The metals markets are still in the midst of sharp price volatility and sluggish demand growth. Reports in mid-September noted a continuation of the base metals sell-off, with further price slides for the likes of copper, zinc, nickel and aluminium, as investors corrected from a three-month wave of speculative investment. Industrial demand from China, as always for major commodities, was intimately linked to movement in the market.

“Chinese headline macro data for August was surprisingly weak, with headline figures missing survey estimates and falling month-on-month,” Liberum Securities told the Financial Times in September.

Amid the volatility, cobalt has emerged as a star metal for investors this year, having been one of the worst-performing commodities in the wake of the global downturn in 2008, after which cobalt’s value tumbled from more than $50/lb at its peak to just $10 at the beginning of last year. More recently, there have been signs of a turnaround, with cobalt seeing sustained price growth from around $15/lb in late 2016 to more than $27/lb at the time of writing.

“If last year was lithium’s time, for 2017 cobalt may be the one receiving more attention,” said Macquarie Group global head of commodities research Colin Hamilton in April. “Risks remain, mainly technological ones on the demand side and geopolitical ones on the supply side, but for now the perennial underperformer in metals markets looks well placed to shine.”

Cobalt’s surge in value has been underpinned by an inflexible yet uncertain supply situation, coupled with strong demand drivers that are unlikely to change anytime soon. So what are the market dynamics shaping this commodity’s fortunes?

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Electric vehicles driving demand

The last few years have brought about a gradual shift in demand for cobalt. Metallic cobalt, which is used in the manufacture of superalloys for jet engines, turbine blades and other products, has traditionally been the largest part of the cobalt market. It has been overtaken in recent years by refined cobalt chemical products, such as cobalt sulphate and cobalt oxide, which will make up 63% of the market in 2017, according to research by metals analyst CRU Group. It’s the growth of cobalt chemicals that is driving a supply-demand deficit.

“Due to this strong increase in cobalt demand for chemical applications, CRU estimates that in 2017 there will be a world deficit of 4,000t for refined cobalt chemicals and over 1,000t for cobalt metal,” wrote CRU consultant George Heppel in an analysis published in September. “CRU expects that the cobalt metal deficit will narrow in the mid-term (2017-2021), while the refined cobalt chemical deficit will remain at high levels.”

This demand growth is primarily a result of rapidly developing lithium-ion battery technologies, around three-quarters of which are set to use cobalt chemicals by 2020. These batteries are used in electronics ranging from grid-level energy storage systems to smartphones and tablets, but by far the fastest-growing source of demand is the electric vehicle (EV) industry. Advancements in the technology have driven down the cost of EV ownership and spurred demand, leading financial services group UBS to raise its projections for global sales. By 2025, according to UBS, 14% of all cars sold around the world – and a third in Europe – will run on battery power. This growth has been supported by legislation in countries including the UK and France, both of which have pledged to ban the sale of all petrol and diesel cars by 2040.

“Future demand for cobalt from the EV sector is looking tangible and is more positive than originally expected,” an unnamed commodities investor told Reuters in February. “China has some aggressive plans in terms of electric vehicles…it will be a major driver behind cobalt consumption growth.”

Supply insecurity

Coupled with sharp spikes in demand on the back of an expected EV take-off is a supply situation that is highly vulnerable to disruption. Around 97% of the world’s cobalt production is as a secondary byproduct of copper and nickel extraction, leaving cobalt supply exposed to copper and nickel market fluctuation. If demand for copper plunges and mines are mothballed, cobalt production could drop along with them. Glencore’s suspension of production at its Katanga and Mopani copper-cobalt mines in Democratic Republic of Congo (DRC) and Zambia in 2015 is a case in point.

DRC contributes around 60% of global cobalt production, and supplies 80% of the cobalt used by Chinese chemical refineries, so another concern of the increasingly cobalt-reliant EV and battery industries will be the humanitarian and geopolitical situation in the country. The prevalence of child labour in DRC’s cobalt mines has been a huge source of controversy, while political violence has claimed thousands of lives in the last year, fuelled by opposition to President Joseph Kabila’s government and tension over elections next year.

These conflicts and political instability have reduced DRC’s cobalt production in the last year, and the risk to a burgeoning EV industry is acute. “While there are a number of new cobalt projects being developed around the world, quite simply: there will be no electric vehicle industry without DRC cobalt,” Benchmark Mineral Intelligence analyst Caspar Rawles told Quartz earlier this year.

So while a large proportion of existing cobalt supply remains uncertain and new capacity is hard to come by due to the scarcity of primary cobalt resources, the risk to the lithium-ion battery supply chain remains, and prices are likely to continue upwards.

Primary cobalt mines emerging

While current market conditions seem to signal continued price growth for cobalt, there are limiting factors. Obviously, if the EV sales trajectory is shallower than expected, demand could drop as quickly as it has risen, while the fortunes of complex energy storage systems will also factor in.

Past a certain price point – some analysts have predicted that cobalt’s value will surge far higher than its 2008 peak of more than $50/lb – the market will become increasingly incentivised to find a way around the cobalt issue. This process of reducing reliance on cobalt has already begun with the rise of the nickel cobalt aluminium lithium-ion battery, which is being favoured for many EV and energy storage applications because of the lighter cobalt content in its chemistries.

A number of junior mining companies – Canadian firms in particular – have clearly identified the demand for new sources of cobalt, and primary cobalt projects are now starting to garner more attention. Very few ‘pure-play’ cobalt mines exist, but a growing number of projects are getting underway in response to the opportunity. eCobalt continues to develop the Idaho Cobalt project, the US’s only advanced primary cobalt development, which is slated to produce 1,500t of cobalt sulphate a year once operational.

Global Energy Metals, meanwhile, is working to revive cobalt production at Werner Lake in Ontario, where the metal was last produced in the 1940s. A recently completed initial resource report concluded an indicated resource of 57,900t of 0.51% cobalt. On 11 September, the company announced that it was proceeding with the permitting process to explore and develop the site further. Global refined cobalt demand is set to be 100,000t this year and could reach 150,000t by 2025, so clearly DRC-based production will still be vital to keep the world’s battery manufacturing plants supplied, but alternative sources are starting to emerge.