A "medium-term surplus looks likely" for cobalt, according to Macquarie Commodities Research, which says that 10% increase in supply will outpace 9% growth in demand. This won't be enough of a glut to slow an expected annual average market price increase for world cobalt to $22.50/lb this year from just under $18 last year. But, as expanded output in Africa, Australia and Canada continues, the bank's forecasters see the annual price dropping to $20/lb next year and $15 in 2012.

While cobalt is used in a variety of applications, the automotive battery sector (24% of 2009 demand) "looks set to underpin future growth," says Macquarie, and "more traditional demand sectors such as superalloys (aircraft engines, power generation) will edge upwards at a slower rate." Cobalt also is used to make high-strength steels, dyes and paints, catalysts, other chemicals, magnets and hard-facing abrasives but their near-term annual growth rates are uncertain.

Traditionally, cobalt has been a secondary product, either from copper or nickel mines, which accounts for 40% of supply. So, says Macquarie, "cobalt prices are often of a secondary concern to miners (and) demand has stayed reasonably insensitive to price." That's why, over time, the cobalt price has been on an erratic yet long-run decline-from $29/lb in 1995 to $18 in 2009, with a two-year run-up an average $35 in 2007-2008.

The Macquarie analysis cautions, however, that while "prices look set to trend downwards in the 2011-2012 period, greater volatility looks likely" because the London Metal Exchange this month launched a cobalt futures contract-"and exchange-traded cobalt prices are likely to become more sensitive to market developments."

Macquarie's analysts say it's also important to note "the high involvement of trading firms in the cobalt industry, with many having off-take agreements for cobalt material." The bank's analysts say such agreements will continue to be crucial in the viability of planned future capacity expansion projects for the alloying metal.