🔋 Your Guide To Investing In Cobalt, The Lesser-Known Metal That’s Essential In Battery Systems

Brief Background

When we say cobalt, you might think of the colour cobalt blue. You’re certainly not wrong. In fact, cobalt-based blue pigments have been used in ancient jewellery, glass and paints. However, there’s much more to cobalt than meets the eye. When talking about lithium-ion batteries, it would be wrong to leave cobalt out of the conversation. This is because although there are a number of battery systems that use little to no cobalt, generally speaking, lithium-cobalt battery systems are safer and more stable. So, this essentially means that cobalt is lithium’s partner, at least in terms of batteries. The problem is that the majority of cobalt mined is a byproduct of nickel or copper mining. This makes it difficult to scale to meet rising demand for the metal, and essentially relies on nickel and/or copper prices to incentivise further cobalt production.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding cobalt to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.

💰 Profit. As you can see from the price chart below, cobalt prices have undergone periods of volatility, providing opportunities for speculative returns. This volatility is partially due to the fact that supply mostly comes from the Democratic Republic of Congo (DRC), making it vulnerable to supply disruptions and price fluctuations. Similar to nickel, cobalt is used in major industrial and consumer products, and so it’s arguably linked to the strength of the global economy.

Generally, there are a number of trends that can act as support for cobalt prices. These include: growing adoption of electric vehicles (EV), increasing support for EV subsidies, growing adoption of energy storage systems (ESS) that use lithium-cobalt batteries, supply disruptions due to the high geopolitical risk in the DRC, as well as cobalt’s byproduct supply problem.

That being said, there are a number of risk factors that can put downward pressure on prices. These include: advances in the recycling rate for cobalt-containing products, advances in research and development that reduces or eliminates cobalt content in batteries, as well as cobalt’s status as the “blood diamond of batteries”.

Price chart of a cobalt futures contract over the years

For more information about lithium-cobalt (also known as lithium-ion) batteries, click on the image above. (Source: visualcapitalist.com)

The different types of cathodes used in battery systems. NCA & NMC are two of the most popular, with NMC being the electric vehicle material of choice due to its stability. (Source: visualcapitalist.com)

Comparison of different types of Lithium-ion batteries used in electric vehicles. As you can see, NMC is excels as an all-rounder. (Source: Yu Miao et al., 2019)

What Affects Cobalt Prices

There are several key factors that are involved in moving the price of cobalt:

• 🇨🇩 Congolese Production (& Human Rights Issues). The Democratic Republic of the Congo (DRC) is the world’s biggest cobalt producer, accounting for a staggering ~70% of the world’s mined production, according to the USGS. Any disruptions in supply in this country alone can have an impact on prices. The DRC is also highly vulnerable to geopolitical & economic risk as it ranks poorly in GDP per capita and the corruption index. There are also a number of concerns surrounding child labour, human rights, and safety issues, making it known as the “blood diamond of batteries”. This reason alone may drive away demand from manufacturers who are looking to source sustainably and ethically.
• 🧑⛏️ “Artisanal” Production. As you can see from the price chart above, there was a massive drop in prices after a rally spurred on by excitement surrounding electric vehicles. Part of the reason is due to an increase in supply from “artisanal” production — independent miners not employed by a mining company, using primitive tools to mine cobalt. The issue here is that this usually involves child labour, which can put pressure on manufacturers to look for alternatives.
• ⛏️ Nickel & Copper Production. Since cobalt is mined as a byproduct of nickel or copper, supply of cobalt (and therefore its price) is linked to changes in production in either nickel and/or copper. So, if there’s speculation that more nickel and/or copper will be produced, then this could lead to speculation that cobalt production will also increase, which could then put downward pressure on prices.
• 🇨🇳 Chinese Demand & Economic Strength. As with a number of other commodities, Chinese demand can certainly impact prices. In fact, as seen in the graphic below, China accounts for a staggering 75% of world cobalt ore imports. Government plans to purchase (like this approved stockpiling plan) or sell cobalt can certainly impact prices. Furthermore, similar to nickel, cobalt is also arguably linked to economic strength due to its applications in a variety of major industries. So, should China’s economic activity slow down, this could potentially lower demand for a number of commodities, including cobalt.
• 🏛️Government Policy. Things like subsidies, tariffs, and trade policies can definitely have an impact on cobalt prices. For example, the DRC announced an export ban on cobalt ore in 2010, which saw prices go up shortly after its announcement.
• 🔄 Substitution. As you might have guessed, cobalt is also vulnerable to substitution, depending on the application. In terms of lithium-ion batteries, there are some that use less cobalt, but these tend to have a slightly higher safety risk (think the Samsung Galaxy Note 7 that caught fire). For other applications, there are substitutes that are available, but these tend to be associated with a loss of performance.
• 📈 Stock Levels. Stock levels can certainly play a part in moving prices as it can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market.
• 🔬 Innovation. Research & development into cobalt-free battery systems, or indeed those using less cobalt, can certainly take away from cobalt’s market share, potentially putting downward pressure on prices.
• 🏷️ Production Costs. Input costs such as the cost of electricity, coal, and crude oil can have an impact on cobalt extraction. Furthermore, recycled scrap cobalt metal can also impact prices as it adds to supply in the market.
• 💵 US Dollar Strength. The benchmark for the pricing of cobalt is in US dollars. A weak dollar compared to other currencies (i.e. need more dollars to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more cobalt) & drive up demand, increasing prices, and vice versa. A weak dollar can also put off cobalt producers from increasing output, since miners will receive less of their home currencies for the weaker dollar.

