CME cobalt futures put spotlight on forward backwardation

From logistics issues easing to a boom in EV interest, our team take a look at the reasons behind this flurry of trading activity

There was a flurry of trading activity in cash-settled cobalt futures contracts on the Chicago Mercantile Exchange over the week to Wednesday, February 9, with market participants taking positions on late-2022 and early-2023 contracts that backwardated the forward curves.

Market participants were pondering what may be driving the backwardation despite tightness and bullish fundamentals that have supported prices in the physical market.

One possible reason for the increased interest and backwardation of the futures contracts was the undervalued nature of some of the longer-term contracts, compared with strong fundamentals supporting the spot price, some said.

Fastmarkets assessed the price of cobalt, standard grade, in-whs Rotterdam at $34.40-34.80 per lb on Wednesday, narrowing upward slightly from $34.30-34.80 per lb a week earlier.

On the CME forwards, volume of 425 tonnes has been traded on a consecutive-day basis from January 28 to February 4, with a combined total of 245 tonnes on January 31 and February 1. These six trading days have had almost three times the volume of the 18 trading days from January 3 to January 27.

On January 27, the December 22 contract closed at $31.05 per lb, down by $0.70 per lb and at its lowest since November 23. Conversely, the midpoint of Fastmarkets’ cobalt standard grade price was $34.40 per lb on January 27. The premium of $3.35 per lb was the largest the spot market had held against the Dec-22 contract since its inception.

Logistics easing

Part of the thinking that could drive the backwardation in futures contracts later in the year may be related to expected improvements in the logistics bottlenecks that are currently limiting the flow of materials to market, according to Fastmarkets’ battery materials research team.

“Shipping delays and port disruptions are not affecting production but are affecting supply,” William Adams, head of Fastmarkets’ battery materials research, said. He added that “higher production and less congestion down the road” are likely to bring better availability in the coming months.

“A backwardated forward curve may indicate a pick-up in producer forward-selling,” he said.

While the physical market remains characterized by general tightness and limited spot availability, which have supported cobalt metal prices in January and February, some sources said the futures backwardation may be a factor leading buyers to limit their current restocking activity.

“Some consumers may look at that curve and think there may also be some easing in prices in the physical markets later on,” one trader said. “So if you are sitting on some stock and you can defer your purchasing, that curve may be one element you’re taking into account.”

“The market is fundamentally under-supplied,” a second trader said. “But the CME is showing backwardation, which is confusing. If you see that as a consumer, you may be tempted to short your position a bit, instead of replacing promptly.”

Narrowing gap

Market participants are questioning how long this backwardation will persist. There are signs that the spread between spot and forward prices is already starting to narrow.

The Dec-22 contract had risen to $33.08 per lb by the close of trading on February 8; the CME was indicating $33.08-33.18 per lb throughout the second half of 2022. The midpoint of the second-half 2022 indications compared with Fastmarkets’ cobalt standard grade, in-whs Rotterdam, midpoint on Tuesday at $34.60 per lb; the spot price was trading at a premium of $1.47 per lb.

Physical cobalt metal prices have traded at their highest since August 2018 in recent weeks, with this buying activity on the CME contracts giving clarity to some opinions on price levels next year.

“This large volume of activity underpins the cobalt market to an extent over the mid-term,” a third European trader said.

Price rises, reflecting a degree of tightness for spot supply and sustained demand from the electric vehicle (EV) sector, has coupled with a recovery in forecasts for other cobalt metal-consuming sectors, including aerospace and medical.

“We think the price is well supported this year with supply demand fundamentals and logistics issues,” a fourth trader in Europe said.

The sustained rally has coincided with a boom in EV interest, driven by ambitious targets for the phasing-out of cars with internal combustion engines. Annual global EV sales grew by 107% in 2021, according to Fastmarkets’ analysis.

“The long-term picture can only be bullish,” a distributor said. “There’s a lot of demand - and growing demand.”

And while logistics constraints may ease in future, some market participants expect demand to remain strong enough to keep prices well supported.

The Fastmarkets-settled cobalt futures contracts on the CME were launched in December 2020.

“As zero-emissions policies continue to grow [in adoption] globally, clients are looking for more effective ways to manage the price risk associated with electric transportation,” Young-Jin Chang, managing director and global head of metal products at CME Group, said at the announcement of the contracts.

Although some market sources noted that the cash-settled futures contract showed a slight separation from physical trading, the CME futures do hold up as a risk-management tool, enabling users to manage price risk by hedging.

“It serves as a good guidance tool for the market and adds an element of volatility which can be beneficial,” another trader said.

Risk management is a key component for the cobalt market, especially because demand is likely to continue to increase. In November 2021, annual contract negotiations were offered at a premium rather than a discount for some consumers for the first time.

And in another change from previous years, consumers have also sought to secure multi-year agreements to guarantee supply over the longer term.

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