The lesser known mineral component of batteries, cobalt, is gearing up to have its year in the sun, with hedge funds stockpiling the commodity in preparation for the “Tesla boost”, ethical dilemmas tainting existing supply and miners exploring the developed world.
Prices for the mineral are starting to see a conspicuous recovery; low-grade cobalt was at a high of $US16.50 ($21.84) a pound on the spot market on Thursday, up more than 80 per cent from lows in December 2015, according to Bloomberg data.
“If last year was lithium’s time, for 2017 its battery peer cobalt may be the one receiving more attention,” a Macquarie analysts wrote in a recent note to clients.
“Prices have accelerated to levels last seen in 2011, and with demand from the core portable electronics sector recovering and supply growth relatively stagnant, this can be fundamentally justified.”
The hard, grey mineral has piqued interest in recent years for its potential widespread use in smartphones and the lithium-ion batteries used in Tesla vehicles. As an efficient electrode, cobalt can help store power for longer.
Analysts expect the likes of General Motors and Volkswagon, in addition to smartphone makers Apple and Samsung, to soon crank up demand as they experiment with their own electric cars.
According to commodity researcher CRU Group, this is set to boost demand for the nickel byproduct on average by 16 per cent annually through to 2022.
The supply issue
Cobalt is particularly contentious, however, given it is largely mined in the strife-riddled region of the Democratic Republic of the Congo. According to an Amnesty International report released last year, a fifth of the DRC’s cobalt is derived from small-scale operations that rely on child labour.
China is the main refiner of cobalt, buying up the commodity from both ethical and conflict zones, refining it and then on-selling it to the likes of Apple, Samsung and Tesla.
“The problem is it all gets mixed together, so you don’t really have an option to buy clean cobalt,” said Matthew Langsford, portfolio manager of the natural resources fund at Terra Capital.
At this year’s African Mining Indaba, which finished up last week in Cape Town, cobalt sprung up at numerous booths, with companies turning their exploration sights towards the commodity which is usually found as a byproduct of nickel.
However, investors seem to be leaning towards more transparent sources of cobalt.
“It’s a chilling fact for a lot of people that the smartphone in the pocket probably contains cobalt produced through child labour,” Edward Lauer, head of portfolio optimisation at Eurasian Resources Group, told a panel during the conference.
“It’s a complex supply chain and a challenging issue; thankfully, a lot of groups are bringing various stakeholders together.”
Investors could once get exposure to cobalt through nickel and copper shares, but there are more companies popping up exploring in developed countries.
ASX-listed Clean TeQ, backed by Regal Funds Management, has a scandium deposit in central New South Wales, with high-grade nickel and cobalt features. Billionaire Canadian investor Robert Friedman has taken an almost 20 per cent slab of the company’s stock and is a vocal proponent of the cobalt story.
Another high-profile investor, Paul Matysek, recently joined the board of Equator Resources and is in the process of renaming the company Cobalt One. The microcap stock hopes to exploit Mr Matysek’s track record of finding difficult deposits and is in the process of raising capital.
“These kinds of companies are looking to add to the cobalt supply from developed countries which will take some of the pressure out of the DRC,” says Mr Langford. “While the deposits there are so rich it’s unlikely cobalt will stop coming out of there, these other plays give investors more options.”
But there are also other methods of gaining cobalt exposure. In readiness for this spike in demand, some fund managers have begun to stock pile the commodity in preparation for the price hike.
“By buying physical stock, you actually own the metal that’s going into the batteries,” Anthony Milewski, a managing director at Pala Investments, told Bloomberg recently. “It’s a much more attractive option, and we’re not the only fund out there doing this.”
But getting one’s hands on the commodity is not easy. About 100,000 metric tons is produced annually, though 65 per cent of refined supply comes in a non-metal form, like the chemicals used in jet engines, drilling tools, pigments and smartphones.
As such, only around 35,000 tonnes comes in metal form, worth around $US550 million ($713 million).
Traders haven’t had it much easier, struggling with the lack of liquidity in markets like the London Metals Exchange.
Before November last year, the average volume was just 24 contracts a day; by comparison, copper trades around 140,000 contracts a day. But increased market attention has seen these contracts jump to an average of 162 a day, with some sessions reaching 600.
By Jessica Sier