Glencore's cobalt stock overhang contains prices despite mine suspension

* Glencore's stocks of cobalt stand at 10,300 tonnes

* Citi expects cobalt surplus this year, deficit in 2020

By Pratima Desai

LONDON, Aug 8 (Reuters) - Cobalt prices have started to firm after Glencore announced plans to freeze output at the world's largest mine of the battery material, but traders say an overhang of stock held by the commodity trader and miner will inevitably cap gains.

Glencore said its Mutanda mine in the Democratic Republic of Congo will be put on "care and maintenance" from the end of this year for an expected two years as the economic rationale for keeping it going had deteriorated.

A byproduct of copper production, cobalt in the DRC is produced in the form of hydroxide, which is easily turned into chemicals used to make batteries for electric vehicles and mobile devices.

Cobalt prices on the London Metal Exchange are near their lowest since October 2016, having crashed to $27,800 a tonne or $12.60 a lb from levels near $100,000 a tonne or $45 a lb in May last year.

Prices have ticked up about $2,000 a tonne this week but traders are wary because Glencore is holding 10,300 tonnes of cobalt, according to its half-year report published this week.

Glencore sells most of its cobalt on long term contracts such as the one recently agreed with battery cathode producer Umicore. But it has this year sold some material into the spot market, cobalt traders said.

"Even after selling into the (spot) market in recent months, Glencore is holding large amounts of stock. They had to close Mumi (Mutanda), they are producing more than the market can absorb," a cobalt trader said.

"Cobalt prices aren't going to rise significantly until that stock has been sold down and demand picks up."

Sales of electric vehicles over the last year were not as strong as many had expected and demand from electronics firms also weakened as the trade dispute between the United States and China escalated and economic growth slowed.

The weak demand was compounded by China raising standards for electric cars that qualify for subsidies.

"Shutting Mutanda may have had more of an impact if demand wasn't so weak. Glencore were probably hoping the price would rebound strongly and they could keep selling into the spot market," a cobalt industry source said.

Two cobalt traders said they had sold cobalt at prices above $13 a lb this week, but many others said they were waiting to see a bigger bounce before offering into the spot market.

Glencore produced 21,300 tonnes of cobalt in the first half of the year, up 28% from the same period last year. Most of that came from the Mutanda and Katanga mines in the DRC. Its guidance for the full year is for around 43,000 tonnes.

Closing Mutanda "is set to result in an underlying cobalt deficit of around 5,000 to 10,000 tonnes over the next 5 years", Citi analysts said in a note. "Quite a large deficit relative to the 120,000 tonne market."

Citi forecasts a surplus of 9,300 tonnes this year, followed by a deficit of 7,200 tonnes in 2020 and expects the cobalt price to rise to $38,000 a tonne during 2020. (Reporting by Pratima Desai; additional reporting by Sethuraman N R; editing by Veronica Brown and Kirsten Donovan)