ANALYSIS-Cobalt to Fall As Output Hikes Offset Demand

LONDON, Feb. 23 -- Prices of cobalt, used to make batteries, are expected to tumble this year as global producers ramp up output at a greater rate than demand grows.

The exchange launched minor metals contracts for steel ingredient molybdenum, and cobalt on Monday Feb 22.

A lack of investors in the latter, which is a byproduct of both nickel and copper, could lead to speculator driven volatility, with production rises in feedstocks nudging prices below $20 this year.

"There is a lot of nickel coming on, and ramp-ups as well," said Carl Firman, an analyst at Virtual Metals. "Demand is not particularly high at the moment either, so yes, below $20 wouldn't be surprising in the current climate."

Russian cobalt 99.3, currently trades above $20 a lb, after touching levels over $22 a lb earlier this month, its highest level since November 2008.

But this is still some way off peaks of over $48 a lb hit in March 2008 before the global economic slump was properly felt.

Prices of cobalt, which can also be mined as a primary source, have risen by as much as 14 percent this year, before tracking back, as supply tightness, and improving demand and economic conditions boost prices.

"I see the price coming off on the cobalt side," said Nicholas Brodie, chief financial officer at Katanga Mining on the cobalt outlook this year. "That is purely because of the quantity being delivered onto the market is going to increase during the year."

Production at the Tenke-Fungurume copper-cobalt mine in the Democratic Republic of Congo is higher than expected and should end up exceeding long-term forecasts, it said in June.

The start of production at Vale's Goro nickel mine in New Caledonia this year, is another example of where an annual cobalt surplus could come from.

"If there is more supply -- it's simple economics, the price has to come down, said Katanga's Brodie. "I'm surprised it has gone up to $23. I'm not going to complain but I see it coming off, and that's just a supply issue."

DEMAND TO INCH HIGHER?

Refined global production for cobalt was around 54,000 tonnes last year, with consumption at about 52,000 tonnes.

Consultancy CRU Group estimated that 2009 saw a global surplus of some 2,460 tonnes, compared with a deficit of about 2,410 tonnes in 2008.

Worldwide production was expected to be around 55,000-60,000 tonnes this year, analysts said.

"From a demand perspective, we would be reasonably positive toward cobalt in terms of its penetration in the battery market," said Neil Buxton, managing director at GFMS Metals Consulting. "We do see supply increasing this year, and that is probably going to more than match any increase in demand ... We essentially have the market in surplus."

Buxton added that global cobalt production could increase by as much as 8 percent this year.

Roskill Information Services saw cobalt demand at about 55,000-56,000 tonnes in 2008, and just under 50,000 tonnes last year.

"It's probably going to be somewhat of a transition year, if not only a little bit better than last year," said Robert Baylis, senior analyst at Roskill, on 2010 cobalt demand. "There is going to have to be some control from the industry to prevent any oversupply."

Baylis added however, that he expected demand to again rise back up to 2008 levels by 2011, with hydro processing and the battery industry growth boosting demand.

"Going forward from 2011, it's probably going to be 3-5 percent rises each year," said Baylis.