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Outlooks for Cobalt, Lithium & Ferrochrome

Brett Hartke
Published 2/9/2011
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CAPE TOWN, South Africa – The global economic recovery does not favor all commodities equally. Cobalt and lithium, for example, are expected to remain amply supplied even as demand increases, while the ferrochrome market will remain relatively tight for the next several years despite shuttered capacity waiting in the wings.
An overview of all three markets, including supply-demand and price predictions, was given this week at the annual Investing in African Mining Indaba conference here by Lara Smith, a commodities analyst who founded and is managing director of Core Consultants
Cobalt
The fundamentals of cobalt are overshadowed by the reality that a single African country plays a huge part on the supply side while a single Asian nation is the world’s major refiner of the alloying metal. More than 50% of the world’s cobalt is produced in the Democratic Republic of Congo (DRC) but only about 5% of refined cobalt Is produced in the region, Smith said. In contrast, China produces nearly 40% of refined cobalt but lacks reserves. The DRC government is trying to change this equation so as to encourage fixed investments in the country in the form of beneficiation. In fact, the majority of new production can be expected to come from the DRC in the near term, despite the perception of significant political risk. There is a move in China away from DRC reliance on cobalt supply, however, Smith added.
Cobalt demand, meanwhile, is expected to grow significantly. Traditionally the largest end-use has been in superalloys, but batteries have recently displaced them and now account for more than 27% of cobalt end use applications compared with 19% for superalloys.
Demand for cobalt in batteries is being driven in large part by the portable electronics and mobile phone sectors. Smith said mobile phone global penetration rates are now 76% on average, with further growth anticipated as penetration rates in developing countries still have much room to grow. Penetration rates in Asia and Africa, for example, are still below the world average at 68% and 41% respectively. Mobile phone subscribers now number in excess of 5 billion globally, up from less than 3 billion as recently as 2006, according to Smith.
Cobalt demand is also benefitting from the use of lithium-ion batteries for vehicles, Smith said. Batteries used in hybrid and electric vehicles contain approximately 4 kg and 6 kg of cobalt respectively. In addition, five out of every six lithium ion battery technologies contain cobalt. Approximately 340,000 hybrid and electric vehicles were produced in 2010 and consumed an estimated 1.2 kilotons (1,200 metric tons) of cobalt.
Smith predicted that over the next 10 years the number of hybrid and electric vehicles on the road will increase to about 13 million, or about 14% of all vehicles on the road, with cobalt requirements needed to support that level of growth increasing to almost 13 kilotons (13,000 metric tons) annually.
Growth in the aviation sector in the near future will ensure substantial growth in cobalt use for superalloys. The turbofan jet engines of a typical commercial jet contain 110-130 lbs of cobalt per plane. Both Airbus and Boeing, the two largest commercial aerospace companies, are anticipating increased orders over the next several years. Smith estimated that by 2013 approximately 80 metric tons of cobalt will be required annually by the commercial aviation sector, with Airbus and Boeing together accounting for 50 metric tons.
Catalysts will be another strong growth sector for cobalt, Smith said, noting that approximately 35% of all cobalt catalysts are consumed by the petroleum industry. Growth in this end use will benefit as rising oil prices drive gas-to-liquid technologies that utilize cobalt.
Cobalt is expected to remain in surplus until 2014 or later, largely as a result of elevated global nickel production rates. Nickel miners also produces significant quantities of co-product cobalt.
Traders have recently indicated that 7% cobalt concentrates were selling in China in a range of $14.00-14.50/lb, indicating that the metal is still amply supplied, Smith said. She added that she sees cobalt prices remaining in a range of $18-20/lb over the next year, but also anticipates increased demand driven by the battery sector.
Lithium
Assessing the lithium market, Smith noted that the factors driving are much the same as those affecting cobalt. The fundamentals are unique to the commodity however, with hard rock mine production having dominated the supply picture until 1997, when production from lower cost brine sources, especially in Chile, resulted in downward price pressure that eventually forced many mines to close.
Batteries are the largest end use for lithium, accounting for about 26% of demand, followed by ceramics and glass at 16% and lubricants at 13%. Demand for batteries is on the rise and is being driven by both the electronics and mobile phone sectors and increased hybrid and electric vehicle demand.
The lithium content of batteries in mobile phones averages 3.4 grams per phone, while lap top computer batteries contain 70 grams per unit. These end uses are expected to grow 11% over the next five years, Smith said.
