing brought on stream to feed ac­cel­er­at­ing de­mand for cobalt in lithium-ion bat­ter­ies.

At the end of the sup­ply chain, au­to­mo­tive com­pa­nies have al­ready been fret­ting about the DRC’s prob­lem­atic mix of po­lit­i­cal in­sta­bil­ity, reg­u­la­tory un­pre­dictabil­ity and ar­ti­sanal min­ing.

Tesla’s Elon Musk would like to engi­neer cobalt out of his next gen­er­a­tion of bat­ter­ies al­to­gether, or at least get it “to al­most noth­ing”.

That may yet prove a tall tech­ni­cal or­der, but it is symp­to­matic of the pres­sures to min­imise cobalt us­age in the elec­tric ve­hi­cle revo­lu­tion. Katanga’s ra­dioac­tive cobalt will do noth­ing to as­suage the sec­tor’s con­cerns about its volatile re­liance on the DRC.

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