Cobalt: will 2017 be a year of change?
After several years of an oversupplied market and weak cobalt prices, many market commentators are expecting 2017 to be a big year for cobalt. The hype is understandable. Prices have risen sharply this year, with Metal Bulletin’s High Grade Free Market price increasing from US$15/lb at the start of the year to over US$24/lb in March. But why?
On the demand side, the answer is clear. Strong demand for cobalt in lithium-ion batteries is set to continue. In addition, cobalt demand is forecast to grow strongly in other key end-use applications such as high performance alloys, tool materials, and catalysts.
On the supply side, many point to the high concentration of cobalt by-production in the DRC as a cause for concern. But while the political situation and infrastructure challenges in the DRC have the potential to impact the market, DRC concentrate supply is growing rapidly as output expands. This should see enough feedstock for cobalt intermediates, refined metal, and refined chemical production reach the market.
While many point to the surging demand for cobalt on one hand and supply risk issues on the other, Roskill expects refined chemical production to able to meet demand over the coming years, and the battery industry should therefore be well supplied.
There are, however, some supply-side constraints which may be impacting the price. Importantly, a number of suspensions, most notably Katanga Mining in the DRC, have contributed to a tight metal market. This, coupled with strategic stockpiling, may be artificially inflating the cobalt price. The Financial Times reported last week that half a dozen funds have purchased and stored an estimated 6,000 tonnes of cobalt, worth as much as US$280M. As detailed in Roskill’s upcoming Cobalt Report, there has already been material taken out of the market in recent years. China State Reserve Bureau (SRB) has moved to purchase considerable quantities of cobalt since 2014.
Set against the narrative of strong demand, supply constraints and speculative stockpiling, the cobalt price could rise much further in 2017. Certainly the cobalt market is prone to volatile prices. Significant price rises were seen over the 2003 to 2008 period, driven by undersupply, perceived fears over future supply shortages, and high levels of global economic growth underpinned by strong Chinese demand. In 2003 the price of high grade cobalt averaged just under US$11/lb but grew to reach an average of over US$38/lb by 2008. At the peak in March 2008, high-grade cobalt metal was sold at over US$52/lb.
As such, the recent price rises do not necessarily reflect the ‘new normal’ and the possibility of a correction is considerable. Nonetheless, with strong overall demand set against a tight metal market, compounded by recent (albeit some temporary) shutdowns, Roskill anticipates higher average prices over the coming years than those seen in recent years.
Tantalum: Dodd-Frank reforms unlikely to make big impact
News emerged in January of a fire at AMG Brazil’s MIBRA operation, near São João del Rei, Minas Gerais. MIBRA is a producer of tantalum concentrates, feldspar and tin, and is due to start supplying lithium concentrates in mid-2018. An associated chemical plant produces tantalum and niobium oxides.
The fire affected one of the company’s two gravimetric concentrators and at one point there were fears that the entire structure might collapse. Although it remained standing, damage was extensive and it will likely be mid-year before full capacity is restored; the plant is presently running at about 50% of normal capacity. Mining and other operations were not affected.
While this was an isolated incident, it serves to highlight the sometimes precarious nature of the tantalum industry. MIBRA is one of the world’s largest producers. Its annual output of up to 0.3Mlb Ta2O5 represents nearly 10% of global mine supply, Roskill estimates (nearer 20%, if artisanal mining is excluded). Moreover, all of its concentrate production is currently supplied to the processor GAM.
History has shown that the tantalum market can overreact to fairly minor, or imaginary, events; it does not take much to cause prices to spike. It has not happened this time, though, and there is no real reason why it should have. MIBRA can very probably maintain its supply of tantalum units from alternative processing routes, such as its chemical plant, and inventory, including tailings. There is almost certainly a buffer of inventory further down the supply chain.
Elsewhere, President Trump’s pledge to “do a big number” on the Dodd-Frank Act had the global business community waiting and wondering exactly what he was going to announce. Dodd-Frank is, of course, an enormous piece of legislation. Most of it is directed at the world of finance (Wall Street). The tiny section covering conflict minerals is of most relevance to industries that use tin, tungsten, tantalum and gold, and Section 1502 of the Act has been a hot topic for some years, particularly in connection with tantalum.
