Glencore and the perils of riding the electric vehicle tiger

But the global metals and marketing powerhouse has just found out that riding the EV tiger can be perilous as well.

Glencore has “a key role to play in enabling the transition to a low-carbon economy,” according to CEO Ivan Glasenberg

The company reported a 32% drop in first-half core profit on Wednesday thanks in large part to problems at its African copper-cobalt business.

It will place one of its mines, Mutanda in the Democratic Republic of Congo (DRC), on care and maintenance at the end of this year due to “reduced economic viability in the current market environment, most notably cobalt related.” That comes with a $300 million impairment charge in addition to a $350 million cobalt hit on its marketing division.

The battery metal that was supposed to power Glencore’s earnings has rapidly turned into a liability.

In part this is down to the multiple problems that come with doing business in the Congo, although operating in one of the world’s most challenging countries is part and parcel of being a major player in the cobalt market.

But in greater part, Glencore’s woes reflect the demand turbulence created by a whole new supply-chain taking shape in super-fast time.

Cobalt has experienced a particularly dramatic boom-and-bust cycle but the same pattern has been unfolding in lithium and may yet appear in nickel, currently on its own turbo-charged rally.

Congo challenge

Glencore’s African copper-cobalt operations, comprising Mutanda and Katanga in the Congo and Mopani in Zambia, generated a $319m net loss in the first half of 2019, compared with a net profit of $817m in the same period of last year.

All three operations have been experiencing operational challenges.

Mopani, where Glencore is investing in a major rebuild of the mine, saw refined copper production slump 31% in the first half of 2019 as a smelter maintenance shutdown scheduled for next year was brought forward to June “following accelerated smelter integrity issues”.

Katanga has been ramping up after a two-year halt for major reconstruction in 2016-2017 but cobalt sales have been hit by the discovery last year of low levels of radioactivity in Katanga’s material which will require the construction of an ion-exchange plant.

Katanga has also just cut its 2019 copper production guidance by 50,000 tonnes to 235,000 tonnes.

Mutanda’s copper production slid 47% in the first half of the year as it “re-optimised its mine plan”.

Overarching such specific operational headaches are rising taxes in the Congo, which has defined cobalt as a strategic commodity liable to a 10% royalty, ongoing conflict with artisanal miners and a lingering U.S. Department of Justice investigation into Glencore’s past dealings in the country.

And, of course, a plummeting cobalt price.

Cobalt challenge

The price of cobalt metal on the London Metal Exchange (LME), a useful proxy for the broader spectrum of cobalt product pricing, is currently $28,300 per tonne. That compares with $95,250 per tonne at the market peak in March 2018.

The price slump generated the $350 million hit to Glencore’s marketing department as product sales lagged the company’s own production to the tune of around 10,300 tonnes of cobalt.

The cobalt market has gone from boom to bust in the space of a little over a year as panic-buying has turned into panic-selling along the supply chain.

This is partly due to weakness in the smartphone sector, still the single-largest end-user of cobalt.

But the greater source of instability has come from the new price driver, electric vehicles, most of which use cobalt in their battery configurations.

China’s aggressive subsidy programme for both battery-makers and electric vehicles caused a demand shock in 2017 as multiple new entrants chased a limited supply of cobalt, according to analysts at BMO Capital Markets. (“Glencore Cobalt Cuts Round 2: Sorting out the Surplus”, Aug. 8, 2019)

This is a supply chain that is still trying to adjust to the volatile rhythms of the EV revolution

The demand shock in turn generated a supply shock as global production surged thanks both to major operators such as Glencore and the legions of artisanal miners working deposits in the Congo.

The original demand shock caused stock building along the supply chain. The subsequent supply shock has sent that process into reverse, a trend accelerated by Beijing’s ongoing tinkering to its EV subsidy programme.

This is a supply chain that is still trying to adjust to the volatile rhythms of the EV revolution and a market that is still trying to price that adjustment.

The problem is two-fold.

Forecasting the future growth of EVs is difficult enough, given the multiple moving parts of government regulation and automakers’ own commercial strategies.

Forecasting how much of any metal will be needed is even more complex, given the range of competing battery designs all of which use differing metals in differing combinations.

Lithium, a core input to any EV battery, has been on its own price roller-coaster for exactly the same reasons, initial euphoria crushed by the first-wave supply response.

Nickel is currently surging, again thanks in large part to electric dreams, but this market is also beholden both to battery chemistry and the supply-chain’s ability to deliver nickel in the right form for batteries.

More turbulence ahead

Glencore’s decision to mothball Mutanda should go a long way to supporting the market by removing around 27,000 tonnes of production from a 130,000-tonne global arena.

Interestingly, one of the world’s top lithium producers Albemarle has done something similar, pushing back a 125,000-tonne per year expansion due to weak pricing and temporary oversupply.

The lithium supply chain simply doesn’t need that material right now any more than cobalt needs Mutanda’s supply.

But it will do.

The EV supply chain revolution is still in its infancy. EV sales are still a fraction of total automotive sales but the fraction is increasingly exponentially all the time.

Analysts at Adamas Intelligence note that battery deployment in hybrid and electric vehicles rose by 114% year-on-year to 11.25 gigawatt-hours in June due to both more vehicles and more powerful batteries.

The build-out of battery capacity and precursor materials capacity is running at similarly exponential rates.

The irony is that the current depressed pricing environment for both lithium and cobalt is actively now deterring fresh investment.

Which in commodity text-book fashion will likely generate the next price boom for both.

The EV revolution has only just started. So too has the associated market turbulence for EV metals.

(By Andy Home; Editing by David Evans)