Wall Street is climbing aboard the electric car bandwagon. It’s being encouraged by investment banks like UBS, Citigroup, and Deutsche Bank, all of which have put out glowing reports in recent months about the future of electric cars.
The Deutsche Bank report, for example, said that electric vehicle sales (including hybrids) would hit 9% of total vehicle sales in 2020 and 14% in 2025. In 2014, such vehicles represented about 4% of total sales.
One key driver to that rosy future, the bank said, would be the release of the Tesla Motors (TSLA) Model III. This vehicle will be a mass market model that will use low-cost batteries produced by Tesla’s Gigafactory, which is currently under construction in Nevada.
When that happens, global production of these batteries will nearly double. And all of these batteries will need lots of lithium, graphite, and cobalt.
Supply-Demand Cobalt Blues
About 40% of current cobalt demand comes from the battery industry for products such as smartphones, laptops, and of course electric cars.
According to Simon Moores of Benchmark Mineral Intelligence, cobalt demand from the battery industry alone could rise 17% from 2013 levels. That would be about 7,000 metric tons more per year.
In addition, Cobalt Investing News quotes Fortune Minerals (FT.TO) CEO Robin Goad as saying the next biggest use of the metal (at 19%) is for superalloys like those used in jet engines and wind turbines. And both of those markets are growing rapidly, too.
Because of the nature of cobalt, it’s normally harvested as the by-product of mining for other metals, such as copper or nickel. In fact, 55% of cobalt production comes from nickel ores and another 35% from copper ores.
But because cobalt is so closely tied with those metals, if mining for nickel or copper drops, so will cobalt production.
The world’s leader in cobalt production is the strife-torn Democratic Republic of the Congo. It supplies about 55% to 60% of the world’s cobalt. The two biggest miners of cobalt there are Freeport McMoRan (FCX) and Lundin Mining (LUN.TO).
Roughly 43% of cobalt refining is located in China. But U.S.-based OM Group (OMG) sold its refining business there in 2013 to Freeport, Lundin, and the Congo’s stated-owned metals and minerals trading company.
Any problems in the Congo and China will definitely affect the players building battery mega-factories, namely LG Chem and Foxconn Technology.
Even if things go smoothly, the business intelligence firm CRU Group says that the global cobalt surplus is quickly being eaten up and the market will be in a deficit by 2017. The firm’s senior consultant Panos Kotseras wrote in a report issued in December, “The cobalt market is expected to become tight due to a combination of robust demand and absence of a concrete project pipeline.”
As the cobalt environment changes, so will the battery market.
Where Will Tesla’s Cobalt Come From?
Tesla has already planned to get around overseas supply hitches by stating that it wants to source all of its raw materials from North America.
But therein lies a potential problem…
The U.S. Geological Survey put 2013 cobalt production in the United States at only 6,500 tons and Canada at just 8,000 tons.
And 2017 – the year CRU predicted there would be a global cobalt shortage – is around the time that the Gigafactory is supposed to kick into production.
Most of the miners interested in expanding North American cobalt output are junior mining companies that have been under tremendous financial pressure due to investors and Wall Street banks’ aversion to mining endeavors. Nearly all of the major banks hear the words “mining” and will walk away from making any loans, no matter how rich the deposit.
This makes it questionable as to whether many North American junior producers will even be around in 2017 to meet Tesla’s needs.
This realization is already having an effect on the price of cobalt.
Cobalt Prices Speeding Up
In its latest cobalt outlook, CRU points out that strengthening fundamentals in 2014 led to the first annual price increase since 2010. More price rises in the months ahead seem to be baked into the cake.
But investing directly in the cobalt market in North America is tough to do safely since, as I mentioned, most of the companies involved in cobalt are so small.
But that isn’t stopping some companies from trying to capitalize on the coming rise in demand.
One example of a small company looking to feed Tesla’s hunger for cobalt is Formation Metals (FCO.TO). It’s looking to exploit the Idaho Cobalt Project, a primary source of high-purity cobalt in Idaho that was mined from the 1900s to the 1970s.
A larger company mining cobalt in North America is Vale S.A. ADR (VALE) through its Inco nickel subsidiary. This could also be another option as a large company would not be as vulnerable.
If an investor wishes to dip a toe into the market, I would suggest you do your due diligence on any of the speculative cobalt miners, like Formation, since the risk is high.
And “the chase” continues,