Can Cobalt Maintain its Meteoritic Rise in 2008? (Update)

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What a difference a day makes, or so the song goes. In this case it has been a couple of months since our last Cobalt post on January 16. At that time, Cobalt had reached $40/lb. and was widely tipped to top $50/lb during the year ahead. Here we are just three months into the year and Cobalt is already at $52-53/lb in Far East sales. But in that article, we also called out the prospect that prices would ease as the year unfolded and we thought now would be a good time to see if there are any early signs of an end to the bull run.

You will recall prices were being driven by both a tightness of supply following the Democratic Republic of Congo’s moratorium on exports and unprecedented demand from aerospace, power generation and rechargeable batteries for hybrid cars, cell phones, I-pods and laptops. In theory the fundamentals of demand have not changed greatly although temporarily the market does appear a little quieter and the shortage of supply is still much the same.

What may be changing though is the perception of when supply side tightness will ease.

According to Bloomberg, Standard Chartered reported last Monday that the DRC has finally completed agreements with major mining companies which will result in new mining projects coming on stream late this year or early next. The rate of production will depend partly on the ability of mining companies to source new equipment. Many of the existing mines are badly neglected or run down and will require significant investment to achieve their potential. With new projects for all base metals and iron ore being furiously developed though many will take quite awhile to come on stream.

However when they do, prices could fall to $30/lb next year according to Standard Chartered’s Daniel Smith or even to $18.50/lb is the prediction of Credit Suisse. Some initial weakness is already being seen in the market as this is becoming more widely accepted. BHP Billiton sold last week at $52.25/lb, $1.25/lb down on their offer price after two weeks with no takers. Russia’s Norilsk is offering at $48.50/lb. So though prices are unlikely to collapse, some softening could be indicative of the peak being reached and may be by mid year we may see more reasonable pricing become available.

Don’t shed a tear for the miners by the way. Geovic Mining is said to have a cost of cobalt production at their West African Cameroon Nkamouna project of just $3.12/lb, so prices have a long way to fall before they will scale back production. Much of the world’s cobalt production is as a by product of copper or nickel mining, both of which are near all time price highs. Therefore production rates will stay high for years to come driven by new copper and nickel projects in the pipeline. Production of cobalt was 54,000 metric tons last year but could reach 100,000 metric tons if all planned projects come to fruition. Although this may not be fully realized, a large increase in capacity is certain to ease the tightness driving prices in 2007/8.

Buyers who followed our tips at the beginning of the year will hopefully now be enjoying $40/lb prices but should keep major auction prices under review and look to take advantage of weakness in spot prices as the year unfolds. The precise timing of when it will come back below this level is a tough call but the trend appears to be looking more favorable in the second half of the year. As always, MetalMiner will keep you posted of interesting developments in this and other metal markets.

–Stuart Burns

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