Hedge funds target exotic metals

By Daniel Magnowski - Analysis

TALLINN (Reuters) - Exotic metals such as cobalt, vanadium and molybdenum may be the next targets for investors in the world's overcrowded commodity markets, financiers and traders said this week.

"There are a lot more people in the metals business, and people are looking for unexplored, unsaturated markets," said Daniel McConvey of New York based commodity trading adviser Rossport Investments, which invests in the so-called minor metals.

Most of the multi-billion dollar investment in metals this decade has gone to copper, nickel and other key industrial commodities.

But the amount of money poured into these metals has made it harder for fund managers to make a return, so they are looking at other materials, says Keith Dunleavy, trader at London firm Stratton Metals.

He has sold cobalt to hedge funds, and he reckons they expect prices to rise well beyond their current 11-year highs above $30 per lb.

"They started getting into cobalt at $22 and $24. We started badgering them to take profit at $28 but they are not interested," he said.

"The funds do immaculate research, and they got the fundamentals of nickel correct," he said at a conference in Estonia hosted by the Minor Metals Trade Association.

HI-TECH EXPLOSION

The major fundamental factor behind rising minor metals prices is their use in products from flat screen televisions to aircraft parts and car exhaust catalysts.

"Lots of these metals are hi-tech, and with the explosion in hi-tech, minor metals are going to feel some of that explosion," Rossport's McConvey said.

Cobalt in particular is expected to rise. Earlier this month, Credit Suisse said the metal could spike to $40 per lb as demand grows.

More hedge funds are knocking on the door of trading firms to try to find a way to take a position in cobalt.

Unlike copper and nickel, though, cobalt is not traded on an exchange. so the market can be opaque and accurate pricing data hard to find.

"One of the perennial problems of minor metals for the larger funds is transparency, reportability and volume," Nick French, managing director of trading firm SFP Metals, said.

"I know for a fact they'd love to have been in cobalt, and still would love to be, but they are struggling to see how to apply their funds to illiquid markets," he said.