Cobalt 27 believes the story of the electric vehicle (EV) is akin to that of the mobile phone. Once inefficient, impractical and priced beyond the reach of the average consumer, management believes the electric vehicle is on the cusp of reaching the next wave of adoption. Improving energy density of batteries together with declining battery costs and a growing desire to pursue environmentally-friendly technologies has led to an inflection point where the electric vehicle is now entering the mainstream at a more economically attractive price point. The Company believes now could be the beginning of a paradigm shift in automobile transportation. A shift that Cobalt 27 believes will be fueled in part by a relatively unknown metal in increasingly scarce supply - cobalt.
What is Cobalt
Cobalt is a hard, lustrous, greyish-silver metallic element with low thermal and electrical conductivity. It can retain its strength at high temperatures (melting point of 1,495°C), can be magnetized (one of only three naturally occurring magnetic metals, together with nickel and iron) and can be alloyed with many different metals.
The unique properties of cobalt and cobalt products are responsible for its extensive applications in energy storage, industrial and other areas. These properties and characteristics include its (i) high-energy density (the amount of energy stored in a given mass of a substance or system), (ii) ability to alloy and impart strength at high temperatures and (iii) ferromagnetic properties.
Cobalt deposits can be found throughout the world and are most prominent in the African Copper Belt, mainly in the Democratic Republic of the Congo (DRC). The United States Geological Survey estimates that global cobalt in-situ reserves were 7 million tonnes in 2016 with approximately half of these reserves located in the DRC.
Approximately 67% of cobalt mined in 2016 was a by-product of copper, 32% as a by-product of nickel, and the remaining 1% from primary cobalt mines, according to Darton Commodities Limited (“Darton”), a specialist supplier of cobalt metal products. Mine production of cobalt encompasses the mining, extraction and separation of ores containing cobalt. These are generally processed into a concentrate or semi-refined intermediate cobalt-bearing product. In 2016, approximately 109,495 metric tonnes of cobalt were mined globally with 65% coming from the DRC.
Refined cobalt refers to cobalt metal, powder or cobalt-based chemicals produced through the refining of mined cobalt. Refined cobalt metal is almost pure with ~99% cobalt content. China currently produces over 50% of the world’s refined cobalt.
Cobalt 27 believes the two key issues facing cobalt supply are (i) concentrated production and reserves in the DRC and (ii) Chinese control over the majority of refined cobalt output.
Historically, the primary use of cobalt had been in the preparation of high strength superalloys. Since cobalt has a very high melting point and retains its stability at high temperatures, its alloys are suitable to be used in turbine blades and jet engines. Its high temperature stability also lends itself to industrial use in cutting tools, surface coating and diamond tooling.
The recent increase in cobalt usage is, however, due to its conductive properties and its usage in rechargeable battery applications. The appeal of cobalt for manufacturers of rechargeable batteries is that the metal makes for an efficient electrode, and can help stored power last longer.
The rechargeable battery segment has become both the largest and potentially fastest growing end use of cobalt, representing 50% of the market according to Darton.
Beyond batteries and high temperature alloys, other uses of cobalt include magnets, polyester and ceramics.
Cobalt in Batteries
Cobalt is an integral metal used in the cathode (positive terminal) of a lithium-ion battery. Cobalt’s physical properties of improving energy density and safety continue to make it an important battery component. Currently, cobalt is found in three of the five common chemistries used in the lithium-ion battery market. These include:
- Lithium cobalt oxide (LCO): LCO material is principally used in smartphones, laptops, tablets, cameras and wearables and may contain approximately 55-60% cobalt; has higher energy density and a shorter life span.
- Lithium nickel manganese cobalt (NMC): NMC is used for EVs, grid storage, power tools, medical devices and may contain approximately 8-20% cobalt; has higher power and a higher life span.
- Lithium nickel cobalt aluminum oxide (NCA): NCA is used for EVs, E-bikes and portable computers and may contain approximately 9-10% cobalt; has relatively lower energy density and a long life span.
Each type of cathode composition is preferable for different applications. NMC and NCA are the two leading technologies favored for EVs, due to their exceptional energy density. Darton estimates cobalt-containing batteries were found in 73% of EVs sold in 2016 and believes that Chinese vehicle manufacturers’ preference is changing from lithium iron phosphate (LFP) to NMC batteries in order to satisfy minimum energy density levels required to qualify for government subsidies to producers.
