Batteries, cobalt: Umicore lowers guidance on China EV, Korea ESS and cobalt markets

Belgian cobalt refiner and major lithium-ion battery (LIB) cathode manufacturer, Umicore, lowered its guidance for 2019 earnings before interest and tax (EBIT), reporting challenging market conditions for its Energy & Surface Technologies business group.

The company has seen demand for its cathode materials soften in China and Korea during 2019 with the reduction in Chinese electric vehicle (EV) subsidies taking effect in April impacting domestic LIB producer purchasing, and safety incidents with Korean LIB energy storage systems resulting in a moratorium on new units. A postponed launch of a major EV platform in China is also to blame. Sales of cathode materials of 100kt in 2019 and capacity expansion to 175ktpy by end-2021, have now been pushed out by 12–18 months. In addition, lower cobalt prices and artisanal mining feedstock were reported to be impacting Umicore’s Cobalt & Specialty Materials business, affecting sales volumes and margins.

Roskill view

A pull-forward of EV sales in China ahead of the subsidy change has been cited as the cause of the significant 118% rise to 254,000 of EV units sold in China in Q1 2019. The subsidy reduction capped a period of weaker sentiment and destocking in China that has endured since mid-2018 and that has underpinned recent declines in lithium and cobalt prices and premiums (higher refined output catalysed by higher prices being the other major contributor). Announcements by cobalt intermediates supplier Glencore and lithium producers Livent and Albemarle preceding Umicore’s announcement, mean this latest news should not have come as a surprise. Nevertheless, while lower subsidies would be expected to impact EV sales, the true effect will only be seen in Q2 sales figures, with China’s NEV credit system expected to put pressure on OEMs to cover the subsidy cut (at least in part) or face fines that may exceed them, thus maintaining market growth. While the subsidy cut is significant, past reductions have not stopped momentum, and China’s goal of 2M NEV sales in 2020 is considered a loose but important national target.

Roskill believes Umicore’s weaker 2019 may be compounded by greater domestic Chinese competition in its cathode material business, especially amongst a growing number of larger producers that are becoming increasingly backward integrated. Roskill estimates Umicore’s share of cobalt tetroxide (for LCO cathode) and sulphate (for NCM cathode) output was 4% each in 2018, and the company is disadvantaged versus now larger Chinese competitors like Jiana, Huayou, Tengyuan and Jinchuan which have captive mine feedstock of cobalt units in the DRC. While Jiana, Tengyuan and Huayou source concentrate from artisanal mines in the DRC, this practice is now more heavily scrutinised; thus Umicore may simply be disadvantaged by a reliance on more costly third-party metal and hydroxide from the likes of Glencore, placing its operations in the fourth quartile of refined chemical costs. Eyes are now on Chinese cobalt and cathode producers’ Q1 results to see if the subsidy cut is really to blame for Umicore’s lower guidance, or if there are other contributing factors that may be company specific.

Roskill’s NEW Lithium-ion Batteries: Outlook to 2028 report was published in April 2019 and its NEW Cobalt: Outlook to 2028 report will be published in July 2019.