Novel coronavirus; Key implications for battery metals

In this insight, we will focus on the implications it has for global battery metals markets, namely cobalt, lithium and nickel sulphate. Overall, CRU believes the impact will likely be short-lived, if the outbreak is largely contained within Hubei province where there are only a few major players (such as GEM).

We believe that the outbreak could put downward pressure on the price of cobalt and nickel sulphate, mainly by hitting sentiment rather than significantly changing the supply/demand fundamentals. However, the huge price falls already seen in the lithium market mean the 2019-nCoV is less likely to drive prices much lower, as prices already seem to have reached a floor area, putting mines supply under pressure.

Our base case assumes that demand will be hit in the short term, as the government takes actions to contain the spread, but it will bounce back in the second half of this year. However, how demand develops in China is the central question for all these markets in 2020.

What is the novel coronavirus and its impacts?
The first outbreak of the 2019-nCov was in Wuhan, in mid-December. The virus is a member of the family of coronaviruses. Since then, the number of confirmed cases has risen sharply and there have been confirmed cases in other countries also. Currently, the fatality rate has been contained under 2.5% and the daily incremental spreads have declined to below 20%.

The Chinese government has taken significant measures to counter the virus, establishing a special team under the Central Politburo Standing Committee and putting the city of Wuhan and the wider Hubei province on lockdown. Most provincial governments have also implemented strict transport restrictions, 26 out of 31 have postponed the restart of business until 10 February, with Hubei province delaying restarts until 14 February.

While there will be some short-term disruptions caused by these policies, detailed below, we do not yet believe that the outbreak significantly changes our expectations for the year ahead.

• Production in China could be squeezed. Many companies planned to restart by 30 January but have now rescheduled, pushing back restarts by a week or two. This is across all facets of China’s battery metals supply chain, from smelters all the way down to automotive OEMs.
• Disrupted logistics and delayed return of workers. Transport considerations are under pressure due to various necessary limits which have been placed on China’s road system. Moreover, it is currently difficult to find qualified drivers and other key workers have delayed their return to work.
• EV purchasing postponed. Many consumers are literally unable to buy EVs currently, and cannot until restrictions ease and the country returns to business as normal once the virus has been brought under control. EV sales could be much lower than anticipated in February and subdued even through to March. However, this will lead to pent-up demand, and we think that the market will largely recover these losses in H2. As a result, our view for the whole 2020 has not changed significantly.
• Growing inventories for raw materials. The 2019-nCoV outbreak has not yet impacted mine supply. Hence, cobalt miners in DRC, lithium miners in Australia, brine players in South America or nickel miners outside of China have not yet, and are unlikely to, scale back production. This may lead to a build in raw material stocks.
• Short term price pressure for cobalt and nickel, lithium already at bottom. The LME nickel 3M price has fallen to around $13,000 /t at the time of writing, a fall of more than 7% since 20 January, largely driven lower by changing sentiment. EU cobalt prices have increased from 16.3-17.1 $/lb on 21 January to 16.5-17.1 $/lb on 4 January. However, due to the weak spot demand in China, further rises, or potentially even falls, are possible in the short term. For lithium the market looks different, as current prices are low and could be at a floor. They are already eating into the cost curve. We believe that the 2019-nCoV outbreak will mean that excess lithium stocks take longer to be absorbed by the market but it will unlikely cause a sharp sentiment driven price drop.

Specifically, among China’s battery metal players, GEM will probably get hit hardest, as their main productions base is in Jingmen, Hubei. It is among the world’s top three precursor makers (producing over 60,000 tonnes in 2019) and second largest cobalt smelter globally. CRU understands that the company plans to resume after 13 February, assuming that no further restrictions are implemented. Other majors, such as Huyaou Cobalt, Jinchuan, Ganfeng Lithium, Ji’en Nickel, are outside of Hubei, as is the vast majority of precursor, cathode and battery makers, and we expect most of them to return to begin ramp-up again next week.

Our base case view is that this is a limited one-off shock that could hit both demand and supply in the near term. There could also be a raw material stock build as mine supply is located outside of China. However, the extended shutdown will hit both smelters and downstream players in China, if only temporally. Currently we have not significantly altered our 2020 view, but if the situation worsens, we will be revisiting this assumption.