Pala Investments Ltd. fund manager Anthony Milewski figures one of the best payoffs from a global boom in electric vehicles will be a hard, grey metal that so far has drawn little interest from investors. That's why he's stockpiling it.
During the past year, the Switzerland-based mining fund has been buying cobalt, an essential element in the lithium-ion batteries powering Tesla Motors Inc. cars as well as all sorts of mobile devices. Even after a 50-per-cent surge in prices last year, Mr. Milewski and other bulls expect more gains as companies such as General Motors Co. and Volkswagen AG make their own electronic vehicles.
But cobalt investing isn't all that simple. There's very little trading in futures contracts offered by the London Metal Exchange, which can mean increased volatility risk. A handful of penny-stock companies such as Fortune Minerals Ltd. are developing cobalt projects, though most won't start producing for years. And for mining giants including Glencore PLC and Vale SA, the metal remains just a small byproduct of bigger copper and nickel operations.
"By buying physical stock, you actually own the metal that's going into the batteries," Mr. Milewski, a Pala managing director, said by telephone from Zug, Switzerland. "It's a much more attractive option and we're not the only fund out there doing this." He declined to disclose how much he's accumulated.
The appeal of cobalt for manufacturers of next-generation batteries is that the metal makes for an efficient electrode and can help stored power last longer. While the market was mired in surplus for years after the financial crisis, supplies are tightening because the electric-vehicle boom is set to boost demand 16 per cent annually on average through 2022, according to commodity researcher CRU Group.
That's already affecting physical prices, which are the highest in more than five years. Low-grade cobalt was at a high of $16.50 (U.S.) a pound on the spot market on Friday, up more than 80 per cent from lows in December, 2015, according to London-based Metal Bulletin Ltd., a commodity market price tracker.
The industry supplies about 100,000 tonnes annually. But about 65 per cent of refined supply comes in a non-metal form, including chemicals and powders used in making parts for smartphones, jet engines, drilling tools and pigments. So, only about 35,000 tonnes produced each year is in the metal form preferred by investors. At current prices, that's worth about $550-million, which may be too small a market for some commodity-focused funds. By comparison, annual copper output is 22 million tonnes valued at $127-billion.
Still, the market is growing. Ivan Glasenberg, chief executive of Glencore, the world's largest producer, said the pickup in production of electric vehicles means increasing demand for both cobalt and nickel, another component in batteries.
Expanding output to keep pace with demand may not be easy. About 63 per cent of global supplies come from the Democratic Republic of Congo, which derives as much as a fifth of its production from small-scale operations that rely on child labour to extract minerals by hand, according to an Amnesty International report last year. The group called on battery-makers such as South Korea's Samsung Electronics Co. and end-users such as Apple Inc. to step up efforts to ensure minerals they use aren't mined illegally in dangerous conditions.
The Amnesty International report made investors such as RobecoSAM AG reluctant to own cobalt. The Swiss asset manager focuses on sustainable industries such as electric vehicles and green energy. "We monitor allegations of human-rights abuses closely," said Pieter Busscher, a Zurich-based portfolio manager for the Smart Materials fund at RobecoSAM. "What we don't want exposure to is a commodity that can be produced in conditions where workers aren't looked after and protected."
The increased public scrutiny could put pressure on global supplies outside the central African country. Chemical companies that supply battery makers rely on semi-refined cobalt being produced by Glencore and others in Congo.
There's also the risk that higher cobalt prices will encourage battery makers to come up with better designs that use less of the metal.
Mr. Milewski isn't worried. Any attempts to substitute other
materials will be dwarfed by the surge in overall demand for cobalt as the world's fleet of battery-powered cars increases.
"So far, sales of electric vehicles have been blowing forecasts out of the water," Mr. Milewski said. "I don't see why that won't continue."