Hedge Funds Hoard Cobalt Amid Battery Metal Slump
Hedge funds have been strategically accumulating cobalt, taking advantage of tumbling spot prices and a more liquid futures market. This strategic move comes as cobalt, a critical component for batteries, sees its prices plummet to the lowest levels in over seven years. The market is currently flooded with production from the Democratic Republic of Congo and Indonesia, creating a perfect storm for savvy investors looking to capitalize on the situation.
Cobalt is a relatively niche market compared to major commodities like copper or oil. However, the current oversupply and depressed prices are attracting financial players back into the physical metal market. This trend echoes the past when funds like Pala Investments purchased cobalt at low prices, banking on the emerging energy transition. Back then, without a liquid futures market, buying physical cobalt was the primary method to invest in its potential price increase. Today's landscape has changed with the introduction of cobalt futures trading on CME Group’s Comex exchange, offering a new avenue for hedging and trading.
The growing surplus of cobalt has created a significant disparity between spot and futures prices. Contracts for future delivery on the Comex have been trading up to 20% higher than current spot prices, enabling profitable "cash-and-carry" trades. This strategy allows traders to buy cobalt at low spot prices and sell futures contracts at higher prices, potentially locking in returns. Anchorage has been buying both cobalt metal and cobalt hydroxide, while Squarepoint has focused on purchasing cobalt metal from traders, indicating a diversified approach to exploiting market conditions.
Despite the opportunities, the cobalt market remains fraught with risks and complexities. The CME contracts are cash-settled, meaning funds cannot deliver their cobalt to the exchange upon closing the trade. Instead, they must find buyers in an already saturated and illiquid physical market. Moreover, the rising popularity of lithium-iron phosphate batteries, which do not require cobalt, threatens future demand. Nonetheless, strategic stockpiling by China and interest from the US in bolstering their reserves highlight cobalt's enduring strategic importance, potentially providing some support to the market amid the current oversupply.