Ditching the Act altogether, or substantially revising it, would require that changes are passed by Congress and approved by the Senate. That is never going to be a swift process. Even if 1502 is consigned to the garbage bin of history, will things really change?
Probably not, Roskill argues. Recognition of conflict minerals’ issues did not happen because of Section 1502. The companies involved were already fully cognisant and active in making sure that their supply chains were ‘clean’. That came about because of growing public awareness and intense media coverage over a period of years. The pressure was bottom-up long before it became top-down and that will not change. Section 1502 or no Section 1502, the companies touched by Dodd-Frank are still on the hook even if the Act disappears. They are global players and will come under rather similar EU rules, due to come into force in about 2021. They are not going to radically modify how they operate, with or without Dodd-Frank.
Niobium: Steeling itself for further changes?
Within the space of a few short years, the face of the global niobium industry, particularly ferroniobium, has changed almost out of recognition. During 2011, CBMM sold 30% of itself for US$3.9Bn to two consortia of Asian investors, one Japanese/Korean, the other Chinese. Both groups include steelmakers (i.e. CBMM’s own clients). In 2015, IAMGOLD sold Niobec to the Toronto-based private-equity firm Magris Resources, which is backed to a large extent by investors in Singapore and Hong Kong. That deal was worth US$0.5Bn. Not to be left out, Anglo American offloaded its Brazilian niobium and phosphate business in 2016 to China Molybdenum (CMOC) for US$1.7Bn, an earnings multiple that surprised most in the industry.
Following these transactions, Roskill estimates Asian investors have gained control of at least a third of global ferroniobium production capacity.
Demand for ferroniobium went through a growth spurt during the 2000s, more than doubling in the first half of the decade and continuing to grow until the global financial downturn kicked in. There are two main reasons for the growth. One is that consumers became more aware of the benefits of using ferroniobium in steel. When added to steel in fractions of a percent of the weight of steel, ferroniobium results in much higher strengths. Less steel overall is needed, which offers major cost savings in large steel structures, while weight reduction in vehicles cuts fuel consumption and thus emissions. The other driver was the explosive growth in global steel production, particularly in China.
The outlook for global steel production now seems starkly different to what it was just a few years ago, especially in China. Overall growth in steel production is not going to be the main future driver of demand for ferroniobium, Roskill contends.
Given the fact that growth prospects for steel are not stellar, and current ferroniobium production capacity is far bigger than demand, why has there been so much investment in the industry? One reason is that there is good potential for the incidence and intensity of ferroniobium use to increase. Ferroniobium is not being used in all the steel applications it could be, and some countries/regions lag far behind others in terms of usage. Ferroniobium usage is currently lowest in countries where it has the greatest potential to grow, either through higher steel production or just because of a move to making higher-quality steel. Another reason, and one that applies mainly to CMOC, is the desire on the part of China to gain greater influence over its raw materials supply chain (and CMOC is part-controlled by the Chinese government).
Although the ferroniobium market is already comfortably met by existing (huge) surplus production capacity, and will remain so, new producers are trying to enter the market. There are several projects in the pipeline and at least two of them are at, or near, the financing stage. They would not be large in tonnage terms by CBMM standards but is there even a place for them? It all boils down to the market’s desire for diversity of supply of what is, essentially, a commodity product and made using similar and well-understood processes by existing producers; processes that would also be used by any new producer. For any project these days, agreeing offtake agreements is key to securing project finance, particularly debt finance (which makes getting equity finance rather easier, too).
The niobium industry in its current form is really only a few decades old. It has seen big changes over the last decade or so and there may well be more to come.
Tungsten: strengthening market optimism encourages supply-side investment
The global tungsten market was in a state of oversupply in 2014 to mid-2016, which led to the build-up of stocks in both tungsten concentrates and the main tungsten intermediate ammonium paratungstate (APT). Tungsten concentrate output reduced slightly in 2016, and this year primary tungsten supply is expected to decline again as the effects of prior mine closures in China and the rest of the world make their impact.
