The economic war for cobalt has reached the hedge funds
A half dozen hedge funds bought about 6,000 tons of nickel and copper cobalt ($ 280 million) in anticipation of the increased demand due to the boom in the electric car industry.
The total purchase is the equivalent of 17% in last year’s cobalt production. And it is that the increase of the use of the batteries for the electric vehicle has been a truly fertile context for the speculators to take advantage of the price inflation.
The bet is simple…These alternative management funds predict that the demand for electric vehicles will exceed market expectations, which will eventually lead to the price of the commodity to rise because the manufacturers of batteries such as Panasonic, which produce Tesla battery cells, need to be insured in cobalt supplies.
Global demand for cobalt last year was about 100,000 tons, of which about half were used for electric car batteries. Mobile phones, laptops, digital cameras, and wireless drills also leverage the precious metal.
After seven years of overcapacity in the cobalt market, a deficit will be reached during this year, aggravated by an unsafe supply chain. More than 50% of the world’s cobalt is in the Democratic Republic of the Congo, implying a high political risk.
Many investment funds have been hogging cobalt, most of them purchased this basic material when the price was around $ 10 per pound in December 2015.
Expectations about cobalt are positive. As a result, Glencore strengthens its control over Congo’s copper and cobalt resources through the purchase of several mine shares worth $960 million, with the potential to become the world’s largest cobalt producer.
For this year, those who have hogged cobalt and therefore, maintain positive expectations about their price could hit. According to commodity consultant CRU, global demand for cobalt is expected to exceed supply in 2017 by 900 tons, which would lead to a price increase.
More immediate consequences
The price of cobalt has risen nearly 50% since September last year and 132% from the beginning of 2016 to the current $ 24 per pound. The catalyst for this rise has been the increase in tighter emission controls that drive the demand for electric vehicles, especially in China, which is struggling against high levels of pollution in some of its cities.
China is critical for both the short, medium and long term outlook. The country’s market is currently dominated by batteries that do not use cobalt, but manufacturers are switching to lithium-ion batteries that are based on cobalt because they offer greater power capacity.
If we add to it the cobalt accumulation, in principle the availability of cobalt would be reduced, and prices should move upwards.
As a result, an increase in cobalt represents bad news for automakers, especially for Tesla or other manufacturers like General Motors and Ford, because these three giants are in the process of developing new models of electric vehicles. Recall that the battery is about 50% of the price of electric vehicles.
The Tesla case is interesting, as it has set the goal of reaching production of 500,000 by 2018 and consumers will demand greater autonomy and greater capacity for batteries, in other words, more cobalt. With all vehicle models to be launched, Tesla alone would consume about 8,000 tons of cobalt in 2018.
Companies that supply the batteries, including Johnson Controls or Japan’s Panasonic, are also likely to be affected by the increase in the price of cobalt and consequently have fewer benefits.
The risk of betting on cobalt
The total world reserves today is 7.1 million metric tons, so we would have cobalt for only about nine years with the projections of demand that are expected with the rise of the electric vehicle. But, the reserve figures change over time so these figures will most likely not remain static.
This bet is not without risk. These investment funds could have difficulties to sell the acquisitions if they maintain a long term perspective by the risk of a liberation on the exploitation of the cobalt that would lead to a greater world supply that could finally lower its price.
We have already seen it with oil and fracking, the high prices of ‘black gold’ granted incentives for new extraction technologies, which finally impacted on higher production, finally sinking crude prices.
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As has been mentioned, mining company Glencore is doing with different mines in the Democratic Republic of Congo to increase cobalt production. The potential of this operation is an increase of up to 22,000 tons of cobalt in a market with an annual production of about 100,000 tons.
There is also the risk of substitution, technologies are currently being developed for batteries that are not dependent on cobalt. Likewise, unlike petroleum, cobalt is recyclable which allows for an extension to the useful life of the raw material. Invest carefully.