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Investors are hedging cobalt bets

Metal Tech News - July 10, 2024

A few investors have been buying up cobalt amid battery metal slump.

While sustainable domestic mines like Jervois Idaho Cobalt Operations in the U.S. fight to stick to opening targets and investors struggle with problematic environmental and social costs of battery metals from overseas, a glut of overproduced cobalt has driven prices down, and savvy investors are buying up physical material for when demand surges or geopolitical issues come to a head.

Anchorage Capital Advisors and Squarepoint Capital are hedge funds that Bloomberg reports have been buying up cobalt at bargain-basement prices.

Oversupplied metal markets often create opportunities to make a profit by buying up the commodity cheaply with the anticipation of scarcity or increased demand in the future. The low price and improved liquidity (ease of buying and selling) in the cobalt futures market have inspired new trading opportunities in the battery metal.

Cobalt prices have been languishing at seven-year lows, fluctuating between $12 and $15 per pound for the better part of this year, a decrease from the average price of $17 per pound in the U.S. during 2023, which was itself a steep drop from $31 per pound in 2022. The production surplus causing the crash is expected to hold through 2024.

Keeping an eye on China

China has been at the head of the curve for nearly the entire energy transition, buying up mines, building production facilities and investing heavily in research and development across the spectrum of battery technologies.

And China is still snapping up cobalt in record volumes this year, with the U.S. also seeking to reinvigorate its own stockpiling program – a trend that belies the metal's strategic value in defense as well as EVs, which have seen a downturn in sales.

While several countries are attempting to divorce themselves from a Chinese-dominated battery metals market, there is a risk that further geopolitical drama and export restrictions might send the U.S. scrambling for critical mineral supplies in the future.

Another aspect of this investment potential is the Western world's aversion to artisanal cobalt, which is considered tainted by human rights violations.

While the U.S. struggles to launch its own domestic production, and funds go into cobalt hotbeds like the Democratic Republic of the Congo (DRC) to help regulate the artisanal aspect of the industry, it's been unprofitable and slow going. Regulatory bans on artisanal cobalt would definitely increase the value of material with the preferred provenance.

Buy low, sell high

Cobalt holding is far from new – betting on the emerging energy transition, investors took advantage of low cobalt prices almost a decade ago as well, which paid off handsomely. At the time, the absence of a liquid futures market for cobalt meant that taking advantage of rising prices required buying and selling the physical metal.

A small, specialized market compared to a monster commodity like copper, cobalt has flooded the market due to overproduction from the Democratic Republic of Congo and a new player on the scene, Indonesia, which quickly became the second largest producer in the world.

Hedge funds are joining automakers and original equipment manufacturers (OEMs) as the latest sign of financial players getting more directly involved in physical metal trades and commodities in hopes of stabilizing supply in the event of shortages a decade from now.

Today, cobalt has taken off on the Comex exchange, allowing traders to hedge their physical positions in the newly liquid futures market. The surplus has led to a widening gap between low spot prices and profitable futures on the Comex, with contracts for delivery in a year's time having traded as much as 20% higher than spot prices.

Risky business

The difference between spot and futures prices has appeal for owners of physical metal who can either sell their cobalt at a big profit when prices surge, or lock in a return by selling futures. This is called "cash-and-carry".

According to Bloomberg's unnamed sources, Squarepoint has been buying cobalt metal, while Anchorage has been buying the metal and EV battery intermediate cobalt hydroxide and has also been active in trading on CME.

The cash-and-carry trades for cobalt are riskier than in larger commodities like copper because the CME contracts are cash settled – meaning the funds can't deliver their cobalt directly to the exchange when they are ready to close out the trade, first needing a buyer for the metal in a small and illiquid physical market – not easy while the market is still flooded.

Weaker sales in the EV sector have also contributed to the surplus, and the rise in popularity of lithium-iron phosphate batteries, which don't require cobalt, also pose a threat to demand. But such are the risks and rewards in the game.

 

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