As one of the key metals for manufacturing batteries, it is estimated that “smart money” quietly returned to the market and became cautiously optimistic at a time when battery prices were sluggish.

Recently, the media learned that two hedge funds Anchorage Capital Advisors and Squarepoint Capital LLP are quietly buying physical cobalt. Among them, Squarepoint has been buying cobalt metal from traders, while Anchorage has been buying cobalt metal and cobalt hydroxide. The latter is an intermediate product for the production of cobalt sulfate, which is used in electric vehicle batteries. Anchorage has always been active in trading on the CME (CME) market.

The two hedge funds bought physical cobalt at a time when cobalt prices were at a low point. Due to a surge in production in the Congo and Indonesia, the main suppliers of cobalt ore, spot cobalt prices have fallen to their lowest level in more than seven years. Most of this year, the price was between 12.5 and 15 US dollars per pound, down at least 60% from the peak price of cobalt of about 40 US dollars/pound during the 2022 electric vehicle boom.

Some commentators believe that since cobalt plays a key role in switching to clean energy and reducing net emissions to zero, the cobalt market may soon return to the balance between supply and demand, even when oversupply and declining demand for electric vehicles are estimated.

The media pointed out that the hedge fund's move is the latest sign that financial institutions are participating in physical metals trading. Since the beginning of this year, large amounts of capital have re-flowed back into commodities, and some metal markets, which were previously oversupplied, have created opportunities to buy these funds at low spot prices to profit. Compared to commodities such as copper or oil, cobalt is a relatively small unpopular market. Ten years ago, funds such as Pala Investments took advantage of weak cobalt prices to make large purchases and bet on the emerging energy transition, making huge profits.

Unlike back then, the futures market had poor liquidity, and bullish cobalt could almost only be used to buy physical cobalt. Now cobalt futures are also emerging in the ComEx market under CEM, creating a way for traders to hedge against physical positions in the futures market. The price of cobalt futures delivered after one year is already 20% higher than the spot price. Huge spot discounts create opportunities for arbitrage. If the spot price soars, owners of physical cobalt can sell cobalt to obtain rich profits, and even if the spot price does not change, they can lock in returns by selling futures. However, this kind of arbitrage is also risky, because funds holding cobalt must find buyers in the physical market where liquidity is relatively low when they close their positions, and there is currently a serious oversupply in the cobalt market.

According to the media, the surge in supply in the electric vehicle industry and weak sales compared to expectations have led to a record oversupply in the cobalt market this year. Many people in the industry are pessimistic about the prospects for a rebound in cobalt prices. The growing popularity of lithium iron phosphate batteries without cobalt materials also poses a threat to demand for cobalt. But China's strategic reserves have been absorbing excess stocks of cobalt metal in record quantities this year. “This trend highlights the metal's strategic value in electric vehicles and defense.”

Looking at the ProShares S&P Global Core Battery Metals ETF (ION), an ETF that tracks companies that mine lithium, nickel, or cobalt to generate positive revenue and production values, it can be seen that the fund has been fluctuating sideways since peaking in 2022.

CarbonCredits, a platform that serves investment and corporate activities related to clean energy and emission reduction, published an article in April this year stating that although the bottom of cobalt prices is uncertain, some analysts expect prices to gradually improve in the next few quarters.

A recent report from the International Energy Agency (IEA) predicts that because cobalt plays a key role in achieving the global net zero emissions target in the next few decades, the value of cobalt will increase sevenfold by 2030 and tenfold by 2050, and the market will reach more than 400 billion dollars.