These efforts appear to have already had a positive effect on prices, with levels being steady since the start of 2017; weekly prices for Chinese concentrates and European APT registered increases of a couple of percent throughout January and February. While these increases have been modest, they indicate that – in the short-term at least – the bottom of the tungsten market may have passed. Recent supply-side news from miners and project developers also indicates some optimism returning to the sector.
In January, Canadian-headquartered Almonty Industries received the final surface permit for its South Korean Sangdong mine, which will enable it to start construction of the processing plant and other project elements. The company expected to sign the engineering, procurement and construction contract in Q1 2017, with a view to commissioning Sangdong in Q1 2018. In addition, Almonty purchased the remaining 49% of its Valtreixal project in Spain from Siemcalsa for €1.5M (US$1.6M).
In February, Premier African Minerals – which is developing the RHA tungsten project in Zimbabwe – appointed a mining contractor for the project and received the X-Ray Transmission (XRT) sorter for the plant. Premier confirmed that shaft upgrades at RHA had been completed and the contractor, African Mining and Exploration (Afmine), would begin underground mining from March 2017. Afmine will deliver 16,000tpm of ore from the underground operations and has also signed an agreement to deliver up to 24,000tpm of ore from open pit mining at the project, also commencing in March.
Meanwhile, annual results for Vietnam-based tungsten miner Masan Resources similarly signalled an improvement: production efficiencies led to a 62% increase in tungsten output between the first and second halves of 2016 at the Nui Phao polymetallic mine. Tungsten concentrate output rose 24% y-on-y to 6,357t (contained WO3), compared to 5,123t in 2015. The company posted net revenues of VND 4,049Bn (US$178.6M) in 2016, representing a 52% y-on-y increase. Masan said that its products remained fully sold and noted that over 90% of planned production in 2016 was delivered into long-term offtake agreements. Tungsten output from the mine is sent to Masan’s 51% owned subsidiary, Nui Phao – H.C Starck Tungsten Chemicals Manufacturing, which began operations in 2015.
There was also rumour of potential M&A activity in the tungsten sector, with state-owned Indian company NMDC apparently considering a potential stake in Nui Phao. Such a tie-up would give India its first captive access to tungsten concentrate for several decades since the closure of the Degana and Chendapathar mines. Domestic tungsten requirements are currently either sourced from imports (primarily tungsten metal, scrap and oxides), or else from recycling of secondary tungsten. Scrap processors in the country include Global Tungsten & Powders (owned by Plansee), Widia (Kennametal) and Sandvik.
In the immediate-term, Roskill expects tungsten prices to remain steady – perhaps with scope for modest increases towards the end of 2017 and into 2018 as stocks are drawn down.
Molybdenum: steel and petroleum support 2017 price recovery
The downward trend in molybdenum prices since July 2014 reached a floor of around US$5.43/lb Mo for ferromolybdenum and US$4.64/lb Mo for technical molybdenum oxide (TMO) in November 2015. These prices were the lowest reported for the ferromolybdenum and TMO since the early 2000s and were largely brought about by lower demand from steel mills in China and the EU, falling oil prices reducing consumption of molybdenum products in petroleum catalysts and oil country tubular goods, and oversupply in the market.
Lower prices resulted in a number of molybdenum mines, particularly primary molybdenum producers in the USA, China and Canada, to suspend or reduce production in 2015 and 2016, which has significantly reduced market oversupply. Tighter supply, recovering oil and gas production in North America, and greater construction and manufacturing in major global markets supported a recovery in molybdenum prices throughout the first half 2016.
The price increases caused some producers to restart or ramp-up production in the second half of 2016. Major Chinese producers, which had reported a 10% cut-back in 2016 target molybdenum output, increased production back to original volumes, though Chinese output remained significantly below 2015 volumes as a result of small-medium molybdenum mines remaining suspended. Improving supply availability coupled with reduced purchases restrained further price increases in Q3 2016. Prices slipped back slightly in Q4 2016 to average US$8.17/lb Mo for ferromolybdenum and US$6.63/lb Mo for TMO, though returning demand from the steel and petroleum industries is forecast to support price increases in 2017.