It’s been a fascinating week as one of my readers forwarded copies of a May 12th “Commodities Comment” from Macquarie Wealth Management that focused on China’s recent efforts to shore up its cobalt supply chains and a May 16th report from Morgan Stanley that focused on expected growth in global demand for lithium, graphite, cobalt, and copper from the electric vehicle (EV) and lithium-ion battery sectors.
After studying both reports in some detail, I’m amazed at the human mind’s capacity to embrace the alternative and inconsistent assumptions that global demand for EVs and lithium-ion batteries can soar without giving rise to the supply chain challenges I refer to as the “Cobalt Cliff.”
Frankly, both reports have the look, feel and smell of hurried and half-hearted attempts to fluff up the due diligence files for Tesla Motors, which is conducting a $2 billion public offering but has not, in my opinion, adequately disclosed the sources and availability of raw materials and related supply chain risks as required by Item 101(c)(iii) of Regulation S-K.
While I don’t normally redistribute copies of third-party reports that come in over the transom, these two reports are important enough to merit an exception, so I’ve uploaded copies to my Dropbox here and here. I encourage readers to download the complete reports and reach their own conclusions instead of relying on my analysis.
The Commodities Comment from Macquarie focused primarily on Freeport McMoRan’s recent decision to sell three of the most important cobalt properties in the world to China Molybdenum. The properties slated for disposition include:
- A controlling 56% interest in the Tenke Fungurume mine in the Democratic Republic of Congo (DRC) which reportedly shipped 15,900 metric tonnes (MT) of mined cobalt in 2015, a figure that represents about 13% of the world’s mined cobalt supply;
- A controlling 56% interest in the Kokkola Cobalt Refinery in Finland which reportedly shipped 9,700 MT of refined cobalt in 2015, a figure that represents over 10% of the world’s refined cobalt supply; and
- A controlling 100% interest in the cobalt-rich Kisanfu Exploration project located near the Tenke Fungurume mine.
In Macquarie’s view, China Moly’s planned acquisitions are all about ensuring supply chain integrity for China, which has “next to no” domestic cobalt resources and imports 93% of its cobalt from the DRC. Macquarie’s summary conclusions are:
- Global cobalt supply will ramp from 91,300 MT in 2015 to 99,600 MT in 2020;
- Global cobalt demand will ramp from 90,100 MT in 2015 to 107,100 MT in 2020;
- Cobalt demand from the battery industry will ramp at a 4.5% CAGR;
- Cobalt prices will increase to $15 per pound by 2020; and
- China’s current cobalt inventories will not be exhausted until 2021.
The following table summarizes Macquaries view of future material flows in the cobalt sector.
From my perspective the most intriguing factual assertion in the Macquarie report was their estimate that surplus raw material inventories in China may be as high as 29,000 MT. While my contacts at the Cobalt Development Institute and Darton Commodities believe the Chinese hold reasonable “ordinary course of business” inventories, neither is aware of significant raw material or finished goods stockpiles outside 5,000 MT the State Reserve Bank of China bought in Q-1.
I was also mystified by Macquarie’s conclusions that:
- Global cobalt demand would grow at a 2.9% to 3.8% rate over the next five years after growing at a 8.3% rate over the last five years; and
- Cobalt demand from the battery industry would grow at a 4.5% rate over the next five years after growing at a 19.3% rate over the last five years.
While Macquarie explained that its modest growth rate assumptions are “based on expectations of substitution, thrifting and over-optimistic battery industry forecasts,” I’m not convinced that either of the growth rate assumptions is reasonable.
I also disagree with Macquarie’s assertion that low-energy LiFePO4 batteries are a reasonable substitute for high-energy LCO, NCM and NCA batteries. The reason is simple. LiFePO4 batteries are twice as bulky and twice as heavy as LCO, NCM and NCA batteries. While battery size and weight may not matter when BYD is manufacturing an electric transit bus, battery size and weight are mission critical product specifications in portable electronics and EVs.
On balance, I can’t buy Macquarie’s production and demand growth estimates and while I’m willing to accept the possibility that Chinese cobalt inventories are larger than other experts assume, those inventories, if they do in fact exist, will be fully depleted within a couple years unless demand growth collapses.
While Macquarie’s Commodity Comment was internally consistent, Morgan Stanley’s “Asia Insight: Primer – New Energy Materials” is so mushy, imprecise and internally inconsistent that it only makes sense as filler for a skimpy due diligence file. While my inner nitpicker would love to highlight all of the places where the textual discussion disagrees with the graphic presentations and conflicts with other source materials I’ve reviewed, I’ll simply observe that the report lacks the tightness and precision I’ve come to expect from Morgan Stanley and focus on a single inconsistency that seems like an elephant in the living room.
After an introductory page that identifies lithium, graphite, cobalt, nickel, zinc, manganese, aluminum and phosphorus as essential raw materials for rechargeable batteries, Page 2 offers this table that summarizes the current growth expectations of Morgan Stanley’s “global autos & shared mobility team.”
On page 3, however, the Lithium discussion begins with this sentence, “Our base case of 1.0% EV penetration into the global auto fleet by 2020 suggests there will be enough lithium supply to meet demand, but only if new lithium supply timelines are met.”
Lemme see if I have this straight. If EVs achieve a dismal 1% market penetration instead of the 2.9% market penetration forecast by Morgan Stanley’s global autos & shared mobility team, there should be plenty of lithium as long as new supply timelines are met?
It reminds me of the Groucho Marx quote, “If we had some eggs we could have eggs and ham, if we had some ham.”
I was even more surprised by the graphs in the cobalt discussion that show cobalt demand in the battery industry growing by almost 100% over the next five years with no relevant discussion of where the cobalt supplies will come from.
It’s my sincere hope that readers who know more than me will take the time to read both reports and contribute their thoughts and observations in the comments section.