2017 was really the year that the electric vehicle (EV) and energy storage narrative entered the metals and mining space.
As announcements on EV targets by automakers and governments grew ever more bullish, panic around the security of raw material supply started to build – reinforced by unsuccessful attempts by auto industry giants to lock in long-term supply deals.
As we have entered 2018, the supply scramble continues. Some such as Toyota and others have gone 'upstream' and bought equity in lithium mines. While sightings of Elon Musk in Chile started rumours that the poster child of EVs may be about to do the same. Perhaps BMW may have pulled off the biggest coup so far if reports that they have signed a ten year deal for lithium and cobalt turn out to be true.
Lithium
Spot prices for lithium in the Chinese market have eased back in recent weeks from their December highs. With inventories reportedly ample and new domestic supply beginning to filter through, prices for 99.5% lithium carbonate averaged RMB155,000/t (US$24,488) – down 6% from December levels.
Conversely on the international market prices continued to rise, with 99.5% lithium carbonate (CIF China) rising from US$14,200/tonne at the start of the year to US$16,000/tonne by the end of February.
That lithium prices maintained such high levels over 2017 surprised many in the market, with some sceptical the 'lithium wave' could last the course. In the end, prices in China for lithium carbonate averaged RMB143,418/t (US$22,659) for the year, up by 2% from the previous year. What last year did see was a number of key supply developments that will radically alter the shape and structure of the industry in the coming years.
Australia saw the number of players in the lithium sector increase last year with the addition of new hard-rock spodumene concentrates and direct shipping ore (DSO) operations, which will be key to meeting lithium demand in the medium term.
Yet despite all the new 'supply', lithium carbonate and hydroxide prices remained at high levels. This likely lies in an imbalance in conversion capacity. Firstly, we have the lag between spodumene concentrate being shipped ex-Australia and converted into lithium chemicals in China. This may take from 6-12 months depending on conversion capacity actually being available. For the DSO being shipped from Wodgina, it could be even longer given the lack of adequate facilities for conversion.
Secondly, we have the ownership disparity between the Australian mines and Chinese converters, where the three majors Albermarle, Tianqi and Ganfeng dominate conversion capacity within China. This leaves independent, non-vertically integrated converters reliant on Mt. Cattlin for feedstock for the time being, but a potential build-up of spodumene inventories at others.
Based on our sectoral analysis of the lithium market, we expect demand to grow from 233 kt in 2017 to 330 kt of LCE in 2020 and 405 kt in 2022. As already noted, the supply response is under way. Yet it will take some time for this new capacity to materialise as battery-grade chemicals. As such, we expect relatively high price levels to be maintained over 2018. However, for 2019 and beyond, supply will start to outpace demand more aggressively and price levels will decline in turn.
Cobalt
If 2016 was the 'Year of Lithium', then 2017 was undoubtedly cobalt's turn to take the crown. The little blue metal was the star performer among its peers, rising 109% between January and December.
Cobalt prices have surged higher in the early part of 2018, with the LME cash price averaging US$80,875/t over February – up 4.4% from January levels and 133% year-on-year. While trading activity in China was subdued around the Spring Festival period, news of the proposed new mining code in the Democratic
Republic of Congo (DRC) caused some mild market panic and proved a boon to prices.
The newly revised mining code, finalised by the country's parliament last month, has the potential to seriously affect mining projects under way in the country, which is so crucial to the cobalt story.
Based on 2017 estimated global mine production of 117 kt, the DRC accounted for 64% of this. Companies will be immediately subject to higher royalties on cobalt, copper and gold. Additionally, there will be a new 50% tax on 'super profits' - that is, income received when metals prices rise 25% above levels identified in the project's feasibility study. A further obstacle for cobalt in the new code is to raise the royalty from 2% to 10% if the government categorises it as a 'strategic substance '. While the new code still has to be signed into law by President Joseph Kabila, the new reforms highlight the inherent risk in the cobalt industry's reliance on DRC supply.
Cobalt demand totalled 104 kt last year (49% of which was from the battery sector) and will grow by an additional 9% this year to reach 113 kt, according to our data. By 2022, we forecast cobalt demand from batteries alone to reach 98 kt – or 61% of the cobalt market. While such a figure would have seemed unrealistic a few months ago, the incremental supply from Glencore, ERG and others now means that we expect significant surpluses in the years 2019 to 2022.
- these surpluses will have a downwards effect on price levels. While the likes of Glencore are unlikely to see these excess tonnages fully shipped, the potential supply, together with stock build of hydroxide or metals/chemicals through the value chain, will likely keep a cap on price levels. Following an average of US$70,548/t this year, we expect prices to ease back to US$55,116/t in 2019, before falling further to a low of US$33,069/t in 2020 and 2021.
Nickel
Nickel prices reached a new high in on 15 February at US$14,125/t (US$6.40/lb), and averaged the month 5% higher than January levels at US$13,572/t. As prices continued their upward progress in February, we have revised up our forecast for the rest of 2018 so that the average for the year now stands at approximately US$13,460/t (US$6.11/lb).
Although batteries account for a much smaller portion of nickel demand than the likes of lithium and cobalt, 2017 saw huge interest in nickel in batteries. We have already seen initial attempts by several western nickel producers to increase availability of products for batteries/chemicals (powders or sulphate), often at the expense of their more customary products (briquettes).
Overall, we estimate global nickel demand in 2017 increased by 6.7%, to 2.18 Mt, and is expected to rise by 5.3% in 2018, to 2.30 Mt. Slower growth in 2019 and 2020 takes the total to 2.40 Mt in 2020.
Our latest view on nickel demand in batteries for electric vehicles and energy storage is that consumption will increase from approximately 50 kt in 2016 to 112 kt in 2020.
In terms of supply, we expect global mined nickel production to reach 2.38 Mt in 2018, up 8% on 2017. Almost all of the growth in mined output is expected to come from Indonesia as it ramps up both domestic nickel pig iron (NPI) production and the export of ore to China.
Although nickel stocks may continue their decline through 2018, that trend might slow down in 2019-20 as the above mentioned increases in supply will reduce the global deficit in those years to levels close to balance. As a result, we believe nickel prices will moderate in 2019, averaging US$12,670/t (US$5.75/lb) for the year.
From the latter part of 2019 and through most of 2020, we anticipate nickel prices trading within the established range of US$12,000-14,000/t (US$5.44-6.35/lb). However, as the market looks ahead to the return of deepening consecutive annual deficits from 2021, prices above US$15,000/t (US$6.80/lb) may be achievable in the final quarter of 2020.
