Erratic upward prices now forecast for cobalt

By Staff -- Purchasing, 11/2/2000

Just as forecasters have been getting comfortable with $14/lb forecasts for cobalt in the fourth quarter, futures have jumped to $16-$17 because a two-month strike at a nickel mine in Canada has restricted supplies in the face of an unexpected demand surge from makers of batteries, chemicals and special steel alloys.

The price of cobalt has slipped from $16 in the second quarter to $14 in the third. But analysts now say prices may jump as high as $20/lb in the fourth quarter for the metal used to strengthen specialty steel alloys for aircraft parts. "Demand growth is extremely strong and so any disruption to supply and the price can rise quite sharply," says Alan Heap, director of commodity analysis at Salomon Smith Barney Australia Ltd. in Sydney. "It's a very thin and illiquid market, and we've had huge gyrations in prices in the past."

Cobalt is mixed with other materials to make heat-resistant alloys used in aircraft. The Central African nations of Zambia and the Democratic Republic of Congo, formerly Zaire, account for about 40% of world supplies. The rest comes from such companies as Inco and Falconbridge of Canada and Anaconda Nickel of Australia, who mine the metal as a by-product of nickel extraction.

Cobalt prices rose above $30/lb several times in the 1990s as supply dwindled from the Democratic Republic of Congo and Zambia as a result of political instability. Analysts have predicted a plunge in prices for cobalt as companies such as Anaconda and Centaur Mining and Exploration Ltd. bring new nickel mines into production in Western Australia. Still, those companies are struggling to bring their mines into full production, which reduces the benefit they might see from higher cobalt prices, Heap says.

The latest supply disruption comes from the decision of Falconbridge, the world's No. 3 nickel miner, to declare force majeure from its Sudbury operations in Ontario on shipments into Europe and the U.S. from November and Asia from December. Force majeure is a contract clause a company can invoke when it may not meet delivery obligations because of circumstances beyond its control.

About 1,260 workers at Sudbury have been on strike since Aug. 1, though limited nickel production resumed this week when some managers and contract workers began working at the Fraser Mine in the Sudbury complex. The strike has disrupted exports of cobalt to Falconbridge's Nikkelverke smelter in Norway where operations are running at 50% of capacity.

Supplies of high-grade 99.9% cobalt were scarce in the third quarter. Interestingly, first-half supply of refined cobalt wasn't a problem, as output rose by 998 tonnes from the year-ago period, notes the Cobalt Development Institute (CDI) in London. Production from CDI members between January and June was estimated at 12,902 tonnes, down from the 1999 level of 13,262.50 tonnes, but metal from other producers and from stockpile sales rose to 4,937.50 tonnes from 3,578.50 tonnes. So, total cobalt refined availability was about 17,839 tonnes, or 6% higher than the same period in 1999.

Output appears to have fallen in Zambia, as production at Chambishi Metals was well below the refinery's capacity. But, apart from Canada's Inco Ltd. and Belgium's Union Miniere, all other producers increased production. Russian availability was put at 1,782 tonnes, up from 1,600 tonnes, while U.S. Defense Logistics Agency (DLA) deliveries rose to 1,493 tonnes from 926.50 tonnes. The DLA sold 1,980 tonnes during January to June, so 487 tonnes remain in its warehouse.

Looking ahead, the CDI disagrees with analysts and says there is the potential for an increase in availability in the second half of 2000. "The commissioning of the slag-treating facility by Chambishi Metals later this year and the recent privatization of the Nkana cobalt refinery will almost certainly result in additional metal from sources in Zambia," the CDI added.

Also, the facilities at Anaconda Nickel Ltd.'s Murrin Murrin plant in Australia and Banff Resources' Kasese operation in Western Uganda are expected to continue improving, even if full production is not achieved until 2001.