By Pratima Desai and Tom Daly
LONDON/BEIJING (Reuters) – Chinese battery firm GEM has stopped buying cobalt from Glencore as the price of the battery material crashed below that agreed in a three-year deal between the two companies, sources close to the matter said.
GEM <002340.SZ> said in a March 14 regulatory filing that it would buy 52,800 tonnes of cobalt from mining and trading giant Glencore <GLEN.L> between 2018 and 2020, without revealing the price.
Cobalt prices <CBD0> on the London Metal Exchange have nearly halved to around $55,000 a tonne since late March, when they hit record highs on expected demand growth. Cobalt is crucial for the lithium-ion rechargeable batteries used to power electric vehicles, a growing sector of the auto industry.
Global prices tumbled due to a surplus of cobalt in China, the world’s largest manufacturer of cobalt chemicals and electric vehicle batteries. The market is expected to struggle for some years to come due to expected oversupply.
“The price went down so much,” one source said, adding that GEM had no alternative supplier but was using its inventories of cobalt and that the Chinese firm had not attempted to renegotiate the contract recently.
According to the filing, GEM and its subsidiaries were to purchase 13,800 tonnes of cobalt from Glencore in 2018, 18,000 tonnes in 2019 and 21,000 tonnes in 2020.
“GEM didn’t buy because of what happened to the price. They didn’t open the letters of credit and said to Glencore, sorry, but we can’t take it at the agreed price,” another source said.
One source said GEM had tried to renegotiate the price, but that was much earlier in the year when cobalt was nearer $70,000 a tonne. Another source said there had been some moves recently to try to renegotiate.
The sources said they did not know whether Glencore would try to sue GEM, but one said Chinese law meant “the odds are stacked against foreign firms” wanting compensation when contracts had broken down.
GEM did not respond to a request for comment. Glencore declined to comment.
Letters of credit are issued by banks to guarantee payments made to specific companies or people so long as requirements such as the delivery of goods are met.
Sources say GEM wasn’t alone in stopping purchases, as some other Chinese firms making cobalt chemicals or lithium-ion batteries for electric vehicles had also halted their buying.
Glencore in an investor update on Dec. 3 said some customers had reneged on contracts for cobalt.
“All the material they haven’t sold is sitting in warehouses in Johannesburg,” a cobalt industry source said.
While the industry typically talks about cobalt metal, the surplus is in cobalt hydroxide, used to make sulphates for the cathode part of lithium-ion batteries.
Hydroxide is a byproduct of copper in the Democratic Republic of Congo, which houses the world’s largest reserves of cobalt. The DRC is expected to produce nearly 90,000 tonnes this year in a market estimated at 135,000 tonnes.
Prices for cobalt hydroxide, a percentage of the metal price also known as payables, hit levels above 90 percent last year and have since slipped to around 65 percent.
“Payables are still around the 65 percent level, despite the Katanga news,” the cobalt industry source said.
Glencore in November said its subsidiary Katanga Mining <KAT.TO> had halted cobalt exports from the Kamoto Project in the DRC while it builds a facility to remove uranium.
Guidance for cobalt production from Katanga was 11,000 tonnes this year and 34,000 tonnes in 2019.
(Reporting by Pratima Desai and Tom Daly; Editing by Veronica Brown and Dale Hudson)