Viewpoint: Cobalt prices face supply pressure

Cobalt

US cobalt prices are projected to decline in the first and early second quarter before bottoming out until the end of the first half of 2019, according to market participants.

Availability of both cut and broken cathode is widely expected to outstrip demand early in the year. Supplier stocks are projected to remain at steady levels, enough to meet more than typical spot market consumption rates once foundries and superalloy producers return for January and February restocking purchases. This is estimated to be at or below 2018 levels as new forward contracts settled in prior months begin to come into effect.

Imports of wrought and unwrought cobalt including alloys grew by 4pc to 7,777t in the first 10 months of 2018 compared to a year earlier, according to US Department of Commerce data.

Traders and smaller suppliers remain hesitant to import additional metal from China, owing to the delayed threat of increased tariffs. The US and China tentatively agreed to delay tariff decisions for 90 days or until 1 March. Market participants previously expected tariffs to rise to 25pc from the current 10pc levels on Chinese metal on 1 January. Although stocks of Chinese metal are expected to fall until March, some market participants forecast a falling Chinese yuan to US dollar exchange rate and lower metal prices to sustain the competitiveness of Chinese origin metal.

Falling cathode prices, steady generation rates and abundant stocks could further raise cobalt scrap supplies, lowering production costs as well. Dealers and processors anticipated cutting buying levels for alloy scrap as margins were squeezed by falling prices and intrinsic values. The drop in value has exacerbated concerns over atypically large stocks held by some remelters. US imports of cobalt scrap rose by 56pc to 2,054t through October.

Investment funds could also destock larger cobalt positions early in the year. The destocking would further weigh on prices, as battery demand fell below expectations for much of the second half of 2018. Uncertainty over lithium-ion battery consumption rates in early 2019 coupled with abundant supplies of precursor cobalt and lithium materials in Asia are expected to pressure some funds to sell out of positions.

In the first half of 2019, US demand is expected to remain firm, supported by consistent aerospace, medical and oil and gas alloy demand.

Glencore raised output by 44pc to 28,500t through the third quarter of 2018. This mainly reflected a 6,500t contribution from the restart of its Katanga operations. Other producers had mixed results. Vale's production of cobalt was down by 12pc to 3,657t over the first nine months of the year, and Sherritt International's output fell by 9pc to 1,180t. Meanwhile, China Molybdenum hit a record high output of 9,029t in the first half of the year.

Rising supplies and falling replacement costs forced US cobalt prices down over much of the second half of 2018. Cobalt prices fell by 18pc to $33.25-34.00/lb between June and mid-August. The market traded flat until early October when renewed demand boosted prices to a high of $34.50/lb. Waning demand and ample supplies set off another wave of falling prices, which were assessed 4 December down by 8pc to $30-32.87/lb from the October levels.

Indium

US indium prices are expected to decline in the first half of 2018 as surplus stocks and higher production rates outpace demand.

Supplies of both western and Chinese origin indium are widely expected to climb on flat demand, lower production costs and production ramp ups. Market participants anticipate prices to fall early in the year, led by a drop in Chinese export prices. A scaling back of environmental checks and regulations coupled with an expected cash crunch for some suppliers will encourage a sell off of inventories.

US solder, alloy and optics producers are projected to remain sporadic buyers into the first and second quarter, while indium-tin-oxide demand across South Korea, Japan, China and Taiwan—the largest source of global demand—will only grow slightly.

Traders and suppliers expect close competition for first-half sales as domestic suppliers avoid taking a loss on older, more expensive inventory, which has built up for some over the last months of 2018. The typical pickup in demand from US consumers between January and March is expected to be washed out by oversupply concerns across Asia-Pacific.

This could exacerbate ample current stocks in the US. Imports of unwrought indium were up by 15pc to 115t over the first 10 months of 2018 compared to a year earlier.

In addition, supplies of crude indium in China are expected to continue easing into the first quarter as several producers restart in southern and eastern China after environmental checks wrapped up. Total output over the year is expected to rise by as much as 85t across western and Chinese producers.

US suppliers were also concerned that cash and financial restrictions in China coupled with declining indium prices could prompt some suppliers to sell off additional metal.

Domestic consumption rates will remain steady in the first quarter but spot market demand is projected to slide from a year earlier. This is because of larger-than-usual stocks after consumers bought ahead in the third quarter to avoid potential tariffs. The delaying of tariff decisions until 1 March is anticipated only to restrict buying for a longer period.

US indium prices fell throughout most of the second half of 2018. Waning spot market demand met with ample supplies to force prices down by 20pc to $230-254/kg on 4 December. Indium traded flat between late September and October sustained by consistent restocking demand ahead of the expected tariff decision in January. Once the restocking purchases were completed and supplies eased, prices resumed sliding.