Part I of this series laid out the parameters for major metals markets for 2017, in preparation for compiling a Top-3 list for this year. Part II of this series listed the #3 metal in this year’s ranking: gold. Part III identified the #2 metal for 2017: silver. The concluding installment will reveal the #1 metal for this year.
For many readers, this news will seem anticlimactic. In 2017; one metal is exhibiting supply/demand fundamentals which clearly separate it from the pack – cobalt. The extremely robust fundamentals for the cobalt market are an equal mixture of emerging demand and restricted supply. Indeed, since the beginning of the year, the price of cobalt has risen by roughly 50%, from just under $15/lb up to over $22/lb (USD).
Savvy investors already know from where much of the new demand for cobalt is coming: lithium-ion batteries and the electric vehicle market. Already, battery-making accounts for more than 40% of cobalt demand, with that percentage steadily rising.
However, as a metal with a number of important metallurgical properties, cobalt’s usefulness goes beyond lithium-ion batteries. Cobalt can be magnetized, indeed cobalt is used in making the most-powerful magnets. Because of its resistance to heat, it is used in jet and gas turbines, and it has a number of military applications. Cobalt is also used as a pigment in blue dies and paints as well as a chemical catalyst.
That summarizes the demand side of the equation: a very useful metal that is suddenly in great demand. But to really understand the fundamentals for cobalt requires having a thorough understanding of the supply side of this equation.
The first factor on which investors need to focus is that cobalt is a rare metal. Much like rare earths, cobalt is seldom found in significant concentrations. What this means is that across the planet there are very few cobalt mines. Instead, nearly all global cobalt production comes as a secondary byproduct of other mining.
Readers of Part III of this series may see some similarities with the silver market. Like cobalt, the vast majority of the mine supply for silver comes as a byproduct of other mining. Roughly 97% of all cobalt comes as a byproduct of nickel and copper mining. However, there is one enormously important distinction between cobalt and silver.
Silver, while “precious” is relatively abundant. For more than 4,000 years; humanity has gotten the vast majority of its silver from primary silver mines. The only reason why we get roughly ¾ of our silver today as a byproduct of other mining is because silver is woefully under-priced. If (when) the price of silver returns to a rational level, we will go back to getting most of our silver from silver mines.
This could never be true with cobalt. In the small percentages that it occurs with other metals, the price of cobalt would have to rise by orders of magnitude in order for the world to start seeing lots of “cobalt mines”.
Markets like cobalt are described in economic terms as being “inelastic” (with respect to price). What this means is that the supply can’t increase rapidly, no matter how high the price rises. Copper mining companies are not going to open new copper mines just to extract the small amount of cobalt which may be found in that ore.
It is these unique supply/demand fundamentals which make cobalt 2017’s metal-of-the-year. Soaring demand; flat supply. It’s an investor fantasy, but with one large Catch-22. If the fundamentals in the cobalt market are so bullish precisely because there are virtually no cobalt mines – anywhere – how do investors buy into this hot commodity story?
Unlike gold or silver, investors can’t simply walk in the doors of a metals dealer and seek to buy bars of cobalt. So the only avenue to play this market is via mining. One option for investors is a company like CobalTech Mining Inc. (TSX: V.CSK, OTCQB: BNCIF, Forum), which has near-term plans to begin producing cobalt through the processing and re-processing of cobalt-rich ore from the sites of old/abandoned silver-cobalt projects.
Another option is to look at junior mining exploration companies like Cruz Cobalt Corp. (TSX: V.CUZ, OTCQB: BKTPF, Forum) which are specifically targeting metals properties which also contain significant percentages of cobalt. However, for North American investors looking for a true “cobalt producer”, one name stands out: eCobalt Solutions Inc. (OTCQB: ECSIF).
Formerly Formation Metals Inc., eCobalt Solutions has been diligently forging ahead on its Idaho Cobalt Project. The Project is moving toward a true “cobalt mine”, projected to produce over 35 million pounds of cobalt over the life of the mine, along with substantial copper and gold credits.
With roughly 98% of the world’s cobalt supply coming as a byproduct of either copper or nickel mining. Currently, there is only one other primary cobalt deposit in the world: the Bou-Azzer Mine in Morocco, owned by CTT.
This makes the Idaho Cobalt Project the most-advanced primary cobalt deposit currently under development. This cobalt will be badly needed if current demand trends continue along the present line. Over the short term; there are about 20 new electric vehicles released from virtually all of the major auto manufacturers.
Toyota has said it’s not going to have an internal combustion engine by 2030. There are at least 12 new battery manufacturing plants being built.
In fact, in just one Tesla Model 3, 15 kg of cobalt are required for the battery alone. If Tesla succeeds in selling millions of these vehicles, the amount of cobalt required for just this one model will eat up vast quantities of cobalt. Factor in multiple auto manufacturers producing multiple models of EV’s, and multiply that by the total number of vehicles to be sold, and the cobalt demand for EV’s alone would strain existing inventories.
When the additional demand for the rapidly expanding energy storage market is added to the equation as well as the important, pre-existing industrial applications for cobalt which existed before lithium-ion batteries, a supply crisis appears inevitable.
The one, potential storm cloud for the cobalt market which looms on the horizon? Ironically, it is the flat supply curve for this important commodity. As demand increases and inventories tighten, these are perfect conditions for a price spike, not just to $30+/lb or even $50+/lb (as was seen in 2008), but very possibly into triple figures.
At that point (or even sooner), economists start to talk about “the substitution effect”. As the increasing price of cobalt begins to have a serious impact on the price of the end-use products for which it is an input, industry research will begin to look for ways to substitute cobalt out of some of these industrial applications, or at least scale back the amounts of cobalt required for particular applications.
Metals research specialist CRU pointed to this potential longer-term development as far back as May 2015, in an article titled Cobalt and the Tesla Effect: higher prices or a risk of substitution?
Tesla’s commitment to develop electric cars that rely on cobalt-intensive batteries was expected to put a strain on cobalt supply from 2017 as vehicle production increased. With the company now planning to expand into the home energy storage market serious questions are being asked about the ability of producers to prevent the chemical-grade cobalt market from slipping into structural deficit. If this proves unavoidable, CRU believes incentives will grow for the development of non- or low-cobalt intensity batteries.
The reality, however, is that what the future holds for the cobalt market is likely a combination of higher prices and substitution. As cobalt prices reach a serious “pain point” for industrial end-users (and consumers), there will be an enormous profit motive to find substitutes for cobalt – at least in some of its applications.
Triple-digit cobalt prices can/will likely only be a short-term phenomenon, if (when?) the cobalt market reaches that level of stress. However, long term prices substantially above today’s present level are a very real possibility for this market. For this reason (and others), cobalt is 2017’s #1 metal.
FULL DISCLOSURE: CobalTech Mining Inc. and Cruz Cobalt Corp are paid clients of Stockhouse Publishing.