Analysts expect long-term support for cobalt prices in China amid a tighter supply picture, as the country reportedly plans to increase its cobalt stockpile as part of efforts to bolster strategic mineral reserves.

In September, China's National Food and Strategic Reserves Administration asked cobalt producers to file proposals to sell their metal to the state, Chinese news portal Sina reported Sept. 10. This follows Antaike, a state-backed metal research company, advising Beijing to stockpile cobalt after domestic prices plunged amid the coronavirus outbreak, Reuters wrote in August. The China Nonferrous Metals Industry Association also said in February that the government should stockpile some metals to take the pressure off producers whose sales and operations have suffered as a result of the pandemic.

A China-based commodity analyst who requested anonymity said cobalt can be used to make superalloys, which are used in aircraft engines. "Cobalt becomes more strategically important with its applications in the aerospace industry amid... increasingly complicated international relations," the analyst said, adding that m ore than 20% of global cobalt output is used for making alloys.

Cobalt superalloys are used in aircraft engines. Source: MOAimage via Getty Images

Congo is the world's biggest producer of the metal, accounting for 71% of global output in 2019, according to an annual report by the U.S. Geological Survey. China accounts for 80% of global cobalt chemical refining capacity, producing 9,000 tonnes in 2019, but 90% of the metal it needs comes from imports, according to the analyst.

Cobalt is also widely used in electric vehicle batteries, recently identified by China's state planner as a strategic industry. In a Sept. 8 announcement, the National Development and Reform Commission said China will boost investment in strategic industries including EVs, new energy resources and technology infrastructure.

Information about China's stockpiling purchases and how much it holds, however, are not made public.

A Shanghai-based analyst, who asked to remain anonymous, expects China may stockpile 2,000 tonnes of the metal, flagging more purchases when the country starts its next five-year plan. "It was said that the 13th five-year plan has a goal of stockpiling 8,000 tonnes of cobalt and a total of 6,000 tonnes has been purchased in the previous years," the analyst added.

The 13th five-year plan is China's economic agenda for 2016 to 2020. China's top leadership will gather in late October to decide its strategy for the next five years.

A cobalt tender meeting was completed on Sept. 17, according to the analyst, but the volume and price are confidential. There might be another round of stockpiling based on the practice in the past, the analyst said, adding that the next five years will likely see the state purchase more of the metal as the 14th five-year plan is expected to have a greater focus on increasing its strategic reserves to reduce reliance on imports amid the economic downturn following the coronavirus outbreak and intensified trade tensions between China and the U.S.

News of stockpiling did not trigger an immediate boost to domestic cobalt prices as the market has been anticipating the measure for a few months now, said Huo Yuan, a cobalt analyst with Shanghai Metals Market. However, she said the stockpiling will have a more significant impact on cobalt prices once purchases start, as some market watchers expect.

Huo said a stockpile volume of 2,000 tonnes is expected to create further tightness to the supply picture after coronavirus lockdowns in southern Africa slowed shipments from major exporters Congo and Zambia. A volume of 2,000 tonnes is equivalent to China's cobalt consumption in a quarter, according to the China-based commodity analyst.

Stockpiling purchases will partially offset seasonally weak demand in the fourth quarter and limit the drop in domestic cobalt prices, according to Huo. The analyst expects prices to fall to 250,000 yuan per tonne to 260,000 yuan/t during the quarter, from Antaike's assessment of 270,000 yuan/t to 280,000 yuan/t on Sept. 30.

Domestic cobalt prices will be supported in the long term as the market gradually wakes up to strategic importance of cobalt, according to the China-based commodity analyst, who expects the domestic cobalt price to increase up to 400,000 yuan/t within the next couple of years should there be any subsequent purchases by the state.

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As of Oct. 5, US$1 was equivalent to 6.79 Chinese yuan.