Cobalt, Bauxite, Lithium to Outperform in 2016

The annual 121 mining investment event commences in Cape Town next week.Core Consultants have been invited to participate in a panel discussion that considers the commodities which would outperform in 2016. This has forced our company to consider the current scenario and the opportunities that might exist in the resource space this year.

Bottom line…. This year wasn’t supposed to start like this at all with one thing after another. At the end of 2015, Core Consultants cautioned its clients that the Fed’s increase in interest rates should create a certain amount of volatility in the markets – a stronger dollar invariably leads to lower commodity prices.

So are there any bright spots? Which commodities will emerge winners in 2016 and potentially thrive against this economic backdrop?

Here are some of Core Consultants’ thoughts:


Bauxite prices seem to be holding up at around $55/tonne (CIF, China). As ever, the issue seems to be Chinese demand which has created a spot market for bauxite. Given the capital costs associated with smelters and refineries, the aluminium industry in the West has largely been vertically integrated right back to the bauxite mines themselves.  The upshot is that there are not many independent bauxite miners supplying significant volumes of raw material to the market.

The Chinese have long relied on a mixture of large scale mines and artisanal operators to feed into the alumina industry. Chinese bauxite is pretty low grade, but since they do not have to transport it long distances, they have been able to mine it economically. However, demand for aluminium has put pressure on supplies of bauxite, which is further exacerbated by the fact that the Chinese deposits are becoming depleted. The Australian bauxite sector has tried to fill the gap and there are a few independent bauxite mining companies (listed and private) signing off-take agreements with various Chinese entities. Since many of these companies face long delays in getting environmental approvals for their proposed mines, the short-fall remains.

The other major supply to China was from Indonesia, though there is an export tax (currently under review).  This virtually killed off the supply, leaving Malaysia to try and fill the gap. Unfortunately, their bauxite is not particularly good quality and tends to have high moisture content making it potentially dangerous to ship (liquefaction of the ore). Given the time it would take to bring a new mine into production – particularly if railways and ports need to be built or refurbished – there is speculation that in a couple of years’ time the refineries could potentially run out of ore, hence the current demand.


Cobalt demand is expected to increase on the back of rising demand for lithium ion batteries. From a supply perspective, there are relatively few primary cobalt producers and the majority of the word’s cobalt is mined as a by-product of copper. As such, output of cobalt is subject to the fortunes of the copper market, which over the last eighteen months has been very poor indeed. Copper prices have fallen from around $2.6/lb in July 2015 to $2/lb in December 2015, deterring investment and resulting in significant production cuts.

Meanwhile, cobalt demand is on the increase, driven by a surge in the battery sector. Currently batteries account for 45% of cobalt demand and this is expected to continue over the medium term. We do caution against expecting “explosive demand growth,” as the adoption of electric vehicles for instance, has been fast, but from a low base. Many countries, including China, have made in-roads into electric vehicle adoption, but have missed medium term targets.

In addition, production costs and prices for these batteries have fallen over time, which is expected to provide a floor in the price of raw materials. Further, towards the end of last year, a multinational technology firm engaged Core Consultants to decide whether they should continue using cobalt in their batteries. Whilst the risk of change is relatively low, this company was only six months away from being able to commercialise a cobalt-free battery in their products if it was deemed necessary.

We therefore need to be cognisant of the fact that whilst companies have incurred enormous research costs for developing and refining lithium ion batteries that make use of cobalt cathodes, many multinationals invariably have developed a range of potential batteries and are able to commercialise those that make the most economic sense at the time and switch should a storage device no longer serve them. This ability to substitute gives the raw material a ceiling price.

That being said, for the time being it appears that lithium ion is the battery of choice and cobalt oxide will be used as a cathode material. Prices fell from over $14/lb in January 2015 to $10.89/lb in January 2016. We expect that the cobalt market will move into deficit in 2016 until 2018 and investors will begin increasing their exposure to cobalt, placing upward pressure on prices, but from a low base.


The world loves chocolate. However, the price volatility in this market makes the commodity trajectory a hard one to call.  In 2000, cocoa beans reached a 30-year low of $714/tonne. This was followed by a 30-year high of $3 775/tonne in 2011 following fears of unrest and supply disruption in the Ivory Coast, the world’s largest cocoa producer. Current prices are at $2 810/tonne, up 11% yoy. At this level, cocoa prices have increased 9.5% on a compound annual basis since CAGR since 2000.

