(The opinions expressed here are those of the author, a columnist for Reuters.)

LONDON - Someone delivered 23 metric tons of cobalt to London Metal Exchange warehouses last month.

This may not sound like a big deal, but it was the first LME warranting of the battery metal since February 2022.

It is, moreover, just the tip of the cobalt iceberg. There were another 684 tons sitting in the LME storage shadows at the end of June.

This off-warrant inventory, which is being warehoused under a contractual option for full warranting, first showed up in February, when it amounted to 839 tons.

The stocks activity has revitalised a contract that didn't trade at all for most of last year. Volumes this year have reached 1,020 lots, a level of liquidity last seen in 2020.

This is good news for the LME, but bad news for the cobalt market. The appearance of so much metal at the dormant market of last resort is a sign of chronic global supply glut.

ANOTHER BOOM AND BUST

Cobalt's recent price history has been a classic tale of boom and bust.

The super-charged rally of 2017-2018, when LME three-month cobalt peaked above $95,000 per ton, generated an overwhelming supply surge that sent the market tumbling all the way back to $26,000 in 2019.

The same story has played out again this decade. Cobalt's price surged to $82,000 per ton in March 2022 only to collapse to the current level of $24,900.

The first price implosion was triggered by a flood of swing supply from artisanal miners in the Democratic Republic of Congo, which hosts the world's largest reserves of cobalt.

This time around the supply boom is being driven by a structural combination of capacity expansion in the Congo and fast-rising output from Indonesia.

Cobalt is mined as a byproduct of copper and nickel respectively in those two countries, meaning the sensitivity to low prices is limited.

China's CMOC Group overtook Glencore as the world's largest cobalt producer last year, with output of 55,000 tons.

It expects an expansion of its Tenke Fungurume copper mine in Congo will cause byproduct cobalt production to hit 100,000 tons by 2028.

Meanwhile, Indonesia has rapidly emerged as the world's second largest cobalt producer thanks to its massive build-out of nickel mining and processing capacity.

Production jumped 86% to 17,000 tons last year, meaning the country now accounts for 7% of global mined cobalt output, according to the Cobalt Institute.

Ever more Indonesian capacity is being added. The Institute was tracking only 10 nickel-cobalt processing plant projects in 2023. The number has risen to nearly 60 this year, it said in its annual market report.

SUPPLY GLUT

Cobalt has historically been used in the form of super-alloys with applications in the aircraft and aerospace industries.

However, the new driver of demand growth comes in the shape of an electric vehicle battery, where cobalt enhances both chemical stability and power performance.

The battery sector accounted for 73% of the 200,000 tons of cobalt used last year, according to the Cobalt Institute, which notes that electric vehicles alone now support around 45% of the market.

True, cobalt has taken a knock from strong growth in lithium-iron-phosphate battery chemistry, but usage is still expanding at a fast rate.

Analysts at Adams Intelligence estimate 5,026 tons of cobalt were deployed globally in new vehicle sales in May, a year-on-year rise of 12%.

The problem is that demand still can't keep up with the production surge playing out in both Congo and Indonesia.

The market was in oversupply to the tune of 18,300 tons last year, following a 10,700-ton surplus in 2022, the Cobalt Institute says.

Given the scale of the current supply-demand mismatch, the expectation is for more of the same in the coming years. Macquarie Bank analysts are forecasting surplus to persist until 2027.

BUY THE DIP

The price bust has created opportunity for some.

China's state reserves manager bought 8,700 tons of cobalt last year and is planning to buy another 15,000 tons this year.

The CME, which launched its cobalt contract in 2020, has seen activity mushroom as the price has fallen steadily from its most recent peak.

The standard cobalt contract notched up just 3,997 lots of turnover in its first full year of trading. Volumes grew to over 17,000 lots in 2022 and to almost 27,000 lots last year.

Low prices have attracted industrial players looking to lock in long-term hedges and investors betting on a change of price trend.

The CME cobalt curve is also in a pronounced contango. The gap between spot metal and forward prices allows for a profitable stocks finance trade.

However, banks prefer financed inventory to be stored in a place from which it can be easily sold if anything goes wrong. The first choice is a terminal market. The CME contract is priced against Fastmarkets' assessment of the price of cobalt in Rotterdam and is not deliverable.

The LME's cobalt contract, by contrast, is deliverable, which might explain the recent sudden appearance of so much metal in LME shadow storage and the simultaneous burst of activity in a contract that seemed to have passed into the history books.

It remains to be seen whether this is the start of a bigger trend, but the current state of the cobalt market suggests there is going to be a lot more metal looking for a home in the coming months.

(Editing by Jan Harvey)