Cobalt shortfall now much closer thanks to closure of the world’s largest mine
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Experts believe the mothballing of Glencore’s Mutanda cobalt mine in the Democratic Republic of Congo will likely be the catalyst the market needs to spur prices higher.
Mutanda is the world’s largest cobalt mine with annual production of around 25,000 tonnes, or a fifth of global supply.
“This should be enough of a catalyst to see prices rise going forward, and although it is too soon to tell how significantly, it appears from early indications that they have already begun to react,” Caspar Rawles, senior analyst at Benchmark Mineral Intelligence, told Stockhead.
Since Glencore announced it would place its Mutanda mine on care and maintenance for at least two years from the end of this year, the price of LME cobalt has climbed over 8 per cent to US$29,500 ($43,640), or $US13.38 per pound.
Rawles said the move would have a big impact on the volume of material available to the downstream.
“The outlook for the market before the announced closure was that it would go through a period of oversupply for at least the next 12-18 months,” he said.
“This pessimistic sentiment on the market has weighed heavily on prices and was one of the key contributing factors in the falling market we have experienced since the start of Q2 2018.
“With the closure this has changed, heightening concerns about availability of supply.”
Glencore will keep Mutanda in production until the end of the year and also has a stock overhang of just over 10,000 tonnes of cobalt hydroxide, which Rawles said would satisfy the market into 2020.
“However due to the uncertainty, people will look to start to secure material or be prepared to pay more for it and early indications are that prices are rising as a result,” he said.
“Furthermore, looking to 2020 and beyond, without the roughly 25,000 tonnes of cobalt from Mutanda the market will be moving into deficit far sooner than was expected.”
Rawles noted that the negotiation season for annual supply contracts was due to start soon and the announcement was likely to weigh heavily on these, with producers in a far stronger position than was previously expected.
“The prices agreed in these contracts will set the tone for spot transactions going into 2020, particularly for cobalt hydroxide,” he said.
Jack Bedder, director of commodity research reports for Roskill, pointed to what happened to cobalt prices when Glencore mothballed its other DRC-based mine, Katanga, in 2016.
“It could be argued that the suspension of Katanga in 2016 and 2017 helped create the market tightness that saw cobalt prices skyrocket from 2017 onwards,” he said.
“Price rises in 2017 and H1 2018 were underpinned by huge demand for cobalt feedstock and a tightness in the intermediates market.
“High demand, set against relatively tight supply, meant that producers were receiving very high (up to 90 per cent) payables.”
One ASX-listed cobalt player, meanwhile, says the premature closure of the Mutanda mine validates what many commentators have been saying for a long time about the instability of the DRC as a supplier of cobalt.
“These things are in the back of people’s minds anyway, so when you see these announcements from Glencore it just confirms that what people have been saying may actually be playing out,” Australian Mines managing director Benjamin Bell told Stockhead.
“It certainly helps us from a commodity pricing point of view.”
Australian Mines is advancing its Sconi nickel and cobalt mine in Queensland towards production.
The company recently locked in an agreement to sell all of the mine’s yearly nickel and cobalt production for at least seven years to South Korea’s SK Innovation at full market price.
The pair had previously negotiated a deal that would give SK a discount on Australian Mines’ nickel and cobalt if it injected $80.3m into the company by subscribing for 669m shares.
But SK decided not to go through with the investment and will have to buy the nickel and cobalt at full price.
But just how high prices will go and for how long depends on a number of factors, the first being the ramp up rate of Glencore’s Katanga mine.
“So far production numbers from the project have disappointed (just 6,100 tonnes in H1 2019) alongside well publicised issues related to uranium content,” Benchmark’s Rawles said.
“The project has the capacity to produce well over 30,000 tonnes of cobalt per annum so can plug some of the gap left by Mutanda.”
The second factor is the ramp up rates of other cobalt projects.
For example, in the DRC, Eurasian Resources Group is currently ramping up production at its RTR project.
And next year is expected to see increased production from Chemaf’s Mutoshi refinery and new production from China Nonferrous Metal Mining Co.
“Glencore are the biggest producer in the supply chain but by closing Mutanda they are allowing some competitors to increase their market share,” Rawles said.
The final factor that will determine just how high prices go will be the response in production from artisanal sources.
“In 2018, when prices were at their highest, we saw a big increase in artisanal production associated with cobalt mining,” Rawles said.
“Due to the low price environment, currently artisanal activity has reduced significantly, but if prices do react and rise $10-15/lb from where they are today, it is highly likely artisanal workers will return to the Katanga region in the DRC and we will see production increase from artisanal once again.
“Despite big efforts to clean up the supply chain this material can still find its way in and in many cases is a cheaper option for less scrupulous refiners.”