Adverse weather conditions, and demand growth in excess of 2% per annum have supported annual price increases. At the end of 2015, the Indonesian Cocoa Association confirmed that farmer’s crop yields may decline by 70% in 2015 due to adverse weather conditions.

Currently a return of rainfall to West Africa, the globe’s largest cocoa producing region, has alleviated the lower crop yields, and prices have fallen. In 2015, the droughts caused by El Nino led to an increase in futures prices of around 12% yoy, finding support at above $3 300/tonne. However, in the first week of January 2016, these gains had reversed with cocoa futures falling 18 points to $2 963/tonne on the Intercontinental Exchange (ICE) in London.

Whilst the trend in cocoa futures is clearly down at the moment, as price gains over the last four years have inspired farmers to increase production, we believe in the commodity’s long term fundamentals, some of which include:

  • Demand for cocoa is growing at a long term rate of 2.5% per annum.
  • Poorer nations have previously been unable to afford chocolate due to its relatively high price point, but this reality is changing with the trend towards urbanization. Annual consumption per capita in China and India has risen to 0.8kg and 0.12kg respectively compared to 0.07kg and 0.05kg respectively in 2005. This compares to 5-10kg/capita pa in developed nations.
  • Over 70% of cocoa is produced in Africa (60% produced in Ghana and the Ivory Coast).
  • Cocoa production in Ghana is expected to decline as arable land, previously used for cocoa plantations, gives way to gold mining.
  • The recent downgrade of Ghana’s sovereign debt by rating agencies has resulted in a significant depreciation of the Ghanian cedi against the US dollar. As prices paid to farmers are fixed in local currency, there is the risk that growers may reduce their investment and exposure to the crop.


Screenshot 2016-01-29 15.44.07

Dubbed the “hottest metal of the year,” lithium is once again taking center stage. The commodity is benefitting from the widespread adoption of electric vehicles and the construction of the “giga-factories”. At present, there are five giga-factories being constructed around the world, including; Tesla, BYD, LG Chem, Boston Power, and Foxconn Technology Group, whilst majors like Samsung and SDI have announced expansions to their existing operations.

As battery supply increases to meet electric vehicle growth, raw input materials, including lithium, cobalt and graphite, are expected to benefit.

Looking specifically at the lithium market, the uptake of lithium batteries in electric vehicles has been constrained by costs, storage capacity, recharging times, and battery degradation. However, these mega factories that offer large scale production are overcoming these hurdles. Battery costs have declined sharply over the last decade from $1 280/kWh in 2005 to $365/kWh in 2015.

China has set a target of attaining 5m electric vehicles (EVs) on its roads by 2020. While the country missed its previous target of 500 000 EV’s by 2015, instead selling 136 733 units, Premier Li Keqiang has emphasised the desire for EVs to have a much larger market share of the Chinese vehicle market. As such, China has reinstated some subsidies and provided incentives such as free registration on all new energy vehicles as well as tax breaks. In addition, the country has invested in developing charging stations in all the main cities.

Overall, electric vehicle production is expected to expand seven-fold over the next five years. As such, demand for lithium carbonate is expected to rise by around 60% on a compound annual basis over this time.

In 2015, prices of lithium carbonate fetched $5 900/tonne, compared to $4 900/tonne in the previous year. Given the expected increase in demand, we expect that prices will reach over $7 000/tonne in the next 18 months.


As with a number of agri-commodities, the current El Niño climate has affected the sugar market. The International Sugar Organization (ISO) is forecasting a 2.5m tonne deficit in global sugar for 2015/16. In 2016/17, the ISO expects this deficit to rise to 6.2m tonnes, assuming no change to the demand dynamics.

India’s monsoon period brought 14% lower rainfall than usual, reducing sugar cane yields by more than a third. In Brazil, heavy rainfall delayed harvesting in the second half of last year, increasing prices by more than 3% to $11.43/lb.

Overall, global sugar production is forecast to fall to 172m tonnes in 2015/16, down 3m tonnes from the previous year, which is expected to result in the first deficit in six years.  Going forward, owing to extended drought conditions, next season a number of sugarcane growers are expected to replace sugarcane cultivation, placing upward pressure on prices.

As of January 15 2016, sugar No. 11 futures contract on the Intercontinental Exchange (ICE) for March delivery settled at 14.9c/lb, up 0.27% yoy, supported by expectations of lower production.

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