If current technological trends continue, then the next several decades will be accompanied by a massive shift from the centralized systems that have dominated since the Industrial Revolution to distributed systems offering more resilience and security. The economy of the future will be delivered by renewable energy (distributed energy), synthetic biology (distributed materials), and the blockchain (distributed finance). But as with most technological transformations over the millennia, the shift to distributed systems in the 21st century will be dependent on a select group of valuable materials. Cobalt is shaping up to be one of them.
Investors have become keenly interested in cobalt stocks in recent years as a play on battery production and electric vehicles, applications for which the material is a key component. That's not a bad bet, either. A global scramble among battery manufacturers looking to secure long-term supply has resulted in cobalt prices more than tripling since 2016.
So, what are the top cobalt stocks to keep an eye on right now? Here's what investors need to know.
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Why cobalt is valuable
Tesla serves as a perfect case study for explaining the value of cobalt. When the Roadster debuted years ago, it smoked the performance of most other EVs produced to that point. The original Model S had impressive specs relative to the competition as well. It was all made possible by betting on the right lithium-ion battery technology for on-the-move applications (such as transportation), where energy density and weight are critical factors. Those batteries relied heavily on cobalt.
That's still true today. In fact, even Tesla's stationary energy storage devices contain cobalt. The company's EVs use NCA (nickel cobalt aluminum) chemistries, while its grid batteries use NMC (nickel manganese cobalt oxide) chemistries. Although the exact ratios of the three materials can vary, the cathode of these batteries usually contain roughly 15% cobalt. Considering the battery systems for EVs weigh hundreds of pounds, that's not an insignificant amount of material -- especially with cobalt prices hovering near $37 per pound, or $80,000 per metric ton.
To put that into perspective, copper prices are near $5,700 per metric ton, while aluminum is near $1,900 per metric ton. What gives? Cobalt's incredible market prices are due to several factors ranging from limited production (it's mined as a byproduct of copper and nickel) and geopolitical risks (58% of global production comes from the Democratic Republic of Congo), but the leading cobalt stocks are looking to change the equation in the near future.
Image source: Getty Images.
Top cobalt stocks
Historically speaking, Freeport-McMoRan (NYSE:FCX) was a leading global cobalt producer. It directly and indirectly owned mining and processing facilities in Europe and Africa. However, the company has looked to divest its interests in recent years as a way to finance efforts to clean up its balance sheet.
In late 2016 Freeport-McMoRan sold its 70% interest in cobalt miner TF Holdings Limited to China Molybdenum (NASDAQOTH:CMCLF) for $2.65 billion. The seller still could earn another $120 million in cash considerations if the price of copper exceeds $3.50 per pound and the price of cobalt averages $20 per pound in 2018 and 2019. As mentioned earlier, cobalt prices are almost double that right now, which goes to show just how unexpected the recent market price movements have been.
The miners were actually dancing around additional cobalt-related transactions, but China Molybdenum, which is acutely focused on becoming a leading global producer, didn't pull the trigger during the exclusivity period. The latest indications are that Freeport-McMoRan is still intent on getting out of the cobalt mining business, as it continues to account for its cobalt interests as discontinued operations and assets held for sale. While the incredible market prices may make investors question the value of sticking to the original plan, selling its remaining assets now actually could be a good idea.
That's because Glencore (NASDAQOTH:GLCNF) has big plans to dominate the market. In 2017, the miner produced 27,000 metric tons of cobalt, or roughly 25% of global production. A new processing center in the Democratic Republic of Congo will increase that to as much as 42,000 metric tons this year and to over 63,000 metric tons by 2019.
In other words, the cobalt market may be vastly undersupplied right now, but massive volumes of new production promises to change that soon. Glencore's investment should make it the undisputed king of cobalt for the foreseeable future. Of course, given the difficulty in mining the material, and the vast size of the global miner's operations, this is by no means a pure-play cobalt stock, even if it's among the best ways to gain exposure to the metal.
Image source: Getty Images.
Technical and geopolitical risks
Although the scarcity and technical performance of cobalt has driven up the price of the metal, that could also could be its undoing in the long run. Material scientists are actively testing new battery chemistries with abundant and dirt-cheap materials (read: not cobalt), exploring using nanomaterials to boost performance without the need for expensive materials, and designing new types of battery configurations altogether.
For instance, adding small amounts of silicon nanowires can greatly increase the performance of the most commonly used battery chemistries, perhaps allowing manufacturers to revert back to cheaper chemistries. It may be possible to make better-performing batteries with cheap and ridiculously abundant materials, such as iron. And after decades of painfully slow progress, researchers are finally nearing the commercialization of solid-state batteries, which are unusual energy storage devices for their lack of notable limitations. They don't always use cobalt.
Cobalt also comes with an incredible amount of geopolitical risk, which certainly played a role in Freeport-McMoRan's decision to remove itself from the market. Nearly 58% of global production is mined in the Democratic Republic of Congo, which will likely increase its share in the coming years. It's not the most stable region, nor is cobalt always mined in the most humane ways. Additionally, the United States is at the mercy of other countries when it comes to cobalt, mining just 4% of its consumption in 2017 -- and that's before the Gigafactory even ramps up. If the United States wants to dominate battery manufacturing -- or needs to keep factories humming along during a major conflict -- then it would be best to move on from cobalt.
Put another way, cobalt has embedded itself as an indispensable material for lithium-ion tech today, but that could change virtually overnight if the right dominos fall. Luckily for investors, the most likely outcome is for cobalt to find a role in at least niche energy storage applications for the foreseeable future. Just don't expect prices to hold at $80,000 per metric ton.
Investor takeaway
Major investments by Glencore promise to cement its lead as a leading global producer of cobalt for years to come. That shouldn't be taken lightly by investors, especially considering the timing of the production surge is occurring just as battery production soars. Meanwhile, keep an eye on Freeport-McMoRan to see who ends up buying its cobalt interests, now that China Molybdenum is no longer in the picture. The Chinese producer could still make additional moves in the industry, however, as it looks to ramp up its presence.
Cobalt is currently an invaluable material for energy storage applications. Although it's difficult to find reputable and stable pure-play cobalt stocks, it may not be a bad idea to gain some exposure to it in the years ahead.
