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Byproducts V: Why the Run-Up in Cobalt Demand?

By Jack Lifton
27 Dec 2007 at 03:17 PM GMT-05:00


DETROIT (ResourceInvestor.com) -- The following price charts from the excellent new Internet minor metals information center http://www.minormetals.com, published by TheBullionDesk.com, clearly show the roller coaster ride that cobalt has been on during the last six months in particular, and the last two years in general. In the earlier period cobalt first doubled and then plateaued. Now in the last six months of 2007 cobalt prices have gone up another 50% above the base established during the plateau period The total increase in price of cobalt over the last two years has, as of now, been 300%; thus cobalt has been a far better investment during the last two years than either gold or platinum.

Is the current cobalt price run-up a “bubble”, or the froth around a bubble, or is it a solid movement in demand that is running ahead of supply? There are just two reasons why the price of a natural resource goes up:

The real (actual) demand exceeds the supply, or;
Speculative demand exceeds supply.



I believe that cobalt is going up in price because of a combination of the above two factors. First of all the existing uses for cobalt are growing and show no signs of moving to substitute materials. Second, a “new” cobalt use, which has so far flown under the investment radar, has begun to grow, and I believe that this has initiated a speculative surge in demand among commodity market players and a surge of risk management by the purchasing departments of some large corporate end-users of cobalt.

The first factor to be noted in trying to form an understanding of cobalt pricing and supply is the fact that “cobalt is not found as a native metal but generally found in the form of ores. Cobalt is usually not mined alone and tends to be produced as byproduct of nickel and copper mining activities…. In 2005, the Democratic Republic of the Congo was the top producer of cobalt with almost 40% of the world share, followed by Canada, Zambia, Russia, Brazil, and Cuba.”


The USGS notes that “The United States did not mine or refine [any] cobalt in 2006,” but that the U.S. imported for consumption 11,800 metric tonnes of cobalt in 2006. Since the USGS gives total mine production of cobalt globally in 2006 as 57.500 metric tones, it is clear both that the U.S. is a major consumer of cobalt and that cobalt is truly a minor metal when compared to copper and nickel, from the ores of both of which it is principally extracted, as a byproduct.

An excellent and comprehensive discussion of the current strategic and critical applications of cobalt is to be found in the October 2006 issue of the Journal of Metals, which is a subscription only publication for members of The Metals Society, a first-class organisation for those interested in technical metallurgy.

I will summarize the article briefly:

It says that “Cobalt has played an important part in the composition of nearly all the new alloys developed since the 19th century for cutting tools and wear resistance. The special properties of cobalt have been utilized in such applications as catalysts, paint dryers,…, and rechargeable battery chemicals. …Superalloys are major applications…. The major uses of cobalt based superalloys (45% cobalt) are in turbine blades for aircraft jet engines and in gas turbines for pipeline compressors.”

Of special interest from the article is the comment that “Cobalt-based batteries are…[an] extraordinary application where the use of cobalt in rechargeable batteries grew enormously between 1995 and 2000….The addition of cobalt to the electrodes substantially enhanced the cell’s life, increased [nickel metal] hydride thermodynamic stability, and inhibited corrosion.”

Finally, note the final paragraph of the article especially the last sentence, which I have put in italics:

“The increasing use of cobalt in rechargeable batteries for electric vehicle applications is expected to increase the use of cobalt even further. A major shift to hybrid-electric vehicles in automotive technology will dramatically increase the demand for cobalt-based batteries. Newly emerging demand combined with increases in cobalt use for other types of turbine engines and gas-to-liquid catalysts is underpinning the recent growth in cobalt demand and is expected to drive future cobalt consumption to unprecedented levels.”

Toyota has just announced this month that it plans to manufacture 1 million hybrid-electric vehicles a year sometime in the 2010s. It is clear that even if Toyota’s goal is not met in the actual year of 2010, the total number of hybrids made that year just by Toyota, GM and Honda will meet or exceed 1 million units. This fact is, in my opinion, the principal driver today of cobalt prices.

Let’s look at the numbers: At least 1.5 million hybrid vehicles have been manufactured since Toyota introduced the first mass produced vehicle of this type, the Prius, in 1999. Toyota alone has already made 1 million of them and 79% of all of Toyota’s hybrid vehicles have been sold in the U.S.

I have frequently reminded readers of Resource Investor that the nickel metal hydride battery packs used in a Prius contain up to 300 pounds of nickel and as much as 64 pounds of rare earth metals, principally lanathanum. Today I want to point out that each battery pack also contains cobalt. The comprehensive article “Developments in hybrid vehicles and their potential influence on minor metals”, written and presented in 2005, contains the graph below and the surrounding commentary:



The conclusions and graph above are based on the premise that future hybrid vehicles will continue to use nickel metal hydride batteries; I personally predict that some, and perhaps, even all, hybrids will utilize safe reliable nickel metal hydride batteries at least as far into the future as the above graph runs.