The longer-life, more stable NMC battery is the type most prevalent across plug-in hybrid electric vehicle (PHEV) and EV models. Tesla however uses the higher-energy density NCA battery in its Model S.
Darton estimates that the approximate cobalt contained in the following lithium-ion battery-containing devices are in the ranges of:
- Electric vehicles: 4 to 14 kg; NMC batteries are used by the majority of EV makers and have approximately twice the cobalt content relative to NCA batteries
- Plug-in hybrid electric vehicles (PHEV): <1 to 4 kg
- Laptop computers: 30 to 50 g
- Tablets: 20 to 50 g
- Smartphones: 5 to 20 g
Cobalt is expected to remain a key component of the leading battery technologies due to its critical attributes of high energy density and safety. Cobalt 27’s management team believes the increased demand for cobalt associated with the expected growth of EV penetration rates will supersede any advancement in battery technology that would require lower amounts of cobalt.
Growth in EV Adoption and Energy Storage will Fuel Cobalt Demand
The use of lithium-ion batteries in the EV market has become the most important growth driver for cobalt demand. At the end of 2016, the number of EVs in circulation reached in excess of two million. Growing market adoption has been supported by the development of lower cost vehicles, the construction of proper infrastructure and government incentives, which Cobalt 27 believes will continue to support additional EV sales.
According to the International Energy Agency (IEA), governments of 14 countries have announced that they target 13 million EVs in circulation by 2020 (over five times current levels). Moreover, in 2015, signatories to the Paris Declaration on Electro-Mobility and Climate Change, including the UN Environment Programme (UNEP), the International Energy Agency, Tesla Motors, Michelin Worldwide and Nissan-Renault, committed to working toward the goal of having 20% of all road transport vehicles globally powered electrically by 2030, representing an estimated 100 million cars. According to Darton, this would require in excess of four times current annual production volume of cobalt, assuming conservative estimates of 3.8 to 4.2 kg of cobalt per vehicle. The Tesla Model S uses a 95 kWh battery pack which contains 14.9 kg of cobalt per vehicle.
Automakers are also forecasting significant EV sales growth. Volkswagen is targeting 20 to 25% of its automobile sales to come from EVs by 2025. BMW is projecting that EV sales will represent 15 to 25% of its worldwide sales by 2025. Telsa is forecasting annual production of 500,000 EVs by 2018 and 1 million by 2020.
In order to take advantage of surging demand, automotive and battery manufacturers have been aggressively expanding their battery production capabilities. Up to 12 mega-factories are being built globally, including Tesla’s Gigafactory. The facility is expected to produce 35 GWh per annum, nearly as much as total global battery production combined.
Cobalt’s role in delivering energy efficiencies across sectors has been increasing and Darton expects that cobalt use in lithium-ion batteries could be poised to grow at an average annual rate of approximately 12% from 2016 to 2022.
Energy storage also represents huge growth potential as electricity can be stored and consumed later. This means decreased power generation capacity is required for peak demand periods. Electrical storage systems are increasingly using lithium-ion batteries due to their charge acceptance, longer shelf life, reliability and lower total cost of ownership. According to IHS Markit, a market research firm, the energy storage market is set to grow to an annual installation size of 6 GW in 2017 and over 40 GW by 2022 from an initial base of 0.34 GW installed in 2012 and 2013.
Cobalt Market Imbalance
Darton expects total refined cobalt demand to exceed 120,000 tonnes per annum by 2020, up approximately 30% from the 93,950 tonnes consumed in 2016. This projected growth is driven by Darton’s expectation for battery consumption which they project will account for 59% of all cobalt demand in 2020, representing a 58% increase in battery demand from 2016. With no large-scale copper or nickel projects with cobalt by-product credits expected to come on stream any time soon, it is unclear where the cobalt will come from to feed this increase demand. Furthermore, with over 60% of mined cobalt produced in the DRC, there is heighted supply risk due to political instability, infrastructure challenges and the prevalence of informal artisanal mining.
The global cobalt market was in a supply deficit in 2016 for the first time since 2009 during the global financial crisis. Continued tightening of the global supply-demand balance is expected in the medium-term. Darton expects a substantial deficit in the refined cobalt market by 2020. During the last multi-year deficit in the cobalt market (2007-2009), the cobalt price reached the US$50/lb level at a time when the supply deficit was smaller than the deficit projected for 2020.
Cobalt 27 believes cobalt offers the most attractive investment proposition in the battery metal sector, as it represents a significant portion of the EV battery by weight and its supply growth is expected to lag behind demand in the near term.