Credit Suisse has opened a market in hi-tech metal cobalt to investors seeking a commodity contract that won't be buffeted by turbulence in other financial markets, the bank said on Tuesday.
Cobalt, a metal mined in Africa, Russia, Cuba and Australia, and used in batteries and aircraft engines, is not traded on an exchange, so until now the only way to invest in it has been to buy the metal and store it - often not an option for hedge funds. But the new financially-settled contract launched in August by Credit Suisse makes it possible to buy cobalt without ever taking delivery of the metal, the bank told Reuters in an interview.
"It works likes other commodity contracts. For example, if you buy December 07 cobalt today at a fixed price of $24.80 and come December, the average for the month prices out at $30.00, then you net receive $5.20. It is purely cash settled," said Lorcan Cleary, Vice President in the commodities group at the bank.
Since cobalt is not traded on any of the world's metal exchanges, the contract is priced on data published by industry journal Metal Bulletin. "We have taken the proactive step of providing access to a market in the absence of an exchange," Cleary said. A cobalt contract makes sense now because speculators are looking for new products in which to invest after several years of pumping money into commodities.
While exchange-traded commodities such as copper and gold fell victim to the recent global financial turmoil that began with the collapse in the sub-prime mortgage sector in the United States, off-exchange metal cobalt is detached from shockwaves in other markets.
"One of the attractions of the 'new' commodity markets, such as cobalt, is that they avoid the short-term correlation that the more commonly financially-traded commodity markets are currently seeing," said Kamal Naqvi, Head of Hedge Fund Coverage in the Commodities group at Credit Suisse.
"Clients are seeing such markets as cobalt and coal as purer commodity plays." Among commodities, cobalt's fundamentals are especially attractive, Credit Suisse believes. The bank has forecast that cobalt prices could spike to $40 per lb by the end of this year. High-grade cobalt now trades around $27 per lb, up 50 percent since September 2006 on strong industrial demand and tight supply.
"We expect the cobalt market to remain in deficit until the end of 2008, as supply struggles to keep up with strong demand," the bank said in a research report earlier this year. The fact that around half the world's cobalt reserves are in the Democratic Republic of Congo, which has a history of extreme instability, is a key risk to supply.
"Going forward, the cobalt market could be further squeezed by supply disruptions, such as rising cost, declining ore grades, potential labour strikes, a lack of infrastructure support and political unrest in the DRC," the report said.
GLENCORE ALLIANCE Credit Suisse can access a ready source of the metal thanks to its alliance with Glencore. Through its shareholding in mining firm Xstrata and deals with other producers, this Swiss-based commodities trader has sales rights to a large chunk of the world's cobalt.
"The challenge for new commodity products is creating and maintaining liquidity. Through our trading alliance with Glencore, Credit Suisse is the only bank that is able to consistently source such liquidity in many of these markets," Naqvi said. "We have plans to further extend the list of tradable commodity products going forward."
Among other commodities traded by Glencore are coal, and steelmaking additive vanadium, which along with cobalt is one of a group of substances collectively known as "minor metals". Credit Suisse's move into cobalt comes at a time when several commodities trading firms are trying to break into minor metals, attracted by an outlook of rising demand and higher prices.
The global trend towards greater use of high-tech products such as laptop computers, flat screen televisions and catalytic converters, all of which contain minor metals, will raise the cost of these metals, merchants believe.
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