Why Are People Investing in Cobalt? Should I?
To investors, natural resources are known as the “commodities” market. This is a major sector of investing, with both professionals and retail investors alike putting their money into assets like coffee, steel and corn every day. Although, given the extreme volatility of this market and the potential for losses that exceed your initial investment, retail investors should generally avoid direct investment in commodities.
Consider working with a financial advisor as you evaluate your asset allocations and consider new sectors to invest in.
Cobalt is an industrial metal, prized for its physical properties, which has a wide variety of applications in electronics, metalworking, art and more. Most notably, it’s used to create the lithium-ion batteries in your phone, laptop and electric vehicle. As with any commodity, this creates an opportunity for investors. However, significant ethical questions surround the production of cobalt, including the use of child labor to mine it.
Understanding the Cobalt Market and Industry
First, what exactly is cobalt?
Cobalt is a relatively common metallic element with physical properties broadly similar to nickel and iron. It is hard and (unlike iron) brittle, and generally nonreactive to common environments like air and water. It can be toxic when inhaled or otherwise ingested and has a very potent lab-created radioactive isotope. Cobalt is often found as a byproduct of copper and nickel production, and is mined in much of the world.
Cobalt is a widely used industrial metal that has applications in a wide range of modern technologies. Applications include engines and turbines, which it is prized for its corrosion and heat resistance. It’s also used in batteries and electronics, steel and alloy smelting, chemical engineering, medical devices and even art. Cobalt blue, made from powdered cobalt metal, has also long been a prized color for paints and glazes.
What You Need to Know About Investing in Cobalt
As with all industrial materials, the cobalt market is sizable. Although exact numbers are hard to pin down, the global market for cobalt is expected to reach around $20 billion annually by the end of this decade. This obviously isn’t the footprint of a commodity like steel or coffee, but it’s still a very large market. As an investor, this gives you a number of opportunities. As with all commodities, you can invest in cobalt in a number of different ways, from individual securities to various sorts of funds. Some of the most common options include:
The first choice is the direct option. You can invest in cobalt as a metal itself. One way to do this is through futures contracts, which allow you to literally purchase quantities of cobalt metal. You can also buy options contracts around cobalt futures, letting you invest in the future value of cobalt as a metal.
Cobalt as a commodity has grown more valuable in recent years particularly due to its uses in batteries and turbines. These technologies are central to emerging green technology such as electric cars and wind farms, increasing the demand for this metal. However, directly investing in any commodity always brings significant risk. Futures contracts in particular can be unpredictable assets, in which retail investors often take losses.
As with all commodities, you can also invest indirectly in cobalt by investing in companies and industries that use it. This approach is far less volatile. While individual equities are considered a speculative asset class, they’re typically far more stable than direct investment in a futures or options contract.
Good ways to invest in cobalt stocks can involve buying into the producers of the metal. Mining companies like Glencore (GLNCY) or Polymet Mining (PLM) mine and sell cobalt to the businesses that use it, so you can expect good performance from their stock if the price of this asset goes up. You can also invest in companies that use cobalt heavily in their products, such as electric car battery manufacturers. This is a way of investing against the price of cobalt, as those firms will typically do better when the commodity is cheaper.
Mutual Funds and ETFs
Finally, arguably the safest way to invest in cobalt is to seek out exchange-traded funds (ETFs) and mutual funds that are either built explicitly around cobalt as an asset or that invest in the mining industry in general. Due to the nature of cobalt production, investing in copper and nickel-related funds would also give you exposure to the cobalt market, since almost all cobalt production is a byproduct of copper and nickel mining.
Funds may directly invest in mining, such as the Vanguard Materials ETF. They may also invest in technology companies that rely on cobalt, particularly those oriented around batteries and next-generation energy.
Why You Should Invest in Cobalt
The biggest advantage to investing in cobalt right now is its surge in demand. In recent years, purchase orders for this metal have skyrocketed as companies push to build next-generation batteries and devices, including electric vehicles. With governments taking climate change increasingly seriously, demand for these devices will only grow. In particular, since cobalt is an essential element in lithium-ion batteries, this has pushed the price significantly up. Producers and their shareholders have made some real money off of this blue gold rush.
Why You May Want to Avoid Investing in Cobalt
There are also some significant problems, most of which have to do with the production of cobalt.
While cobalt is mined around the world, some of the largest producers are in politically unstable areas. The Democratic Republic of Congo alone produced 74% of all cobalt in 2021, according to the Cobalt Institute. Another massive, untapped reserve exists under the mountains of Afghanistan, where the second-largest deposit of copper on Earth has been found.
The political instability of the DRC makes production and prices unusually volatile even for a raw commodity. Worse, the practices of companies operating in this country have been questioned on an ethical level. Industrial Safety & Hygiene News wrote that the cobalt supply chain starts “mostly by digging for cobalt by hand – often children’s hands.”
While long used as an industrial metal, cobalt has also been a relatively niche material. Few mining companies have ever looked for natural deposits of the ore, instead generating more than enough to meet demand by filtering it out of copper and nickel deposits. This process involves using toxic chemicals and practices that make cobalt mining an environmental disaster. Cobalt is often found in proximity to uranium which can exacerbate the environmental harm of extraction.
Companies have started trying to phase it out of their supply chains, looking to develop products that don’t rely on an environmentally and ethically dubious material, and its production has become increasingly controversial. In fact, the industry site Mining.com gave the blunt recommendation in 2019 that “a wise investor would do well to give this fraught industry a wide berth.”
How to Diversify a Cobalt Investment Portfolio
Diversification would be wise in this industry. All commodities are volatile, but cobalt is especially unpredictable. While it is currently in demand, the combination of environmental and human rights issues surrounding this material has made it a target for corporate divestment. So investors who would like to get into this area should consider hedging their bets with a combination of mining funds that will continue to perform across commodities, as well as industry stocks that will continue to perform even after changing product composition.
An industrial metal long known for its corrosion resistance and magnetic properties, cobalt is used in many next-generation batteries and energy production industries. However, the environmental issues caused by its production, as well as the human rights concerns in many of the largest production sites, make this a particularly volatile asset for investors.
Tips for Investing in Cobalt
If you’re interested in cobalt, that means you’re interested in the commodities market. It’s important to have a solid foundation in commodities investing, understanding the upside and potential risks of investing in raw materials. Be sure to read our explainer piece on investing in commodities before jumping into cobalt.
A financial advisor can help determine whether cobalt is a good investment for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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