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Commodity investors are used to booms and busts. High prices lead producers to pile on capacity, while low prices prompt rationalisation. The same should hold true for battery metals such as lithium, nickel and cobalt, all down between 60 and 80 per cent from their peak. Yet for cobalt, at least, the bear market could prove protracted.
Like other battery metals, it is suffering from supply growth — 17 per cent in 2023. Meanwhile, demand has been hit by the slowdown in the growth of electric vehicles, as well as the rising penetration of lithium-iron-phosphate (LPF) batteries, which do not use cobalt and have taken off in China.
While producers of lithium and nickel have responded to lower prices by cutting production — in the case of lithium 10 per cent of global demand just in the past quarter, according to Goldman Sachs — cobalt is a byproduct of copper or nickel. And with copper prices staging a recovery, supply is not going to be curtailed any time soon.
This will stimulate longer-term cobalt demand. The push away from cobalt-containing batteries was partly driven by scarcity concerns, which should abate. So-called nickel-manganese-cobalt batteries can hold more energy than their counterparts, which is particularly useful for the longer-range, heavier vehicles favoured in the west.
In this light, the current cobalt glut might provide an opportunity for those with the nous to stockpile it.
Governments should be interested. Yet, with the notable exception of China, which took advantage of low prices to buy the metal in October, the move towards creating strategic reserves is happening only slowly. The US only stockpiles $912mn of nonfuel commodities — $13.5bn less than its requirements, according to a Congressional Research Service report. It has, however, allocated extra money to the Defense Logistics Agency and moved to speed up procurement. The EU does not have a policy that allows it to buy and store the metal.
Some opportunistic buying seems to be happening in the auto sector. Tom Price at Liberum estimates that cobalt inventory will reach more than 10,000 tonnes in 2024, more than twice as much as last year, and about 12 per cent of the auto sector’s annual consumption. That should lock in lower prices and alleviate any concerns over supply bottlenecks.
It also highlights who the real winners and losers in the battery metals glut are likely to be. Lower input prices should drive down the cost of batteries, supporting margins. That ultimately will help to make EVs cost-competitive with traditional internal combustion engines.
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