Cobalt — Do today’s prices have a ceiling?
Cobalt. You may or may not have heard of this obscure metal. Yet, it’s arguably the most important metal of the 21st century. Both the US and China consider it a strategic metal. Why? It’s critical to many industrial applications, necessary to modern rechargeable batteries and has very unusual supply / demand mechanics.
This has caused the cobalt price to quadruple in the last two years, but this is only the beginning.
By 2030, global demand could be 47 times more than it was in 2017 (Bloomberg New Energy Finance estimates*).
In this analysis, I lay the foundations to understanding cobalt supply and demand, cobalt use cases, modern battery chemistry and investment opportunities.
Background
Cobalt is a chemical element with symbol Co and atomic number 27. It’s a hard, silver-gray metal with impressive magnetic properties that it retains at temperatures as high as 1,121 °C.
In 2017, the world produced just over 100,000 tons of cobalt. Of this, 50% went to producing rechargeable batteries, and the other 50% went predominately to mission critical industrial applications, such as jet engine turbines and high-speed drill bits.
Globally, the Democratic Republic of Congo (DRC) supplies 63% of global cobalt supply, with the rest being produced by a handful of countries producing less than 6% each. These include Canada, Australia, Phillipines, Cuba, Russia, China, New Caledonia, Madagascar, Papua New Guinea, and South Africa to name the major suppliers in no order.
This is worsened by just how unstable the DRC is. The DRC has already passed new tax laws, increasing copper and cobalt royalties, even when they said they wouldn’t. Glencore, has been battling to keep Katanga mining, of which they own a 38% stake, from being nationalised in a messy law suit battle.
This is all nothing compared to the fact that the DRC has many cobalt mines using child labor in horrible work conditions. It’s been appropriately compared to blood diamonds. Yet, as cobalt prices continue increase, we could see many new mines come online in countries with strict work laws and stable government, such as Canada and Australia.
Diving deeper, only 2% of cobalt is sourced from direct production cobalt mines. The remaining 98% is split , with 60% sourced from copper mines as a by-product and 38% from nickel mines as a by-product.
This means cobalt, because it’s a bi-product, cannot respond to the normal laws of supply and demand.
The world’s largest miner (and Cobalt producer via nickel/copper bi-product), Glencore, had $14.8bn in EBITDA in 2017. This was driven by these commodities and activities;
● Copper 28% ● Zinc 17% ● Nickel 4% ● Ferroalloys 4% ● Coal 25% ● Oil 1% ● Marketing 21%
Cobalt did not get mentioned. This is because it makes up an inconceivably small percentage of revenues and profit for copper and nickel miners.
The CEO of Glencore, Ivan Glasenberg, is not going to decide to produce more cobalt just because electric car companies need more. They will only produce more cobalt if it is economically worth it.
As of writing this article, cobalt’s current spot price is $36.06 USD/lb or just under $80,000 USD/t. This is not even a order of magnitude near driving copper and nickel miners to significantly increase production.
Unless both Nickel and Copper continue to significantly increase in price, cobalt supply will not meet demand.
Even though, Glencore is reopening their DRC Katanga mine, forecasting increased cobalt production.
Supply deficit is inevitable for the foreseeable future.
Industrial Applications — 50% of the Story.
Cobalt is a critical element in many industrial applications. Superalloys, Magnets, High Strength Steel and Diamond Drill Bits all require cobalt.
Of 2017’s 100k tons, 50k went to industrial applications. The companies that are using 50k tons are year don’t care about the price, as they don’t have an option to use anything else. You can’t make jet engines without it. You can’t make gas turbines without it. You can’t complete mission critical task without it.
These companies (and governments) will pay anything in to get cobalt, as without cobalt, they cannot operate. This demand is price inelastic.
This is why the United States and China both view cobalt as a strategic metal.
The U.S. Government literally stockpiles it.
In 2010, the U.S Government held approximately 300 metric tons of cobalt in the National Defense Stockpile for use in case of a national emergency.
Lithium Batteries — Growth Story.
Lithium Batteries. The rechargeable, long-lasting and relatively affordable battery that powers the tech you use everyday.
The Chemistry
Lithium Batteries, as suggests, use Lithium as the anode and other metals as the cathode.
Yet, 40% of the cell weight of a battery is the cathode powder.
The cathode is usually some combination of metal depending on cell type. Cobalt, Manganese, Nickel or other.
Manganese and Nickel both have relatively strong supply channels, so the price isn’t as susceptible to huge changes.
Apple use’s around 10–20g cobalt per iPhone, they don’t care about price, only the space it takes up in your phone & battery life. At a current spot price, cobalt costs $36.06 USD/lb. 1kg = 2.20462 pounds. spot price * 2.20462 = $79.489 USD/kg. $79.489 * 0.02 (20 grams) = $1.59 USD. With these rough calculations, we can assume each iPhone has a maximum $1.59 worth of cobalt in it’s battery. Relative to the average cost of a iPhone at $687, cobalt is 0.23% of product price.
While lithium supply is still arguably stretched, leaving the price to increase accordingly, it’s nothing like cobalt market dynamics.
In my opinion, cobalt prices have no near-term price ceiling, as resources go to those who are willing to pay the most, and that will be the Samsung, Apple and the US Military.
