Rising Cobalt Prices Could Trigger Increased Investment Demand

Stock Market

Cobalt is commonly used in batteries like those used in electric vehicles, so as you can imagine, demand for it is increasing. The supply-and-demand dynamic for the metal is attractive, given that suppliers are having trouble keeping up with demand.

Source: Nick Starichenko/InvestorPlace.com

RBC Capital Markets analyst Tyler Broda sees cobalt as a positive driver for companies like Glencore PLC.

Cobalt at an Inflection Point

In a report, Broda said he expects cobalt demand to grow at rates of at least four times GDP, with critical mass hitting between 2025 and 2030. Although the supply is growing, there’s no clear guarantee that it will be able to keep up with long-term demand.

Broda explained that when supply can’t keep up with demand, prices tend to become volatile, and the same has been true of cobalt. He noted that expectations have become as important of a driver as underlying fundamentals. Broda believes cobalt demand is approaching its inflection point due to the “tangible reality of accelerating EV adoption and demand reaching a critical mass.”

He noted that cobalt prices had spiked materially in the past, with the most recent ones occurring in 2018 when they reached about $50 a pound. More recently, cobalt has shifted higher alongside other commodities, reaching $28.13 a pound in China. Broda believes this could be the beginning of the cobalt market shifting to incentive pricing, which would be needed to convince producers to increase supply.

Investment and EV Demand for Cobalt Surging

CRU looks for a small surplus of 5,000 to 10,000 tons in the coming years before the market shifts into a permanent deficit. Broda warned that the short-term gap could be even thinner than that. He explained that the Chinese State Reserve Bureau has been stockpiling cobalt. Additionally, the potential for stronger buying amid the expected shortages and increasing geopolitical tensions could drive strong investment demand for the metal as well.

Demand for electric vehicles accelerated last year, and Broda expects that trend to continue. About 70% of lithium-ion batteries have cobalt in them. He noted that there are long-term risks to the nickel-manganese-cobalt base cathode chemistry, and they will take time to work through on the technology side.

Further, Broda said lower recent cobalt prices should have slowed the switching trend. Nickel is now the most expensive part of the cathode, but that might not remain the case in the long term. Broda increased his price forecast for cobalt to $28.75 per pound for this year, $32.50 per pound next year, and $35 per pound in 2023. His long-term price forecast rises to $30 a pound.

Demand Breakdown for Cobalt

CRU estimates that total cobalt demand reached 136,000 tons last year and looks for a compound annual growth rate of 12.5% until 2025, bringing it up to 247,000 tons.

Broda notes that demand for lithium-ion batteries accounted for 57% of cobalt demand last year. Battery makers use the grey metal in cathodes due to its thermal stability and high energy density. Cathodes made with cobalt don’t overheat easily and can store and transfer more energy. These factors are especially important for the EV market, where weight is a concern and battery safety is a sizable challenge.

According to CRU, EV demand for cobalt accounted for about 75% of last year’s demand. The firm expects cobalt demand for lithium-ion batteries or EVs to grow at a compound annual growth rate of 24% between 2020 and 2025. The firm sees the main driver as the push toward electrification of the transport fleet in Asia and western Europe.

The most common chemistries used for lithium-ion batteries are nickel-manganese-cobalt oxide and nickel-cobalt-aluminum oxide, and CRU expects them to remain the most common ones for some time. Although innovations have reduced the amount of cobalt used in batteries, the metal still accounts for 5% to 10% of the total metal used in them.

A New Area of Demand

In addition to EVs, a new area of demand for cobalt is the rollout of 5G technology. Broda explained that 5G phones require larger batteries with lithium-cobalt chemistry. Further, base station antennas for 5G also require more power, pressuring energy storage systems. CRU expects cathode demand in this segment to see a compound annual growth rate of more than 54% between 2020 and 2025.

Broda also said cobalt’s ability to handle high temperatures and good oxidation resistance make it well-suited for superalloy production, which accounted for 12% of demand last year. Superalloys are used in gas turbine aircraft engines, spaceships, rocket motors and other aerospace applications.

Industrial applications accounted for 30% of cobalt demand last year, including polyester and ceramics production.

Cobalt Market to Tighten Despite Increasing Supply

Broda explained that demand fundamentals in other metals largely determine the cobalt supply because it is mostly produced as a byproduct of those other metals. Last year, about 70% of cobalt production was as a byproduct of copper, while 20% was as a byproduct of nickel.

CRU predicts that cobalt production will see a compound annual growth rate of 9% between 2020 and 2025 as growth comes from all major producers, keeping the market in balance this year. According to Broda, secondary supplies of cobalt like from scrap and recycling are minimal. They should increase materially until 2025 or 2030, when a growing number of EV batteries will reach the end of their useful lives.

Cobalt a Positive for Glencore

The main supply lever for cobalt is likely to be artisanal mining in the Democratic Republic of the Congo, although it has a challenged ESG profile. Broda expects this fact to favor more ESG-friendly suppliers like Glencore. In the 2018 price spike, artisanal production increased from about 10,000 tons to 27,000 tons or 10% of total global production.

Broda explained that Glencore’s ESG profile has been improving and that higher cobalt prices and better cost guidance in copper will give the company another boost. The company’s cobalt-copper Mutanda mine is shut down but expected to reopen this year with an 18-month ramp. Thus, Glencore’s exposure to cobalt is lower than it was, but the company still sees upside potential. Broda believes mark-to-market upside will provide earnings momentum for Glencore, although commodity stocks could pause in the rising yield environment.

Nonetheless, he said the company is a higher-conviction exposure for the long term. Broda likes Glencore’s battery exposure and elevated free cash flows. He expects the upcoming purge of higher-cost assets under new CEO Gary Nagle to trigger a re-rating in the shares.

Michelle does not own any of the stocks or ETFs in this article.

Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.