Cobalt is a key material in the manufacturing of lithium-ion batteries and various other industrial products. The rapid growth of electric vehicles and large-scale battery storage applications is expected to drive increasing demand for cobalt – and with it, greater price risk for the industry.
Cobalt prices have shown persistent volatility in the past, driven by changing supply and demand factors impacted by the growing electric vehicle (EV) sector. This can present problems for both sellers and buyers of cobalt as projects and profits are affected by price changes.
Cobalt Metal (Fastmarkets) futures, from CME Group, offer an effective mechanism to hedge the price risk of cobalt. Derivatives, like the Cobalt futures, are financial instruments whose prices move in line with the prices of their underlying product. By hedging with futures, both buyers and sellers can protect themselves from adverse price movements which negatively affect their profit margins.
In early October, a cobalt refiner agrees to sell 20 tons of standard-grade cobalt metal to an original equipment manufacturer (OEM) for December delivery at the prevalent Fastmarkets December average price. The refiner is now faced with the risk of falling prices when it comes time to sell the standard-grade cobalt metal to the OEM.
To hedge its risk on this forward sale, the refiner can sell 20 December futures contracts at the price currently available in the market. Should the price in the physical market drop between October to December, the lower selling price to the OEM will be offset by a gain in the futures market. For the seller of a futures contract, like the refiner, the futures position shows a gain when the final price of the contract is below the initial selling price.
On the other hand, if the cobalt market rallies, any benefit from a higher physical selling price is offset by a loss in the futures position. Regardless of the market direction, hedging with Cobalt futures locks in a selling price for the refiner ‒ netting the physical sale and financial gains or losses on the futures. It is important to note that by hedging, a company is trying to mitigate risk, not make additional profit through speculation. Therefore, if properly hedged, adverse and favorable price fluctuations will net the same result.
Cobalt futures are available to trade through your bank, broker, or electronically nearly 24 hours a day.
The future is unknown. Cobalt futures allow those involved in the purchase or sale of cobalt to manage their price risk. To learn more about Cobalt futures, please visit cmegroup.com/cobalt.