Glencore (LSE:GLEN) has confirmed plans to halt production at the world’s largest cobalt mine, potentially wiping out one-fifth of the world’s global supply of the critical battery metal. In a gloomy set of half-year results on Wednesday that saw it reveal a 90pc fall in net income, the major miner said it expects to transition its Mutanda mine in the DRC into temporary care and maintenance by year-end.
Its decision reflects Mutanda’s ‘reduced economic viability’ in the face of rising regulatory costs in the DRC at the hands of a harsh new mining code and a significant fall in cobalt prices. After quadrupling in two years, cobalt prices have sunk to their lowest level since 2016 as producers have flooded the market with new supplies. Indeed, Glencore itself has reported a $350m non-cash loss from cobalt that it has mined but not been able to sell.
As well as 199,000ts of copper, Mutanda produced more than 27,000ts of cobalt last year, making it one of the world’s largest sources of the metal – responsible for around 20pc of global supply. Like many businesses operating in the sector, Glencore and its investors had hoped to ride the boom in electric vehicles (EVs), many of which are powered by batteries containing significant amounts of cobalt.
The world’s fleet of EVs grew by 54pc to about 3.1m in 2017 and is expected to hit 125m by 2030, according to the IEA. JP Morgan forecasts that EVs will account for 30pc of all global vehicle sales 2025 – this compares to 1pc in 2016. As such, the market for cobalt is expected to double over the next four years alone and quadruple by 2028. To express this another way, 62pc of global cobalt demand is likely to come from battery manufacturers by 2020, up from 51pc in 2016 and 20pc in 2006.
With this in mind, Glencore’s decision to cut supply at a time of low prices has been interpreted by some as a way of placing a floor under the flagging market and turn it around by eradicating its existing surplus. This would not be the first time the business has implemented such a tactic. As Bloomberg reports, the business slashed zinc production in late 2015 when prices were plunging in a bid to manufacture supply shortages. The metal responded with a 60pc price surge in 2016.
As such, Glencore’s move has breathed life into many cobalt businesses, with shares in major Chinese cobalt companies rallying on Wednesday. Mitchell Smith, president of Global Energy Metals (TSX-V:GEMC), a firm developing a diversified portfolio of cobalt assets in stable jurisdictions, also noted the significance of Glencore’s decision to shutter Mutanda.
‘The shuttering of Glencore’s Mutanda Mine in the DRC in combination with the limited production numbers from the business’s Kamoto Copper Company drastically changes the supply outlook for cobalt in light of increased demand pressure from the automotive industry’s quest to go electric,’ he said. ‘Cobalt should definitely be on investor’s radar as mining companies in the Central African Copper-Cobalt belt begin to retaliate against the new mining code and push back to relax the significant taxation rates. It should be interesting to see how the price of cobalt reacts and where investors turn to get exposure to the critical mineral.’
Wednesday’s boost to the cobalt market comes around a month after British scientists warned that if EVs replace the UK’s 31.5m cars by 2050, as per government plans, it will require twice the current annual global cobalt supply alone. In a letter to the country’s Committee on Climate Change, the team of scientists said replacing the vehicles will require 207,900ts of cobalt as well as 264,600ts of lithium carbonate and 2,362,500s of copper.
Many believe that cobalt’s bear-run could soon come to an end. For example, a recent report from FocusEconomics suggests that cobalt prices will hit $40,000 by mid-2020, before adding another $10,000 in 2021. As International Banker highlights, this bullish sentiment is being put down to a boost in global EV sales volumes.
Likewise, Roskill Information Services has said: ‘With demand across most major end-use applications set to increase, and with demand from the battery sector expected to enjoy double-digit growth over the coming decade, the market is gearing itself up for a sustained period of unprecedented consumption growth.’
Should EV uptake and cobalt demand continue to increase and supply constraints become more apparent, then it will be of significant benefit to businesses like Global Energy with exposure to the metal beyond the DRC.
Author: Daniel Flynn
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