By Nathan Slaughter
This is what opportunity in the commodities market looks like...
Right now, you can buy one of the most important metals of the 21st century at a fire sale price, simply because no one is paying attention. For commodities investors, that's good news. In all my years of investing, I've found that the biggest gains go to investors who move before the rest of the herd, when a commodity is still overlooked and underappreciated.
And it looks as if that's exactly what's happening with cobalt right now.
Cobalt is a hard, silvery metal with a multitude of industrial uses, from pharmaceuticals to communications satellites. But the most important application is rechargeable batteries, particularly cobalt-based lithium-ion chemistries found in cell phones, tablet computers, and other devices.
For years, nickel dominated the battery market. But manufacturers are gravitating toward cobalt designs for several reasons -- chiefly, they can recharge in minutes rather than hours. Rechargeable batteries currently account for about a quarter of global cobalt consumption. But this percentage is expected to reach 50% within the next five or six years as countless computers, phones, and hybrid vehicles roll off assembly lines.
Yet, investors don't want anything to do with cobalt. Hardly anyone is talking about it. The neglected metal is trading at just 25% of its high four years ago -- meaning you can buy four pounds for the price of one. In fact, right now cobalt prices are cheaper than they were during the entire 2008 meltdown, when the economic recession sent most commodities into the abyss.
But the global economy is on much firmer ground now. Manufacturing activity has picked up, strengthening demand for industrial metals. Copper, zinc, molybdenum, and others have at least partially recovered.
You might think that cobalt would have received the same bounce. It's not as if batteries have suddenly gone out of style -- Apple just sold two million iPhone 5s in the first 24 hours of it going on sale. But cobalt got left behind. In fact, spot prices have slid even further and currently sit near $13 a pound.
Even though prices have yet to rebound, demand has certainly recovered. In fact, it has never been stronger. The world used 75,000 tons of cobalt in 2011 -- 20,000 more than it did in 2006. And consumption should top 100,000 tons by 2015. Tablet computers alone will boost annual cobalt demand by 11,000 tons. Meanwhile, cell phone penetration rates are still on the rise in many emerging markets. Worldwide cellular subscriber growth has exploded from two billion in 2005 to 5.8 billion today. That pace isn't sustainable. But every year, hundreds of millions of outdated phones are replaced with upgrades -- and almost every cell phone on the planet contains about 3.5 grams of cobalt.
So why haven't prices rebounded? Investors just aren't paying attention.
But I think that's about to change. At $13 a pound, cobalt prices are stuck at their 2006 level. However, annual demand is 20,000 tons greater now than it was then -- and it will rise by another 25,000 tons from here during the next three years. It won't be easy for producers to ratchet up production to meet the increased demand, either. Cobalt is rarely found in high enough concentrations to support economical extraction. And that's not to mention that more than 50% of the world's reserves are locked in the Democratic Republic of Congo (DRC), a politically volatile country with inadequate infrastructure.
Let me warn you, though, investing in cobalt can be tricky. It doesn't trade on a major exchange and it's impossible to buy in the open market. The best way to invest is by owning the mining companies that are sitting on cobalt assets destined to become even more valuable during the next few years.
One such company is Freeport McMoRan (FCX), a mining company with more than 700 million pounds of cobalt reserves in the DRC's Tenke Fungurume mine. If cobalt prices start to recover, those 700 million pounds of reserves will become significantly more valuable.
I think it's only a matter of time before they do, too. As supply and demand dynamics start to kick in, cobalt prices should start to rebound. When they do, investors who bought early are going to be handsomely rewarded.
Disclosure: Nathan Slaughter does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of FCX in one or more if its "real money" portfolios.