Trading the Blue Metal: Growing Activity in Cobalt Futures

  • 9 Jul 2021
  • By Gregor Spilker
  • Topics: Metals

In late 2020, CME Group launched cash-settled Cobalt futures on its COMEX exchange. The Cobalt Metal (Fastmarkets) futures contract was CME Group’s first foray in the world of battery metals. Six months since officially launching, Cobalt futures trading has found widespread adoption across the supply chain. The launch of this new hedging tool came at an opportune time, as the industry expects to enter a prolonged phase of growth to support higher demand from electric vehicles (EV) manufacturers. With higher EV delivery volumes expected, participants need ‒ now more than ever ‒ a way to hedge their cobalt price risk.

Supply and demand

Despite widespread lockdowns due to the pandemic, cobalt mining production was relatively stable year-on-year, dropping 6% versus 2019, to 145,000 metric tons (MT)1. Cobalt mining production is concentrated in the Democratic Republic of Congo (DRC), which accounts for 2/3 of global mining output. Cobalt recycling is a growing market and accounted for approximately 10,000 MT production volumes in 2020.

On the demand side, global cobalt consumption fell back marginally (-0.6% versus 2019). While sectors such as aerospace and manufacturing were negatively impacted by COVID-19, the battery sector continued to grow. It now accounts for 57% of total cobalt demand. Since 2013, demand from the battery sector has been rising at an annual rate of 10%, while the overall cobalt market grew by “only” 5% per year.

With EV sales forecast to increase by 30% annually out to 2025, the battery sector will only become more relevant for overall cobalt demand. Glencore, the world’s biggest cobalt producer, recently announced2 that its mothballed Mutanda mine in the DRC will be put back into production by the end of 2021. In 2019, Mutanda produced 25,000 MT of cobalt, making it the world’s largest cobalt mine.

Volatility in cobalt spot prices

As for any commodity that is dug out of the ground, producers do not always have the spare capacity to instantly respond to changes in demand. A delayed response can contribute to volatility in the market clearing price for a commodity. When demand is low, producers do not invest enough to sustain or expand production. When the price rises, it takes months or years to react by which time anticipated higher demand may have failed to materialize.

This is what happened in cobalt markets in the 2010s. In anticipation of higher EV demand, the cobalt price more than doubled between 2017 and 2018. Just as producers ramped up production to respond to those higher market prices, EV demand growth failed to meet sky-high expectations, and the market was heavily oversupplied, eventually leading to prices falling to where they were pre-2017. Since the start of the year, cobalt prices have risen to above $20/lb. again.

Source: Fastmarkets

Futures trading on COMEX

The COMEX Cobalt contract is a cash-settled futures contract based on an industry reference price ‒  namely the Fastmarkets assessment for cobalt metal, standard grade, price basis in-warehouse Rotterdam. In the physical market, this assessment is widely used for floating price indexation in term contracts. Even though cobalt metal is not used in the manufacturing of batteries, cobalt hydroxide ‒ the material actually used in batteries ‒ is priced as a percentage of the cobalt metal price, meaning that the cobalt metal standard grade assessment has relevance across the entire supply chain.

Since launching in late December 2020, the contract has quickly amassed over 1,000 MT of open interest. As of July 1, 2021, open interest was 1,780 MT, the equivalent of about $100M notional value. Usually, futures markets develop with most activity concentrated on the short end of the forward curve, meaning contracts that have a nearby settlement date. In the case of cobalt, activity has mushroomed in both the short and long end of the curve, with traders using contract maturities as far out as December 2023. 43% of the total traded contracts had settlement dates in 2021, while 2022 contracts accounted for 42% of total volume. 2023 maturity contracts accounted for 15% of total trading activity.

Source: CME Group, data as of July 1, 2021

Conclusion

Following a boom-and-bust cycle that lasted from 2017 to 2019, the cobalt market is now entering a new phase. Investments in EVs and battery applications will be the primary demand driver for the blue metal. Participants along the cobalt supply chain need to consider how to manage price risk around the commodity. With the successful introduction of COMEX Cobalt futures, a new hedging solution is available to these firms. The contract has had a promising start with over 2,400 MT traded to date and over 1,600 MT open interest going out to December 2023. With trading activity on both the short and long end of the forward curve, commodity traders and hedgers have adopted a tool to help them manage their forward price exposure in cobalt.

References


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