But the largest driver of near-term demand for lithium in batteries will be in the automotive sector, where an estimated 12 kg of lithium are used in a hybrid vehicle and 50 kg are required for a fully electric vehicle. The market for such vehicles should increase 25% over the next decade, Smith forecast. This means the sector will need an additional 15 metric tons of lithium carbonate by 2015 and 18 metric tons by 2020. Growth is not expected to continue unabated, however, but may reach a steady state and level off within 15 years, Smith suggested. For purposes of her predictions Smith based lithium requirements for vehicles on a rate of 1.6 kg/KWh, with hybrid vehicles averaging 10 KWh and electric vehicles averaging 30 KWh.
Apart from batteries, other lithium end-use applications should grow at GDP rates, Smith said. As examples, she predicted that lithium use in ceramics and glass will grow at an estimated 4% per year, while industrial and other end uses will increase by 2.5% annually. India and China will account for much of this increase. Demand will reach 165,000 metric tons/year of lithium carbonate equivalent by 2015 compared with about 115,000 metric tons in 2010. Demand this year is estimated at about 123,000 metric tons. The market will continue to be adequately supplied in the foreseeable future, however, Smith said, adding that concerns of insufficient lithium reserves are unfounded.
Since brine-sourced lithium entered the market more than a decade ago, lithium prices have been on a roller coaster, peaking at $6,612/metric ton before falling in 2009-2010 to an average of $5,069/metric ton. Since then they have recovered to levels around $5,750/metric ton recently. At this level, many junior mining companies can again operate profitably, although margins are relatively thin and prices may not hold. Smith estimated lithium extraction costs for brine producers at slightly below $2,000/metric ton, while hard rock miners face costs of about $5,300/metric ton.
If prices hold, a number of capacity additions can be expected to come on stream over the next three years equal to about 49,000 metric tons on a lithium carbonate equivalent basis. Of that total, 39% would come from higher cost hard rock sources, with another 38% coming from brine. The remainder would come from geothermal and clay or other mineral sources. Brine-source producers can be expected to reduce prices to protect their market shares, Smith said, as current margins are large enough to make this strategy worthwhile.
Chinese buyers were paying about $3,400 per metric ton for lithium carbonate as recently as December, Smith said. She predicted that prices over the next five years will average $4,400-4,600 per metric ton before returning to levels above $5,000 per metric ton.
Ferrochrome
The stainless steel sector accounts for about 80% of chrome ore consumption, meaning that the outlook for ferrochrome is closely tied to overall global growth rates, Smith said. South Africa remains the largest producer of metallurgical chrome ore and concentrates, contributing 36% of global supply, followed by Eastern Europe at 24%. Western Europe and India each account for 15%.
South African production fell 17% in the third quarter of 2010, however, while Indian and Chinese output declined 13% and 12% respectively. Even so, there remained a slight market surplus. In South Africa, average ferrochrome production costs are expected to be in a range of 89-92 cents/lb. Costs are being pressured higher by increased energy, labor and raw material expenses (e.g., for coke).
Smith predicted that global stainless steel demand will grow 13% this year, while production will increase 12%. Approximately 59% of that increase will be in Asia. This demand level translates to about 8.5 million metric tons of ferrochrome requirements to support the stainless steel sector, up from approximately 6.0 million metric tons in 2009. Production this year is expected to be about 8.4 million metric tons, ensuring that the market can be expected to remain tight. These factors, combined with rising costs, suggest that pricing will remain solid despite the fact that China will continue to dominate the import market, Smith said.
Ferrochrome capacity increases are planned, primarily in South Africa, although growth there may be constrained by power supply limitations. Smith said no significant production increases can be expected until after 2015, however. Relatively small increases are planned in India, Kazakhstan and Finland over the next three years.
Ferrochrome contract prices fell 5 cents/lb for the first quarter this year. Prices were settled with Japanese stainless mills at $1.33/lb, while European mills settled with South African producers at $1.25/lb for the quarter. The decline was attributable to favorable prices for Chinese buyers and increased Chinese exports of stainless steel to Europe. Higher price levels in the US relative to the European markets have created export opportunities into North America. Meanwhile, strong stainless output in Asia will help to tighten the market as capacity begins to increase faster than ferrochrome production levels.
This relatively favorable pricing situation for Europe will not last, however, Smith said. By the fourth-quarter of 2011 benchmark contract prices for high carbon ferrochrome in Europe will have increased to $1.33/lb and will average $1.28/lb for the year. Smith estimated that long-term prices will be lower, however, in a range of
.97-1.01/lb,” Smith said.
Brett Hartke is a contributor to ResourceInvestor.com who has more than 20 years of experience researching and writing about commodities and the metals markets.