To investors, natural resources are known as a “commodity” market. It is a major investment sector, with both professionals and retail investors putting their money into assets such as 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 allocation and consider new sectors to invest in.
Cobalt is an industrial metal valued for its physical properties that has a wide variety of applications in electronics, metalworking, art, and more. Most notably, it is used to create the lithium-ion batteries in your phone, laptop, and electric car. As with any commodity, this creates an opportunity for investors. However, significant ethical issues 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 similar to nickel and iron. It is hard and (unlike iron) brittle and generally unresponsive to ordinary media such as air and water. It can be toxic if inhaled or otherwise ingested, and has a very powerful laboratory-created radioactive isotope. Cobalt is often found as a by-product of copper and nickel production and is mined throughout 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 are valued for their resistance to corrosion and heat. It is 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 significant. Although exact numbers are hard to pin down, the global cobalt market is expected to reach about $20 billion a year by the end of this decade. It’s obviously not 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 options. As with all commodities, you can invest in cobalt in a number of different ways, from individual securities to different types of funds. Some of the more common options include:
Contracts for goods
The first choice is the direct option. You can invest in cobalt as the metal itself. One way to do this is through futures contracts, which allow you to literally buy quantities of cobalt metal. You can also buy options contracts around cobalt futures, allowing you to invest in the future value of cobalt as a metal.
Cobalt as a commodity has become more valuable in recent years, particularly due to its use in batteries and turbines. These technologies are central to emerging green technologies such as electric cars and wind farms, increasing demand for this metal. However, investing directly in any commodity always carries significant risk. Futures contracts in particular can be unpredictable assets where retail investors often suffer losses.
As with all commodities, you can also invest in cobalt indirectly by investing in companies and industries that use it. This approach is much less variable. Although individual stocks are considered a speculative asset class, they are generally much more stable than direct investments in a futures or options contract.
Good ways to invest in cobalt stocks can include buying the producers of the metal. Mining companies such as Glencore (GLNCY) or Polymet Mining (PLM) mine and sell cobalt to companies that use it, so you can expect their shares to perform well 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 to invest against the price of cobalt, as these firms tend to do better when the commodity is cheaper.
Mutual funds and ETFs
Finally, perhaps the safest way to invest in cobalt is to look for exchange-traded funds (ETFs) and mutual funds that are either built specifically around cobalt as an asset or invest in the mining industry as a whole. Due to the nature of cobalt production, investing in copper and nickel related funds would also give you exposure to the cobalt market, as almost all cobalt production is a by-product of copper and nickel mining.
Funds can directly invest in mining, such as the Vanguard Materials ETF. They can also invest in technology companies that rely on cobalt, especially those focused on batteries and next-generation energy.
Why you should invest in Cobalt
The biggest advantage of investing in cobalt right now is the growth in demand. Purchase orders for the metal have skyrocketed in recent years as companies seek to create next-generation batteries and devices, including electric vehicles. As governments take climate change more seriously, the demand for these devices will only grow. In particular, since cobalt is a major element in lithium-ion batteries, this has significantly increased the price. Producers and their shareholders have made real money from this blue gold rush.
Why you might want to avoid investing in cobalt
There are also some significant problems, most of which are related to cobalt production.
While cobalt is mined all over the world, some of the biggest 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 beneath the mountains of Afghanistan, where the second largest copper deposit on Earth has been discovered.
The political instability of the DRC makes production and prices unusually volatile even for raw materials. Even 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 begins “mostly with the mining of cobalt by hand – often by the hands of children.”
Although it has long been used as an industrial metal, cobalt is also a relatively niche material. Few mining companies ever looked for natural deposits of the ore, instead generating more than enough to meet demand by filtering it from copper and nickel deposits. This process involves the use of toxic chemicals and practices that turn cobalt mining into an environmental disaster. Cobalt is often found near uranium, which can exacerbate environmental damage from mining.
Companies have begun trying to phase it out of their supply chains, looking to develop products that don’t rely on the environmentally and ethically questionable material, and its production is increasingly controversial. In fact, industry site Mining.com strongly recommended in 2019 that “a wise investor would do well to give this struggling industry a wide berth.”
How to Diversify an Investment Portfolio from Cobalt
Diversification would be wise in this industry. All commodities are volatile, but cobalt is particularly unpredictable. Although it is currently in demand, the combination of environmental and human rights issues surrounding this material have made it a target for corporate sales. So investors who would like to enter this space should consider hedging their bets with a mix of mining funds that will continue to perform across commodities as well as industrial stocks that will continue to perform even after change in product composition.
An industrial metal long known for its corrosion resistance and magnetic properties, cobalt is used in many next-generation battery and power generation industries. However, the environmental problems caused by its production, as well as human rights concerns at many of the largest production sites, make this a particularly volatile asset for investors.
Cobalt Investing Tips
If you are interested in cobalt, it means you are interested in the commodity market. It is important to have a solid foundation in commodity investing, understanding the benefits and potential risks of investing in commodities. Be sure to read our Commodity Investing Explainer before jumping into cobalt.
A financial advisor can help you determine if cobalt is a good investment for you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches for free to decide who’s the best fit 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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