Hedge funds including Anchorage Capital Advisors and Squarepoint Capital LLP have been aggressively accumulating cobalt, capitalizing on plummeting spot prices and a burgeoning futures market. This strategic move comes as cobalt prices reach their lowest point in over seven years, largely due to an oversupply from the Democratic Republic of Congo and Indonesia.
Cobalt, though a niche market compared to commodities like copper or oil, has seen prices drop significantly, creating an attractive opportunity for hedge funds. These financial players are purchasing physical cobalt to leverage the wide gap between depressed spot prices and higher-priced futures contracts on CME Group’s Comex exchange.
Market Dynamics and Trading Strategies
The influx of cobalt supply has led to a substantial surplus, resulting in a notable disparity between current spot prices and future prices. Futures contracts for delivery in a year have traded as much as 20% higher than spot prices, providing a lucrative setup for “cash-and-carry” trades. In these trades, funds buy cobalt at low spot prices and sell futures contracts to lock in a profit, regardless of future price movements.
Squarepoint Capital has been buying cobalt metal from traders, while Anchorage Capital has acquired both cobalt metal and cobalt hydroxide, an intermediate product used in the production of cobalt sulfate for electric vehicle (EV) batteries. Anchorage has also been active in trading on CME, according to sources familiar with their operations.
The cash-and-carry strategy, while common in larger commodity markets like aluminum and copper, involves added complexity in the cobalt market. CME contracts are cash-settled, meaning traders cannot deliver physical cobalt to close out their positions. They must find buyers in an already saturated market, adding risk to their trades.
Supply and Demand Challenges
The current cobalt market is characterized by a ballooning surplus, driven by increased production and weaker-than-expected demand in the EV sector. The rise of lithium-iron phosphate batteries, which do not require cobalt, further threatens demand. Despite these challenges, some optimism remains, particularly from China’s strategic stockpiling agency. This agency has been purchasing surplus inventories in record volumes, highlighting cobalt’s strategic importance for both electric vehicles and defense.
The U.S. has also shown interest in bolstering its cobalt reserves, with inquiries about purchasing metal from traders and efforts to revive its stockpiling program. These moves underscore the metal’s critical role in future technologies and national security.
In a historical context, similar market conditions saw funds like Pala Investments profit from buying cheap cobalt during price slumps. Pala and others capitalized on low prices a decade ago, selling to Cobalt 27, a company that amassed the largest private stockpile of cobalt. The strategy paid off initially as prices soared, though the market later crashed due to new supplies from Congo.
Future Prospects and Strategic Moves
As hedge funds position themselves to profit from the current market conditions, the long-term outlook for cobalt remains uncertain. The EV market’s evolution and the adoption of alternative battery technologies will significantly impact demand. However, the strategic stockpiling by major nations suggests a continued recognition of cobalt’s value.
The hedge funds’ current activities reflect a calculated bet on cobalt’s future, leveraging market dynamics and strategic foresight. Their involvement adds a layer of financial complexity to an already volatile market, influencing both prices and market behavior.
Source: Mining.com
