It is not possible to make the NCA batteries Tesla (TSLA) makes use of in its electrical autos or the NCM batteries Tesla makes use of in its stationary power storage merchandise with out cobalt. If the Mutanda mine is taken out of manufacturing, the crippling cobalt shortages that I anticipated in 2024 will turn into apparent in a matter of months. The Cobalt Cliff is not a “sometime” problem. It’s a right here and now actuality that might cripple or kill the electrical automobile and savage the market worth of Tesla, which may’t manufacture something however photo voltaic panels with no safe cobalt provide chain that it doesn’t have.
Since March of 2016, I’ve repeatedly cautioned readers that the world’s cobalt provide chains are too fragile to assist anticipated development within the electrical automobile business. My Searching for Alpha focus articles on this subject embody:
Whereas my understanding of the cobalt market has advanced over the past two and a half years, my newest evaluation for a June presentation on the Advanced Automotive Battery Conference predicted modest surpluses by means of 2021 adopted by sharply growing deficits starting in 2022.
On Aug. 6, Glencore (OTCPK:GLCNF) unexpectedly introduced plans to shut its Mutanda mine within the DRC by the top of this yr. In Slide 33 for its recent half-year conference call, Glencore defined that Mutanda’s financial oxide ore reserves can be exhausted by year-end. It additionally defined that additional work could be required to evaluate the financial and technical feasibility of recognized sulphide ore deposits that might lengthen mine life for an additional 20 years. Accordingly, Glencore plans to maintain Mutanda in care and upkeep mode for at the least two years.
Since Mutanda produced over 20% of the world’s cobalt in 2018, the mine closure will shift the short-term provide and demand steadiness from snug surpluses in 2020 and 2021 to crushing provide deficits of 19,00zero and 23,00zero tonnes, respectively. If the Mutanda mine might be introduced again on-line in 2022 after two years of care and upkeep, the long-term provide deficit development can be:
- three,400 tonnes in 2022;
- 22,700 tonnes in 2024;
- 41,100 tonnes in 2026;
- 82,700 tonnes in 2028; and
- 149,200 tonnes in 2030.
The next graph combines and summarizes:
- Historic cobalt provide and demand data from Darton Commodities;
- Forecast cobalt demand from 2019 by means of 2030 from BNEF;
- Forecast cobalt provide from 2019 by means of 2025 from Darton, as adjusted for Glencore’s plans to shut the Mutanda mine for 2 years; and
- An expected-case extrapolation of cobalt provide from 2026 by means of 2030.
The 2-year dip in cobalt availability will not essentially derail the automobile electrification plans of main automakers who can merely delay product launches, but it surely might nicely be catastrophic for Tesla which may’t manufacture EVs or stationary storage programs with out cobalt.
I’ve beforehand defined why I imagine producers of EVs and stationary storage programs would be the least-effective rivals within the cobalt market. Whereas I received’t repeat that evaluation intimately, I feel the next graphs do a high-quality job of illustrating the worth inelasticity of cobalt demand from industrial customers and producers of batteries for transportable electronics.
The graphs don’t overlay completely because of minor time scale variations, however a side-by-side comparability of worth and demand says all of it. Industrial customers and producers of batteries for transportable electronics can pay no matter they need to pay to get the cobalt they want. It is also price noting that the 2016 and 2017 provide deficits that gave rise to the 300% worth spike had been nicely below 5,00zero tonnes.
Producers of EVs and stationary storage programs merely don’t have that luxurious.
There is a risk that Glencore will reverse course and proceed mining operations at Mutanda past year-end, however I am not certified to evaluate the chances. The 2 major components that might result in a continuation of mining operations could be:
- Vital adjustments within the DRC’s mining code that scale back or remove onerous royalty and tax burdens that had been carried out through the latest cobalt worth spike; or
- Substantial fixed-price offtake agreements that might enable Glencore to scale back the “financial cut-off grade” for its oxide ore deposits.
Based mostly on the info as they exist right this moment I feel the following two years can be very ugly for the EV market and that Tesla could be the first fatality. If the market worth of cobalt begins one other sustained spike, I feel the first beneficiary can be Katanga Mining Ltd. (OTCPK:KATFF), a majority-owned subsidiary of Glencore that operates the world’s second greatest cobalt mine.
Disclosure: I’m/we’re quick TSLA THROUGH LONG-DATED OUT-OF-THE-MONEY PUT OPTIONS. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Further disclosure: I at the moment function a non-executive director of Giyani Metals Corp (CATPF) and as a member of the index committee for the EQM Battery Metals and Supplies Index. My private portfolio contains Giyani Metals, Katanga Mining Restricted (KATFF) and the Amplify Superior Battery Metals and Supplies ETF (BATT). I’m additionally quick Tesla by means of long-dated out of the cash put choices.