All of the “new” cobalt demand coming just from hybrid vehicle nickel metal hydride battery construction is today probably already in excess of market supply. Cobalt production has tripled in the last 12 years from 20,000mt per annum in 1995 to nearly 60,000mt per annum in 2007. Production will have to increase by another 25% just to keep in equilibrium with the above forecast hybrid demand and the natural growth in existing uses. A friend of mine warned me on the phone today that there is a high probability of a downside to this optimistic view of demand exceeding supply. He said that if a safe reliable lithium technology battery is developed for hybrid vehicle operation then cobalt will immediately be in surplus and the price will crash from today’s highs.

Let’s examine his thought a little. The highest energy density most efficient lithium technology battery available today, which is almost universally used in laptops, cell phones, and even concept cars is the one based on lithium/cobalt oxide electrode technology: the so-called lithium ion battery. I have written before that the world’s largest lithium producer, Chile’s SQM [NYSE:SQM], and the General Motors Corporation both agree that an optimum size lithium-ion vehicle propulsion battery would need 2 kilograms of lithium.

The (reversible) chemical reaction that describes the operation of this widely used battery is:



The above equation tells us that a battery pack utilizing 2 kilograms of lithium will require 8.4 kilograms of cobalt or 18.5 pounds; this is six times as much as the current nickel metal hydride batteries!

So, if nickel metal hydride battery packs were converted to lithion-ion, cobalt type, batteries then the 2015 demand just for such batteries of cobalt would be nearly 50,000mt annually or the equivalent of nearly all of today’s annual supply!

Take heart, though, because we are told that all kinds of newer cheaper and safer lithium ion battery technologies are “being developed.” But, in the meantime….

Ultimately I would predict that a compromise will be reached. I think that a large proportion of workaday hybrid vehicles will be made and continue to be made with nickel metal hydride batteries; some of the rest will be made with exhaustively researched and more safely designed lithium cobalt ion batteries; and the top few performance types will use one of the non-cobalt based lithium ion battery technologies.

I say this because it is clear that end-users are bidding up cobalt prices to insure their supplies for the near term production of items like superalloys where cobalt is absolutely critical and cannot be substituted, and that battery makers are hedging their bets on the future composition of the end-use hybrid battery market by laying in supplies of the metal even as, and, in particular, in case that, the global economy slows down because they recognize that since cobalt is a byproduct, a drop in either copper or nickel demand immediately impacts not only the supply of those metals but also of cobalt. The battery makers know that the demand for hybrids may well rise if the price of oil continues to go up and that hybrid vehicle customers will not wait forever for new battery technologies.

Dollar investors, take note: At this point I want you to keep in mind that the increase in demand for cobalt for the new hybrid battery use is coming today entirely from outside of the United States. Essentially all vehicular hybrid batteries are today being made in China and Japan. China and Japan both believe in national stockpiling by government funded agencies for critical metals. Private Japanese “trading” and mining companies and both “private” and state-owned Chinese trading and mining companies are today diligently scouring the world for sources and supplies of critical and strategic metals such as cobalt, nickel and lithium because, for example, in the case of cobalt, they are worried about the most extreme of the above scenarios. The Chinese are concerned first and foremost with keeping their domestic economy fed with the natural resources it needs. The Japanese also have this as a goal but it is to ensure their survival as a trading nation as well. In either case cobalt, among other resources, will be mostly unavailable in the global market place after it is acquired by China or Japan.

Should the Japanese and Chinese succeed in locking up most of the additional supply of cobalt to be created during the next decade and the most extreme of the above demand scenarios materialize, it will be a significant blow to American heavy industry and the U.S. military. In the case of civilian industry, it could result in the acceleration of its relocation to China.

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Comment on this story (7)

Tim Wood's Advice is Very Sound - Posted by Jack Lifton, 28 December 2007

Cobalt Investment Exposure - Posted by Ron Bye, 28 December 2007

Exposure to cobalt securities - Posted by Tim Wood, 28 December 2007

Cobalt Investment exposure - Posted by Tom Edwards, 28 December 2007

Cobalt - Posted by Steve Higgins, 28 December 2007

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I have been talking about Cobalt for three years. The US goverment stockpile is down to zip. They have none left to sell. At 92 I will not be around to see my two little Cobalt picks go to twenty dollars a share from two,but you will if you buy them. BAJ---- and------FT