We turned bullish on cobalt, before the market did, in June 2016:
‘Though it has been a terrible couple of years for cobalt, the spot price has shown signs of moving higher.
‘While it could be in the early stages now, you want to see cobalt jump to about US$12 per pound. This should get the market excited, believing that significantly higher prices are ahead. If that happens, as I predict, the price will keep heading up from there, generating more excitement, and seeing more investors pour money into cobalt stocks.
‘With companies like Tesla building lithium-ion battery mega-factories, which will require significant amounts of cobalt, the future of some cobalt-producing companies is looking bright.
‘If cobalt starts to take off, the best miners could make you a truckload of money.’
It took six months for cobalt to break out.
The base metal surged when civil unrest broke out in the Democratic Republic of Congo (DRC) — the world’s largest cobalt supplier — that December. The country’s president, Joseph Kabila, refused to step down when his constitutional mandate expired.
Cobalt on track for another run
Here’s the latest story:
The base metal is trading around US$33 per tonne today.
Technically, cobalt is experiencing a correction ― nothing goes up in a straight line forever. The long-term red support level, dating back to the 2005 low, captured the recent high. Cobalt has pulled back to technical support, shown by the black trend lines. If this level can’t hold, it could test the blue support trendline at US$27 per tonne.
But don’t be so sure. There’s a good chance cobalt could bounce in the months ahead. It’s trading around a fair bit of support, after all.
News24 summed the story up yesterday (it’s not what you think):
‘Amid a fresh wave of civil unrest in the Democratic Republic of Congo (DRC), the international community must question its confidence in President Joseph Kabila to achieve stability in a turbulent region. He has been at the helm since he took over as president in 2001 after his father, Laurent, was assassinated. The young Kabila ruled for a transitional period until 2006, before winning two elections.
‘He is now in his seventh year of what should have been just five years of his second term and is constitutionally barred from standing again. But he has remained in office after his mandate ended in late 2016. This, as the country awaits a long-delayed election. The delay has sparked deadly protests.
‘While Kabila cannot legally stand for a third term, the opposition is concerned that he might. Fears among opposition and church leaders have been further fuelled by Kabila’s appointment of three new judges to the constitutional court. Two are well-known allies.’
Indeed, nothing has changed with the investment thesis. Joseph Kabila remains in government, and it doesn’t look like going anywhere. Remember, his reluctance to step down originally drove cobalt through the roof.
Cobalt was originally a supply story.
It had nothing to do with demand.
Election delays pushed the base metal higher over the past two years. And, given that the president won’t step down or hold elections, it could fly even higher following this correction.
Supply issues keep building…and demand is now catching up.
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Demand for cobalt booming
The Cobalt Boom wrote on 25 June:
‘Global demand for cobalt in the battery sector alone has tripled since 2011 and is expected to continue on this trajectory, rising from 46,000 metric tons in 2017 to around 190,000 metric tons by 2026, according to the industry analyst Benchmark Mineral Intelligence. The price of the metal has also soared, reaching more than $30 per pound by late 2017, up from an average of $18 in 2011.’
Wood Mackenzie expects cobalt demand for EV batteries to grow four-fold by 2020.
Its forecast might not be too far off.
At the Frankfurt auto show last September, Volkswagen Group [DE:VOW] said it would spend €70 billion to build 300 electric car models by 2030. For that reason, it’s been trying to line up more than five years’ worth of cobalt supply for months.
From what we hear, the company hasn’t been successful.
Producers haven’t been willing to lock-in long-term contracts in a rising price environment. If the supply can’t be found, Volkswagen Group’s expansion plans could be threatened.
It’s a problem.
Volkswagen Group is just one of many companies hungry for cobalt. Tesla Motors’ [NASDAQ:TSLA] boss, Elon Musk, is also losing his mind. He tweeted the following last month:
Good luck with that!
The Verge explained it best on 21 June:
‘Cobalt is the safe element in the cathode. As you reduce it, you reduce the life cycle of the cell. The current market standard for electric vehicles is an eight-year warranty to retain 80 percent of the original capacity of the battery. You need to be sure your battery can do that, otherwise, you’ll have to replace it under warranty, which is way more expensive than the theoretical savings you gain from less cobalt.
‘And there’s a safety issue as well. As you decrease the amount of cobalt, you increase the amount of nickel. The cells can overheat and it can no longer effectively cool itself, which can lead to combustion. That’s a relatively low risk but it’s not a risk that can be taken and you need special technology to avoid that. Plus, the low-cobalt formulations need to produce in special dry environments, and so there’s a cost to making them, too.
‘I think it’s very challenging from an engineering standpoint to solve these problems, so I think the current NCA technology is going to be the dominant technology for the next 10 years.’
I believe cobalt is here to stay…
It’s time to buy
CRU Group, a global commodities consultancy firm, expects lithium-ion batteries to consume around 55% of total cobalt demand by 2019. This number stands at 42% today. Here’s cobalt’s projected demand growth:
Future demand for the ‘strategic’ mineral appears strong. Too strong, in fact, for the current supply pipeline. And, while that may pose a problem for battery producers, their problem is our opportunity.
If you’re interested in cobalt stocks, we suggest checking out Meteoric Resources [ASX:MEI]. It owns a bunch of cobalt projects and could turn into the sector’s super star stock within months. Please note that, unlike in our premium advisory newsletters, these are not active recommendations. I won’t be following up on these here, to let you know when is the right time to buy or sell. So please think of them as starting points for your own research.
If you would like more research on this and other companies, and to see my active recommendations, check out Gold & Commodities Stock Trader. I have analysed the company at length in those pages, and will provide another update soon.
Resources Analyst, Gold & Commodities Stock Trader
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