World cobalt mine production & reserves, according to the USGS.

Global exporters and importers of cobalt ore, or mined cobalt. As with many other commodities, China is the largest importer for cobalt ore.

Global exporters and importers of refined cobalt, the processed and purified product of cobalt ore.

What Is It Used For?

Since cobalt shares similar physical and chemical properties to nickel, cobalt is also used in a variety of important industrial and consumer products. Here are some of its core uses:

• 🔋 Rechargeable Batteries. As seen in the chart below, most of the cobalt produced is used in various rechargeable battery systems, like portable devices (phones, laptops, tablets), E-mobility (electric vehicles, trains, bikes), and stationary utilities (renewable energy power stations, home storage).
• 💻 Electronics. In addition to battery systems, cobalt is used in electronic components, like integrated circuits, semi-conductors, and magnetic recording.
• 🖋️ Inks & Pigments. Cobalt is also used as a colourant, the most famous of which is deep cobalt blue. That being said, it can also produce other colours too, depending on what’s in the pigment. These are mainly used in glass, porcelain, ceramics, paints, inks, and enamelware.
• 🛠️ Alloys. Similar to nickel, cobalt can also be used as an alloy to combine with other metals. Applications of this includes bio-compatible prosthetics, automobiles, cutting tools, aerospace (like jet engines), and industrial equipment.
• 🧪 Chemical Catalysts. Cobalt is also used as a catalyst to help with chemical reactions in industry to produce other products, like refined petroleum products and polyester precursors.
• 🏥 Healthcare. As mentioned, cobalt can be used as an alloy to make prosthesis implants. There are other applications in the healthcare field too, like tumour detection, radiotherapy, sterilisation, and measuring vitamin B12 absorption.

Cobalt consumption by application, according to the Cobalt Institute.

The Case Against Cobalt

There are a couple of risks involved if you want to get involved with cobalt. Firstly, as seen in cobalt’s price chart above, prices seem to have recovered from multi-year lows in previous years. Continued increase in prices could incentivise an increase in both artisanal and industrial supply, which could put downward pressure on prices. Secondly, further advances in the research and development of recycling cobalt-containing products (such as batteries, alloys, catalysts, etc.) can certainly lower demand for newer cobalt supplies Thirdly, further advances in research and development that reduces or eliminates cobalt content in batteries can certainly lower demand for cobalt as it represents another substitution. Last but not least, cobalt is known as the “blood diamond of batteries” due to the various human rights issues surrounding cobalt mining in the DRC. As companies and manufacturers focus their efforts on sustainability, they may be pressured to choose alternatives over cobalt.