The (re)Birth of the Electric Car
In the United States by the early-1900s, 40 percent of automobiles were powered by steam, 38 percent by electricity, and 22 percent by gasoline*. A clear winner was not obvious. It was only when Ford, scaled Model T production with an Internal Combustion Engine, that the electric car quickly faded from public view.
Today, we are seeing the re-birth of the electric car. Car companies around the globe are realising that electric is the way of the future. Consumers will no longer wait for politics to solve climate change, instead they are demanding real change with their wallet. 20% of Americans say their next car will be electric.
This is lead by Tesla, however, other major car companies are following suit with Volkswagen doubling their EV Battery Order To $48 Billion and BMW saying they will have a total of 25 electrified cars in their lineup by 2025.
Tesla vs. the world
EV’s are going to drive the vast majority of future cobalt demand.
The key here is to understand what specific battery technologies each company is using.
Tesla, with it’s in-house production, has gone the route of using an NCA Battery cell, with 80% Nickel, 15% Cobalt and 5% Aluminium.
Every other car manufacturer (except Toyota) has chosen to use a NMC Battery Cell, generally with equal parts Nickel, Magnesium and Cobalt. NMC cells vary in cathode formulation, with NMC 111, 433, 532, 622 and 811.
As cathode power is 40% of cell weight, approximately 1.6kg of cathode powder is required to make a kWH in an EV.
If each of the billion cars on the road were replaced today with a Tesla Model X, 14 million tonnes of cobalt would be needed — twice global reserves.
Luckily, Tesla realised this issue, and in partnership with Panasonic has reduced cobalt usage by 60% since the Roadster in 2009.
- In 2012, Tesla was consuming 11kg of cobalt per vehicle on average.
- In 2018, Tesla consumes 4.5kg of cobalt per vehicle on average.
Breaking this down, at a current spot price, cobalt costs $36.06 USD/lb. 1kg = 2.20462 pounds. spot price * 2.20462 = $79.489 USD/kg. $79.489 * 4.5 = $357 USD. With these rough calculations, we can assume each Tesla has $357 worth of cobalt in it’s battery. Relative to the average cost of a Tesla at $50,000, cobalt is 0.714% of product price, quadruple that of the iPhone ratio.
Tesla is best in it’s class for EV batteries. Let’s look at what the average EV currently uses. Based on a battery size of 60kWH: 79.489 USD/kg * 1.6kg * 0.33 (NMC 111 Battery) * 60 = $2,518 USD, or 10 times the cobalt of a Tesla.
While cobalt usage is decreasing in batteries, it’s not going down at the rate demand is going up.
“This new lab battery is going to…”
Musk’s “next gen” battery, doesn’t set out a timeline, and for good reason. Because it’s really hard to build cobalt-free batteries.
Cobalt provides longevity and safety to the battery cell. As you decrease the amount of cobalt in a cell, you reduce the life cycle of the cell and increase the propensity for the cell to overheat, which can lead to combustion.
No one wants to be driving a car that has even the smallest risk of randomly catching fire.
Furthermore, current low-cobalt formulations require production in a dry, sealed environment, which adds cost to overall battery production.
Battery development, unlike chip development, have not followed Moore’s Law. At the end of the day, batteries are limited by their chemistry, thus radical improvement in battery technology can only be made by switching to a different chemistry.
I’m a massive Musk fan, but also a realist. The fact is, that majority of viable low-cobalt or no cobalt alternatives are still in the lab. Lab batteries are unstable, unproved and are not going into mass production anytime soon.
While Tesla is leading in battery development, cobalt is not going away overnight, and Musk is not the best at timelines.
Low-cobalt batteries are at least a decade away.
This is why all car companies are struggling to secure long term supply, even after going directly to mining companies.
Conclusion
Cobalt is critical to many industrial applications, necessary to modern rechargeable batteries and has very unusual supply / demand mechanics.
It’s also not going to be replaced any time soon. Cobalt usage in batteries is declining, but it’s not declining anywhere near the rate of cobalt demand increases.
Apple, Samsung, Tesla and every other consumer electronics company and car company will be competing against industrial applications that don’t care how much cobalt costs.
As EV production increases exponentially, cobalt demand will continue to outstrip supply, meaning cobalt prices are only going to continue to increase.
Investment Opportunities
Renewable technologies, have a large reliance on raw materials, generally metals.
In my opinion, cobalt will only continue it’s bull run as a commodity long-term. This has opened up many opportunities of varying degrees of risk.
As the majority of cobalt is produced as a bi-product of copper and nickel production, gaining pure exposure to cobalt is challenging.
Thus, I believe many junior miners in Australia and Canada will profit handsomely from the cobalt boom, as there are a number of cobalt focused plays.
Furthermore, by investing in companies that operate and source cobalt in an ethical manner, you can do your part to reducing the amount of harm cobalt is causing in the DRC.
I’m currently writing a detailed analysis of my preferred ASX listed company giving investors exposure to cobalt. Follow my medium profile to get notified.
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Author Bio
I’m a 20 year old startup founder who is experienced in driving online growth, having previously built eccomerce startups from $0 to $250k in revenue in 3 months. I now work on Sempo. We are reinventing the way the world does humanitarian relief by enabling NGOs to rapidly and efficiently deliver cash assistance.
Mandatory Disclaimer: The information in this blog and the links provided are for general information only and should not be taken as constituting professional advice from the author. Calculations done in this blog are rough estimates and should not be considered accurate. The author has stock ownership in Tesla. The author has no stock ownership in all other companies referenced.
