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Spillovers between cobalt, copper and nickel prices: implications for deep seabed mining

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Abstract

Interaction between prices of nickel, copper and cobalt, the latter a by-product of nickel and copper in laterites and sulphite deposits, are analysed in relation to the price of oil, the US real interest rate and the real effective exchange rate of dollar using an autoregressive distributed lag model, to draw considerations on the profitability in the exploitation of polymetallic manganese nodules and cobalt crust in a mutually exclusive scenario. The results show co-movements between these variables through the presence of three long-run relationships. Focusing mainly on the cobalt/nickel relationship, it is shown that price of cobalt anticipates and exerts a negative effect on nickel while, as expected, the price of oil has a positive impact and the exchange rate a negative one. Conversely, the impact of the real interest rate is not significant. A Monte Carlo simulation is employed to forecast a robust average price of nickel in the long run, finding that under the actual stagnant economic conditions and an average price of cobalt of $40/kg (at 2000 price equivalence), the price of nickel will remain close to the actual, around $18/kg (at 2000 price equivalence). This result, coupled with the literature findings that in a mutually exclusive scenario, the prevalence of cobalt crust over manganese nodules can be shown only if the price of nickel is below $9/kg (at 2000 price equivalence), justifies why increased attention has been re-directed towards polymetallic nodules.

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Notes

  1. This rate of return is mainly based on a mining model with recovery of three metals (cobalt, nickel and copper). Historically, the processing of manganese has been considered uneconomical; however, the high price of this metal today has changed this suggestion. Interest is now more focused on manganese than cobalt that is considered to have “zero” value. As such cobalt crust has “zero” value (David Heydon, former CEO Nautilus Minerals Inc., personal communication, 2012). Following this idea, a comparison between the two ocean resources is meaningless. However, in this paper we follow the three metals model proposed by Yamazaki (2002) giving a sense to the comparison of the two resources in a mutually exclusive context.

  2. We have not included all of the commodity prices in the model simultaneously, in order to limit the size of the model, as we have a small number of observations. Therefore, the interaction between copper and nickel, which are co-products in some land-based deposits (Maxwell 2006), is not assessed here. The focus is mainly on the nickel/cobalt and copper/cobalt interaction.

  3. Available at http://www.bls.gov/data/inflation_calculator.htm

  4. Available at http://minerals.usgs.gov/minerals/

  5. Available at http://databank.worldbank.org/ddp/home.do

  6. The use of law frequency data is motivated by the availability of data on cobalt only in annual figures, while the short length of the series is motivated by the short record of the variable lreer. Although higher-frequency data would add more observations, the extremely volatile nature of commodity prices allows even annual observations to contain a large amount of information (Baffes 2007). In addition, the low frequency reduces the noise to signal ratio and largely eliminates the influence of speculation on commodity prices, allowing us to concentrate on “fundamental” price co-movements (Byrne et al. 2011).

  7. ARDL (11020) is the model characterised by 1 lag for lpni; 1 lag for lpco; 0 lags for lpoil; 2 lags for irus and 0 lags for lreer.

  8. ARDL (11020) is the model characterised by 1 lag for lpcu; 1 lag for lpco; 0 lags for lpoil; 2 lags for irus and 0 lags for lreer.

  9. ARDL (12100) is the model characterised by 1 lag for irus; 2 lags for lpco; 1 lag for lpcu; 0 lags for lpoil and 0 lags for lreer.

  10. Not shown here to save space, but available on request.

  11. Not reported here to save space, but available on request.

  12. This threshold has been assessed in a condition of economic indifference, i.e. equalising the Net Present Value of manganese nodules and cobalt crust. The discounted cash-flow adopted does not take into account the effect of manganese which has normally been discarded in the literature (Yamazaki 2002, 2006 and 2008), but considered recently the most important metal in the revenue share of manganese nodules due to its high price (as recorded in the last years) and its relative abundance (20–30 %) (David Heydon, former CEO of Nautilus Minerals Inc. Personal communication, 2012). The inclusion of manganese in the model would relevantly increase the profitability of manganese nodules, thus flattening the threshold price of nickel below $9/kg and increasing further the price of cobalt that makes cobalt crust to be as profitable as manganese nodules. Then, the exclusion of manganese allows us to obtain a more conservative result.

  13. This price of cobalt is predicted by http://www.asianmetal.com/news/viewNews.am?newsId=886226, consulted in July 2012

  14. Information sourced by www.consensuseconomics.com; consulted in July 2012.

  15. Source: www.intexresources.com; consulted in June 2012

  16. Price of cobalt are expected to drop in the following years due to oversupply as reported in the report “Oversupply and Steady Prices Expected for Cobalt Future”, April 2012; source: www.ArnoldMagnetics.com

  17. These results were obtained deriving the cobalt-nickel price ratio that equates the net present value of the two mining ventures (Martino and Parson 2012). The cost of mining and processing the three metals (cobalt, copper and nickel) was deduced by Yamazaki (2002, 2006, and 2008) and deflated in US$2010. Revenues are a function of metal prices and of the coefficients of transformation for mining and processing, as deduced by Yamazaki (2006). The cash-flow is simplified with capital costs distributed equally over the first 5 years, while operating costs and revenues follow from the sixth year to the 25th. The adopted discount rate is high (15 %, as for land mining) to take into account the riskiness of the mining operations.

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Acknowledgements

The authors gratefully acknowledge critical comments on a draft of this paper discussed during internal debates held at the National Oceanography Centre, Southampton, within the UNCLOS Group. Finally, special thanks to two anonymous reviewers that have improved the quality of the paper suggesting further statistical analysis to check the robustness of our preliminary results.

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  1. Marine Geoscience Group, National Oceanography Centre, Southampton, European Way, SO14 3ZH, Southampton, UK

    Simone Martino & Lindsay M. Parson

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Correspondence to Simone Martino.

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Highlights

1. The paper investigates the joint production and price spillovers between cobalt, nickel and copper;

2. Long-run relationships between cobalt/nickel and cobalt/copper are found by autoregressive distributed lag;

3. The cobalt/nickel long-run relationship predicts an average steady state price of nickel around $18/kg;

4. This price is so high that it reduces to zero the probability of exploiting cobalt crust before polymetallic nodules;

5. Expected low internal rate of return (15 %) suggests least cost extraction strategy to launch ocean mining.

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Martino, S., Parson, L.M. Spillovers between cobalt, copper and nickel prices: implications for deep seabed mining. Miner Econ 25, 107–127 (2013). https://doi.org/10.1007/s13563-012-0027-8

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