Cobalt, palladium on Scotiabank’s ‘Naughty and Nice’ list of 2018

Weak production growth, steady-to-rising demand, supply deficits and falling inventories pushed prices of palladium up 19% in 2018, after a 51% jump in 2017, Scotiabank economist Rory Johnston concludes in his Dec. 20 Commodity Price Index report.

By contrast, cobalt prices were down 24% year-to-date in 2018. That’s a sharp reversal from the 127% gain in 2017, which made the metal the best performing commodity of 2017.

In 2018, cobalt was among the worst performers while palladium was the second-best performer for the second year in a row. Cobalt — along with lumber (-28%) and AECO natural gas (-43%) — are on Johnston’s “naughty” list of 2018’s worst performers, while palladium, along with Henry Hub natural gas (+22%) and Canadian Heavy Crude (-4%), were on his “nice” list of best performers.

Material drops off a conveyor at North American Palladium’s Lac des Iles palladium mine in northwestern Ontario. Credit: North American Palladium.

For his analysis Johnston used a basket of industrial and mined commodities, including crude oil, natural gas, copper, nickel, zinc, aluminium, iron ore, metallurgical coal, steel, gold, silver, platinum and palladium, cobalt, and lumber.

During 2018, the bullish narrative on cobalt “soured,” Johnston writes, “primarily on a weakening of the Chinese electric vehicle (EV) market following the rollback of consumer subsidies, combined with the build-out of new production capacity.

“The fallback in EV demand, coupled with the build-out of Chinese cobalt hydroxide production capacity, has resulted in a localized glut and rising Chinese exports, which have put downward pressure on global prices,” he says, explaining that cobalt hydroxide “stabilizes battery chemistries and extends useful lifespans.”

He also notes risks to supply from the Democratic Republic of the Congo, which he expects will produce 90,000 tonnes of the 135,000 tonnes of cobalt supplied to the market in 2018.

Meanwhile, for the first time since late 2002, palladium prices overtook gold prices, he says.

Cobalt briquettes at Cobalt 27 Capital’s Rotterdam warehouse. Credit: Cobalt 27 Capital.

Johnston points out that 80% of palladium consumption each year is in autocatalysts used in traditional gasoline-powered vehicles to reduce emissions intensity.

Although global car sales “have been relatively sluggish,” he says, palladium has benefitted from the switch to gasoline over diesel cars in the wake of Volkswagen’s diesel scandal. Another contributing factor to palladium’s price rise is the “continued pressure to increase the environmental performance of commuter vehicles,” especially in countries like China, where political elites know that the country’s smog problems can ignite protests from the public.

He also points out that 2018 was the eighth consecutive year of supply deficits for palladium and inventories are “falling fast.

“The dearth of palladium has pushed consumers to buy it off exchanges,” he writes, “and ETFs that hold the metal have seen volumes drop, as metal meant to serve as a proxy for the market ends up being needed in manufacturing processes.”