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Apple's surprising cobalt move signals a controversial buy on metal commodities

  • Apple took markets by surprise when the iPhone maker said it would try to directly buy cobalt from suppliers.
  • Cobalt is one of the most important metals in battery production.
  • Investors can read the Apple move as a sign that commodities remains one of the financial markets better trades.
  • But there's a non-financial price that investors must be willing to pay.

If you have not seen Black Panther yet, I'm not giving anything away by telling you that Wakanda, the make-believe country in Africa where it is set, sits in a mountainous region where the imaginary metal vibranium is plentiful. This metal is both very rare and special, and it has allowed Wakanda to develop into a hidden, technologically advanced society. Aside from its deep social undertones — colonialism, oppression, slavery, nationalism and, most importantly, that a black child could see a superhero who looks like him or her — the movie got some play in financial press when Apple announced last week it had entered into talks directly with miners of cobalt.

Cobalt is super-important in the production of batteries for cellphones and electric vehicles. If Apple or one of its competitors couldn't get it, it would be at a major disadvantage — no more batteries to power their products. Hence, cobalt has gone mainstream as an investment opportunity, despite its substantial rise in price over the years. Roughly half of cobalt's production comes from the wartorn northwest corner of Democratic Republic of the Congo, a country with severe human rights violations, dangerous mining operations and terrible child labor conditions.

Gold and other mineral deposits, which are numerous in the volatile northeast of The Democratic Republic of Congo, have become a catalyst to much of the conflict there. Numerous militias and warlords have vied for control of the mineral-rich eastern Congo for decades, creating instability and continued bloodshed.
Getty Images
Gold and other mineral deposits, which are numerous in the volatile northeast of The Democratic Republic of Congo, have become a catalyst to much of the conflict there. Numerous militias and warlords have vied for control of the mineral-rich eastern Congo for decades, creating instability and continued bloodshed.

Apple is looking to lock in supplies, as well as buy from suppliers that are less controversial, but as an investment professional, I have to tell you that the Apple headline also sends an amoral message to those trying to figure out what securities in this market still have room to run: global commodities.

Another metal used in batteries for cellphones and EVs is lithium, the lightest of metals. Too bad it isn't very stable and can burn. This is where metals like nickel — one of the main sources of cobalt — comes in. Quality batteries for portable devices is about finding the right mix of metals and chemicals that optimize both holding a charge and stability. Cobalt affects the time it takes to charge a battery, its energy density, stability, and it is the main component of the battery cathode. Cobalt is the primary material in the cathode, the most expensive part of the battery, and also where experts believe there is the greatest potential for battery improvements.

Top nations by cobalt production and reserves

Country
Production 2016 (metric tons)
Production 2017 (metric tons)
Reserves (metric tons)
Democratic Republic of the Congo 64,000 64,000 3,500,000
Russia 5,500 5,600 250,000
Australia 5,500 5000 1,200,000
Canada 4,250 4,300 250,000
Cuba 4,200 4,200 500,000
Philippines 4,100 4000 280,000
US (for comparison purposes) 690 650 23,000
United States Geological Survey

Betting on any commodity has risks, particularly volatility. Nowhere in market is the supply-vs.-demand rule more pronounced than in this asset class. Fortunes are made and lost, and long-standing industries rise and fall.

Due to bone-crushing drops in the price of gold, silver, oil and other commodities in the '80s and '90s, mining companies either underinvested in new production or shut down mines altogether. For a long while, this left the world with supply constraints. The mining industry, after years of running full-out to increase production, has caught up to demand with many major commodities. Oil is an especially key example, via shale production.

Lithium and cobalt may be "new school commodities" but they are no different than other commodities in being subject to the laws of supply and demand. What could change its current condition of tight supply and strong demand? New mines in friendlier places could be discovered. Chemists could come up with replacements for cobalt or at least find ways to use less of it. But those two things look a long way off.

The handful of ETFs that track the stocks of metals and rare earth metals are near their 52-week highs — the VanEck Vectors Rare Earth/Strategic Metals ETF, Global X Lithium & Battery Tech ETF, iShares Global Metals & Mining Producers ETF and SPDR S&P Metals & Mining ETF.

Major metals ETFs one-year return

REMX 54.00%
LIT 46%
PICK 27.00%
XME 16%
XTF.com, data through Feb. 23, 2017

Trading on Tuesday after the first testimony from new Federal Reserve chairman Jerome Powell dinged metals ETFs, but these new-school metals trades are based on the long-term growth trend of electrification of mobile devices and automobiles. Even robotics will need more and that is what I'd consider an industry of the future. It's clear that investors are optimistic about the sector. But investors need to go into any market position with eyes wide open: There has never been a time in recorded history when production doesn't eventually catch up with demand. So watch the earnings reports from mining companies; that will be your "canary in the coal mine" early warning system.

Right now, these ETFs aren't the only bullish call on commodities. "Bond king" Jeff Gundlach has said on several occasions in recent months that commodities are the best bet in the financial markets.

On Apple, cobalt and socially responsible investing

Making investment recommendations isn't my overarching goal in writing. It's to educate investors and help raise their potential to reach financial goals. But one thing my posts can't do is to make you feel good every week, as much as I'd like to. Investing is about compromising between potential reward and risk.

I applaud Apple for making the choice to go for more humanely sourced cobalt, even if it may be for optics, and the truth is more about locking up vital supplies for the future. And I hope more companies follow its path. The Apple products in my pocket, my kids' pockets and in my home are ubiquitous parts of our lives. Maybe yours, too.

This conflict — between the Apple products we love and wartorn regions that help produce them — is obviously much harder to make sense of than the reward vs. risk of investing in commodities. It is becoming equally compelling to many investors.

In the past week alone, similar headlines show that the social consequences of investing are only going to increase. In addition to Apple's news, we had major asset managers like BlackRock saying they will begin a dialogue with gunmakers in which they own stock, because of the latest school shooting, and Warren Buffett being asked on CNBC whether he supported the decision by many corporations to discontinue discounts given to members of the National Rifle Association. Buffett does not support "imposing my own views on 370,000 employees and a million shareholders."

The Wakandans of Black Panther, as it turned out, discovered conflicts that they didn't even know they had. But they moved to remedy them, which is what superhero movies are all about.

You can invest today in commodities, and relative to other spots in the market right now, I think, have a decent chance of realizing financial gains. Beyond that, though, you are on your own. And that's the way it should be. An investment advisor should be able to find investments that suit your portfolio if you want it to have a socially responsible component, but they can't be the one to define that responsibility for you.

I'll leave off with a quote that I wish was from a fantasy movie but was actually from an exposé about cobalt mining in DRC by The Washington Post.

"He sat next to a series of small food stalls, stout squares of discarded mining sacks stretched over sticks, where a digger could buy a bread roll for 100 Congolese francs, equal to about 10 cents. The bread came with a free cup of water. 'You eat what you make,' Mboma said finally. And eating would have to wait."

By Mitch Goldberg, president of ClientFirst Strategy

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