By Gavin Montgomery, Research Director
The electric vehicle exuberance has been gaining traction in recent years. Governments are setting ever more aggressive targets on internal combustion engine bans, while automakers have been jockeying to outdo each other by laying out bullish production plans for new electrified models.
Cobalt, a key input material for some of the most prominent lithium-ion batteries, should be riding high on the electric vehicle (EV) wave. Yet, the outlook for cobalt has waxed and waned over the last year or so. Announcements by those in the cobalt supply chain, from miners through to battery makers and auto manufacturers, have buffeted the small, concentrated and previously overlooked 'blue metal' industry.
Indeed, as the the full ramifications of the EV story started to be realised last year, medium-term fundamentals looked increaslingly tight, with even Tesla's own aspirations appearing unachievelabe. Then late last year, Glencore came along and blew away notions of market tightness with its announcement that its Katanga mine restart would add 34 kilotons per annum to the market – equivalent to around one-quarter of the current market.
As we have moved through 2018, bullish projections for the uptake of new battery types with low cobalt and Tesla's predictions that it could go 'cobalt free' further tempered sentiment.
Meanwhile, falling spot prices in recent weeks have certainly not helped. Yet, it seems that rumours of the death of cobalt have been greatly exaggerated. And while we may see medium-term respite for the cobalt market thanks to Glencore, ERG and others, the long term still looks increasingly tight.
Cobalt is used in a variety of applications – from superalloys and high-strength steels, to magnets and catalysts. However, the rechargeable batteries sector accounts for the largest share of consumption at present, and has, by far, the greatest growth potential thanks to an increasingly bullish outlook for EVs and batteries in energy storage applications.
The two leading battery chemistries for EVs that use cobalt are lithium nickel cobalt aluminium (NCA) and lithium nickel manganese cobalt (NMC). The former is most famously employed by Tesla in its fleet and the latter used by the majority of other automakers, including BMW, Audi, Nissan, General Motors, Mitsubishi and Ford.
Our base case view has cobalt demand essentially doubling by as soon as 2025, before demand growth really starts to accelerate as EV penetration grows. We remain of the view that the cobalt market will slip into surplus for the next few years.
EV penetration to drive cobalt demand surge
We have just released the first long-term outlook for our Battery Raw Materials Service. In this study, we have linked together our forecasts for EVs and energy storage with our supply views for the three most important battery metals: lithium, cobalt and nickel. The results are illuminating and suggest that a decarbonisation future – certainly one employing battery technologies of the same family as currently – may be very challenging indeed!
To start with, our current EV view has electric passenger car sales (with a plug) accounting for 6% of sales by 2025, 11% by 2030 and 36% by 2040.
Predicting future trends in EV sales is only slightly less difficult than determining what battery technologies they might employ. Our in-house battery demand model projects metals demand based on our cathode chemistries and battery capacity in kilowatt hours. Given the glacial pace of development, testing and approval cycles for the new battery types, we are reasonably comfortable that current chemistries, or derivations thereof, will continue to dominate over the next five to 10 years.
Our base case view has cobalt demand essentially doubling by as soon as 2025, before demand growth really starts to accelerate as EV penetration grows. We remain of the view that the cobalt market will slip into surplus for the next few years. A situtation accompanied by low prices likely to stymie investment interest in cobalt.
For cobalt fundementals over the long-term, however, the supply picture is altogether more challenging. Further out, the market slips into deficit – one that will struggle to be met. Indeed, by the early 2020s, cobalt demand looks to be expanding by around 13 kilotons a year, meaning the equivalent of a major new mine is required each year.
Forecast supply gaps or defecits in the commodities sector is nothing new. Yet for cobalt, it presents a particular challenge given the metal's unique characteristics.
For a start, cobalt typically occurs at such low concentrations that it is uneconomical to produce on its own. As such, it is mined mainly as a by-product of other metals, primarily copper and nickely. However, this by-product status creates an inelasticity of supply. Put simply, the copper or nickel price, rather than cobalt, determines the economics of operations. As the cobalt market tightens in the long term, the inability of mined cobalt to respond to increasing demand will be a huge challenge.
Secondly, cobalt supply is overwhelmingly reliant on supply from the Democratic Republic of the Congo (DRC) – a reliance that is only going to increase over the coming years, as it is home to all the largest cobalt-bearing projects under consideration. Yet, the country is also home to a high level of geopolitical risk that, given its dominance, exposes the entire cobalt supply chain to disruption.
How to solve the cobalt conundrum
Falling costs of cobalt-containing batteries have been very much an enabler of the EV story so far. The potential for this enabler to morph into a barrier down the line is emerging as a distinct possibility.
Thrifting of cobalt – that is, reducing the cobalt content of batteries – is underway. But reducing cobalt also decreases the battery's thermal stability. Given the widespread coverage there has been of lithium batteries catching fire in consumer electronics, most automakers are understandably cautious. For this reason and others, we expect cobalt to remain a key component of EV batteries for many years to come.
Short of switching battery types – and most automakers have already laid out their plans – most hope lies in improving the performance of the batteries themselves, so less metal will be needed. Yet, the current generation of lithium-ion batteries are starting to approach their limits. One thing is sure – the battery raw materials sector will continue to evolve. Falling battery costs and increasing energy density enablers have given the EV narrative legs. Whether these two trends can continue will likely make or break the EV revolution.