Recently, the cobalt market has seen a new trend - some hedge funds are establishing cobalt positions by purchasing physical materials, in order to take advantage of trading opportunities brought about by sharp drops in spot prices and enhanced liquidity in the futures market. The strategies of funds such as Anchorage Capital Advisors and Squarepoint Capital LLP signify that financial participants are once again entering the physical metal trading market, seeking to buy at low prices in an oversupplied market with the hope of generating profits.

Compared with other commodities such as copper or oil, the cobalt market is relatively small and specialized, with the main supply sources being the Democratic Republic of Congo and Indonesia. Due to oversupply, cobalt prices have fallen to their lowest level in over seven years. Ten years ago, funds such as Pala Investments took advantage of the weakened cobalt price to purchase large quantities of metal, bullish on the prospects of energy transformation. Ultimately, this strategy proved to be successful.

Pala and other funds sold their cobalt to Cobalt 27, a listed company that established the largest private cobalt inventory. With the rise in cobalt prices, the value of Cobalt 27 had soared, but then its value crashed due to the influx of new supply from Congo.

At that time, purchasing physical cobalt was one of the main methods for betting on price increases due to a lack of liquidity in the futures market. However, the situation has now changed - cobalt futures trading has been launched on the Comex, providing traders with a way to hedge physical positions in a more liquid futures market.

Currently, spot prices on the Comex are low, while futures prices are rising - the prices of futures contracts that will be delivered in one year are 20% higher than spot prices. This huge gap between spot and futures prices has created opportunities for the 'buy spot, sell futures' trading strategy, allowing physical metal owners to generate high profits when prices soar.

According to insiders, Squarepoint and Anchorage are actively buying cobalt metal and cobalt hydroxide, which is an intermediate product for producing cobalt sulfate - a key raw material for making electric vehicle batteries. Some insiders also revealed that these funds are actively participating in trading on the Chicago Mercantile Exchange.

However, traders in the cobalt market face additional risks and complexities compared to other commodities such as aluminum and copper, because contracts on the Comex are cash settled. This means that funds cannot deliver cobalt to the exchange when closing their positions, and must find buyers in the smaller and less liquid physical market.

The market is now filled with surplus metal, making it challenging to find buyers. An oversupply in the current market has led to record surpluses, due to a surge in supply in the electric vehicle industry and lower-than-expected sales. The popularity of iron phosphate lithium batteries also poses a threat to cobalt demand, as these batteries do not require cobalt.

Despite this, China's strategic reserve institutions have been consuming record amounts of excess inventory, highlighting the strategic value of cobalt in electric vehicles and national defense. The United States is also looking to revive its reserve plans, and has made inquiries about purchasing metal from traders.

These latest developments in the cobalt market reflect investors' and governments' continued confidence in the future value of this critical battery metal. Although the market may face challenges in the short term, in the long run, as the electric vehicle industry continues to develop, the demand and value of cobalt are expected to be boosted.