With its high growth rates and huge potential, battery demand is a key focus for metals markets. If 2016 was all about lithium, then 2017 should see cobalt start to attract greater attention.
Prices have already accelerated to levels last seen in 2011, as rising demand from the core portable electronics meets relatively stagnant supply growth. And while risks remain — technological on the demand side and geopolitical on the supply side — cobalt looks well placed to shine.
Roughly half of its current consumption goes into battery manufacture. By contrast, lithium may only reach cobalt’s current levels on a five to 10-year view.
The past decade has seen an almost 10 per cent compound annual growth rate for cobalt in this market, although the pace both in absolute and percentage terms has been weakening in recent years.
Much of this slowdown is related to the portable electronics sector. Lithium-cobalt (LCO) batteries are the staple of consumer electronics, and have suffered as core areas have declined — both laptop and tablet shipments dropped by more than 10 per cent year on year in 2016.
However, smartphones (which use smaller batteries, but sales are significantly higher) did pick up strongly in the second half of last year.
This is highly beneficial for cobalt, while LCO batteries also continue to gain penetration in other areas, notably power tools. Thus for 2017 there is an acceleration in cobalt demand for batteries to 10 per cent year on year.
This increase is putting pressure on Chinese battery manufacturers to find more cobalt.
More than 90 per cent of Chinese cobalt unit imports are from the Democratic Republic of Congo, making the metal China’s most concentrated supply risk in an individual commodity.
The Chinese purchases of DRC assets (notably the Tenke Fungurume mine by China Molybdenum) are with one eye on securing supply of cobalt.
Materials buyers rarely feel comfortable when they are beholden to such concentrated supply. Given concerns over the social and environmental impact of DRC mining, cobalt could be engineered out of battery technology over the longer term. Alternatively, a two-tier cobalt market could emerge, with a premium paid for non-DRC material.
Unlike lithium, cobalt has had little penetration in the growing electric vehicle and new energy vehicle market.
However, since late last year China has prioritised higher battery quality in this sector, which should see a shift in favour of cobalt-containing technologies.
While 2017 may see some pressure on the sales growth of electronic vehicles in China, it is still seen as a sector targeted for growth by the government to alleviate environmental concerns.
Lastly, the battery demand story has attracted a new source of cobalt demand in recent times — investors.
With strong expectations of growth in rechargeable batteries and energy storage, and cobalt having lagged behind lithium pricing, it is viewed as the catch-up trade.
And with limited equity exposure options, this has often resulted in taking physical metal positions. This of course can accentuate upside moves but can also pose the risk of a correction should the cycle turn.
The Commodities Note is an online commentary on the industry from the Financial Times
Colin Hamilton is the head of commodities research at Macquarie
