Owner of $1 Billion Cobalt Project Says Rally Is Far From Over

(Bloomberg) -- Tight cobalt supplies will keep boosting the price of one of this year's hottest commodities, according to Eurasian Resources Group S.a.r.l., which is developing an almost $1 billion project in the Democratic Republic of Congo.

Cobalt jumped 71 percent this year on surging demand for the metal used in batteries for electric cars made by firms such as Tesla Inc. It may rise another 60 percent to as much as $90,000 a metric ton in the next 18 months or so, said ERG Chief Executive Officer Benedikt Sobotka. He said clients are already asking to pay fixed prices for supplies from the mine, which isn't due to start until late 2018.

Demand surged after usage expanded from mobile phones to larger batteries in cars and homes, prompting concern supply won't keep up. Sobotka's view echoes that of Glencore Plc's billionaire chief Ivan Glasenberg, who last month said the electric vehicle boom is coming faster than expected. ERG plans to initially produce 14,000 tons a year from its Metalkol Roan Tailings Reclamation project in the DRC and eventually leapfrog Glencore as the top producer.

“Demand is remarkably strong,” Sobotka said in an interview in Moscow. “People are inquiring about lifetime offtake contracts” from ERG's project for 2018-2019, he said.

Cobalt, which rallied 37 percent in 2016, traded at $56,500 on Friday, according to Metal Bulletin Ltd. This year's advance has far exceeded gains for most major commodities.

While analysts such as those at CRU Group expect further price gains, Morgan Stanley last month said more supply from the DRC, where the bulk of production comes from, will start putting pressure on prices next year.

ERG's Sobotka isn't worried, and sees any excess supply being “quickly eaten.”

“Over the last 12 months the market participants have realized that there was a lot of dirty cobalt product that is produced using child labor in the DRC” and outdated technology, he said. “Big automotive corporations can't just ignore this alarming problem anymore,” and that may support a tight market, he said.

Speculative demand is also significant, partly because it's hard to invest in battery producers, many of which are part of other firms such as carmakers, he said.

Read more: Investors get another way to bet on Tesla if they can bear risk

To limit the impact of any electricity shortages at the cobalt project, ERG is developing a large power project in Mozambique that will be able to supply the company's DRC assets via neighboring countries. The firm is conducting a feasibility study and aims to start construction in the next two years.

ERG has at least $4.5 billion worth of projects under development and also owns assets in Kazakhstan and Brazil. While it's involved in production of copper, aluminum and iron ore, Sobotka says he's more excited about cobalt and chrome, which he calls the “next generation of commodities.”

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin, Liezel Hill