CME Group, which owns the world’s largest derivatives exchange, is set to roll out a new cash-settled cobalt futures contract. The contract will make its market debut on December 14, pending regulatory review

The new contract will be listed on and subject to the rules of COMEX and settled against the benchmark daily standard-grade cobalt price assessed by Fastmarkets, which CME has announced as the official price reporting agency for the contract.

Two sides make a market

As CME notes, cobalt is a critical building block of the emerging new energy economy and a principal material for the fast-growing electric vehicle market. Cobalt prices have recovered from three-year lows seen in 2019 but remain significantly below the 10-year highs seen in 2018. In addition, as CME acknowledged in a company announced on Thursday, there is continuing uncertainty in the global cobalt market, due to competing market views and divergent approaches to cobalt’s role in the chemical recipe for emerging EV battery technologies.

While some companies are pursuing competing battery technologies—Tesla abides in its efforts to phase out cobalt as a battery input—other market participants are stockpiling or signing multi-year cobalt contracts to secure supply. Market views are so contentious that after Tesla’s Battery Day event in September, in which the company reiterated plans to cut cobalt from its battery batter, Trent Mell, President and CEO of First Cobalt, North America’s only permitted cobalt refinery, issued a statement in response.

“Cobalt will continue to play an essential role in long range vehicles, keeping cars safe and prolonging battery life,” Mell said. “Contrary to speculation, cobalt will not be taken out of the battery anytime soon, reinforcing our business plan. The evolution of battery technology towards lower cobalt content is positive from the perspective of EV penetration rates and for cobalt as a critical input.

“As it is the scarcest raw material input and the most expensive commodity, decreasing the amount of cobalt in battery cells will facilitate higher penetration rates which in turn will drive adoption rates.”

A forward curve

The growing size of the cobalt market, alongside volatility in prices, underscores the need for and value of a hedging mechanism. And this is all good news for traders.

The final settlement price will be an arithmetic average of the daily Fastmarkets standard-grade Rotterdam cobalt (midpoint) price.

The launch of the contract builds on growing participation in OTC trades, which are cash-settled against Fastmarkets’ cobalt price assessments. Key market participants have endorsed the exchange’s partnership with Fastmarkets as a critical step in the evolution of risk management solutions for the cobalt market.

“As zero-emission policies continue to grow globally, clients are looking for more effective ways to manage the price risk associated with electric transportation,” said Young-Jin Chang, Managing Director and Global Head of Metal Products at CME Group. “This new product will also provide a forward curve for the cobalt market, creating more transparency around a key metal in the green economy.”

Fastmarkets has been regarded as a standard-bearer for cobalt prices, having invested significantly in resources and technology to ensure its price-assessment process aligns with IOSCO (International Organization of Securities Commissions) principles. The Fastmarkets daily standard-grade cobalt price was validated over a 12-month period in September 2019. It then received a 12-month re-validation in September 2020.

“Cobalt is a prime candidate for risk management. It is central to the emerging new energy economy but susceptible to price swings as different battery chemical strategies unfold,” said Fastmarkets CEO Raju Daswani upon CME Group’s announcement earlier this week. “Given the expected dynamism, market participants require a price that is transparent, auditable and reflective of market events. Fastmarkets’ standard-grade price assessment meets all those requirements, giving a powerful tool to help market participants manage risk along the entire cobalt supply chain.”

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