The Case For Cobalt

Firstly, like other commodities, not only can cobalt serve as a portfolio diversification tool & a hedge against inflation, but it can also provide opportunities for speculation and profit, as seen from the volatile price chart above. Overall, there are a number of trends, both long term and short term, that can certainly act as support for cobalt prices.

Firstly, as expected, growing adoption of electric vehicles (EVs) will further drive cobalt demand. EVs are expected to take a larger percentage of cobalt’s market share.

Secondly, generally speaking, there is increasing support for EV subsidies across the world. As countries shift their focus to sustainability and tackling climate change, governments may introduce policies in support of this, examples of which include EV subsidies to support further adoption, and an outright ban on new petrol and diesel cars, as the UK has proposed.

Thirdly, growing adoption of energy storage systems (ESS) can also drive demand for cobalt. Energy storage systems are, as the name suggests, stores excess energy, and then supplies it when needed. With these systems in place, our energy capacity is spread more efficiently to ensure a consistent supply. It is expected that this sector will grow over the coming years. Using lithium-cobalt batteries in these systems certainly represents a growth opportunity in the long-term.

Last but not least, cobalt’s supply factors themselves can certainly act as support for cobalt prices in the long-term. As mentioned above, the DRC has a high level of geopolitical risk that can disrupt cobalt supplies and/or production in the future, either due to economic or political interference. Since most of the world’s cobalt supply is from the DRC, this is certainly something to take note. In addition, one must also take into consideration cobalt’s production process. As a byproduct of nickel and copper mining, this makes it difficult to scale to meet rising demand for the metal since actual cobalt concentrations can be quite low, and essentially relies on nickel and/or copper prices to incentivise further cobalt production.

Popular Ways To Invest In Cobalt — Pros/Cons of Each

Unlike nickel, unfortunately, you can’t really invest in physical cobalt. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

• Cobalt ETFs. Unfortunately, there are no ETFs that has a direct focus on cobalt. However, there are ETFs that either bundle mining stocks with exposure to cobalt prices to establish an investment theme (like battery metals, for example), or invests in a range of futures contracts, including cobalt. Nevertheless, they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your cobalt. Depending on which broker you go with, you may be charged with trading commissions. ETFs/ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF or ETN you choose, be aware of the fine print — the risks and costs.
• Cobalt Stocks. These are shares of companies that have exposure to cobalt prices. There are no fees, apart from trading commissions depending on your broker. They don’t necessarily follow the price of cobalt since company profits and stock market movements need to be taken into account. Additionally, since cobalt is a byproduct of copper and nickel mining, many of these companies also have exposure to other metals, not just cobalt. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
• Cobalt Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell cobalt at a specified time in the future with an agreed-upon price. The London Metals Exchange (LME), & more recently, the Chicago Mercantile Exchange (CME), both offer these contracts, with each representing one tonne of cobalt. The LME futures contracts are settled physically after they’ve expired, whereas the CME contracts are settled financially. Because you are using a significant amount of borrowed money, even small price changes in cobalt can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. Similar to other commodities, cobalt can not only be used as a portfolio diversification tool, but it can also provide decent speculative returns. Overall, there are quite a number of factors that can support cobalt prices in the long term.

These include growing adoption of electric vehicles and support for EV subsidies, growing adoption of energy storage systems (ESS), cobalt’s inherent byproduct supply problem, and potential supply disruptions due to the high geopolitical risk in the DRC. However, there are a number of factors that can put downward pressure on prices. These include research and development into increasing the recyclability of cobalt-containing products, research and development that reduces or eliminates cobalt content in batteries, as well as cobalt’s controversial status as the “blood diamond of batteries”.

🧺 If you are considering adding cobalt to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your cobalt position so you can take advantage of any volatility in the market.

💰 If you are considering adding cobalt for speculation and profit, you may want to monitor the factors that affect cobalt prices mentioned above. You may also want to keep track of the annual cobalt publications provided by the USGS to identify supply and demand levels. Similarly, monthly stock level reports provided by the LME can also provide a snapshot to supply and demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on cobalt’s price chart to help consolidate trends and patterns to help with your decision. That being said, its price can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

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