Funds switch on to battery commodities

More than 90 per cent of Chinese cobalt imports are from the Democratic Republic of Congo © Bloomberg

by: Henry Sanderson

Investing in a silvery-blue metal mostly mined in the Democratic Republic of Congo may seem a strange way to get exposure to the growth of electric vehicles.

But a couple of funds are betting cobalt’s use in the majority of lithium-ion batteries will lead to dramatic growth in demand for the niche metal, which is mined alongside nickel and copper.

Earlier this year a Switzerland-based fund, Pala Investments, made headlines after stockpiling the metal in a move that was widely seen as a bold wager on higher prices. Now, it is teaming up with rivals that did the same thing in what it says is an attempt to offer the same opportunity to smaller investors.

The plan is to raise $200m through selling shares in a Toronto-listed company called Cobalt27, which will in turn buy stocks of cobalt, including some owned by Pala. The fund also plans to invest in junior miners targeting the metal. In total it is aiming to buy up to to 3,200 tonnes of cobalt, about 3 per cent of global mined supply.

Critics say Pala has become nervous about the size of its position and is looking to unload it on to the public after a 134 per cent run-up in cobalt prices over the past 12 months. The alternative, a traditional sale of its hoard, could roil the relatively small cobalt market, which is controlled by a handful of players.

Pala’s response to these claims is that it will have a “substantial equity holding” in the company and one of its employees will run the company.

“This creates an equity product for people to invest in,” Stephen Gill, a director of Cobalt27 who also works at Pala, told the Financial Times. “If you can’t hold the physical metal there’s few other sources of exposure as most equities don’t give you leverage to the price because it’s such a small component [of their business].”

Until now, the only way to gain exposure to cobalt was to buy miners such as Glencore, the biggest producer of cobalt, or Hong Kong-listed China Moly, owner of the giant Tenke mine in the DRC, which produces copper and cobalt. Refiners such as Shenzhen-listed Gem Co, which recycles and refines cobalt for batteries, or Huayou Cobalt were another way to bet on the metal.

But that approach also gives exposure to other metals in the case of Glencore and China Moly, or to China in the case of the largest Chinese battery suppliers.

Still, anticipating commodity price rises is a notoriously difficult game. So is anticipating transitions, which can be unexpectedly abrupt or take decades.

In 2007 hedge funds were attracted to uranium, as prices for the nuclear fuel rose on optimism about a buildout of nuclear power in China. Since then, prices for uranium have slumped by 70 per cent to $23 a pound, hit by a shutdown in Japan’s nuclear capacity following the Fukushima disaster in 2011.

Analysts agree that there will be increased cobalt demand, even as the amount of cobalt in each battery is already being reduced due to its high cost. Bloomberg New Energy Finance says rising demand for the batteries in electric cars as well as in battery storage for the power grid and for homes will see demand for cobalt rise from 1,918 tonnes last year to 90,579 tonnes by 2030. That would make the cobalt market worth $5bn at current prices.

But even analysts who see the quickest disruption coming from electric vehicles say supply for critical minerals will rise to meet the challenge. Miners are already touting the arrival of electric vehicles as an incentive to keep investing in copper and nickel mines, which produce cobalt as a byproduct. A host of junior mining companies also have projects in the works.

“Provided that the market anticipates the scale of disruption, market forces should deliver the required increases in supply of these materials,” said RethinkX, a think-tank, in a report published this week.

That means investors may need to ride the cobalt price wave and time their exit perfectly. If the China-led demand “supercycle” over the past decade is anything to go by that may be a tricky act to pull off.

The Commodities Note is an online commentary on the industry from the Financial Times