Pala Investments fund manager Anthony Milewski figures one of the best payoffs from a global boom in electric vehicles will be a hard, gray metal that so far has drawn little interest from investors. That's why he's stockpiling it.

During the past year, the Switzerland-based mining fund has been buying cobalt, an essential element in the lithium-ion batteries powering Tesla Motors cars as well as all sorts of mobile devices. Even after a 50 per cent surge in prices last year, Milewski and other bulls expect more gains as companies like General Motors and Volkswagen AG make their own electronic vehicles.

But cobalt investing isn't all that simple. There's very little trading in futures contracts offered by the London Metal Exchange, which can mean increased volatility risk. A handful of penny-stock companies like Fortune Minerals are developing cobalt projects, though most won't start producing for years. And for mining giants including Glencore and Vale, the metal remains just a small byproduct of bigger copper and nickel operations.

"By buying physical stock, you actually own the metal that's going into the batteries," Milewski, a Pala managing director, said by telephone from Zug, Switzerland. "It's a much more attractive option, and we're not the only fund out there doing this." He declined to disclose how much he's accumulated.

The appeal of cobalt for manufacturers of next-generation batteries is that the metal makes for an efficient electrode, and can help stored power last longer. While the market was mired in surplus for years after the financial crisis, supplies are tightening because the electric-vehicle boom is set to boost demand 16 per cent annually on average through to 2022, according to commodity researcher CRU Group.

That's already affecting physical prices, which are the highest in more than five years. Low-grade cobalt was at a high of $US16.50 ($21.84) a pound on the spot market on Friday, up more than 80 per cent from lows in December 2015, according to London-based Metal Bulletin, a commodity market price tracker. Average prices this year may exceed CRU's November high-end forecast of $US18, and may rise "well above" $US20 if supplies fall short of estimates, Edward Spencer, a senior consultant at CRU, said by email.

More trading

Increased attention for the market also has boosted cobalt trading on the LME to the highest since its contract began in 2010. Average volume that was just 24 contracts a day during the year before November has since jumped to 162 a day, including several sessions above 600, exchange data show. By comparison, the LME handles about 140,000 copper contracts every day.

Global demand exceeded output in 2016 for the first time in seven years, and increased purchases by fund managers this year probably will deepen the production deficit, according to Guy Darby, co-founder of Darton Commodities, a cobalt trading house based in Guildford, UK.

The industry supplies about 100,000 metric tons annually. But about 65 per cent of refined supply comes in a non-metal form, including chemicals and powders used in making parts for smartphones, jet engines, drilling tools and pigments. So, only about 35,000 tons produced each year is in the metal form preferred by investors. At current prices, that's worth about $US550 million, which may be too small a market for some commodity-focused funds. By comparison, annual copper output is 22 million tons valued at $US127 billion.

Still, the market is growing. Ivan Glasenberg, the chief executive officer of Glencore, the world's largest producer, said the pickup in production of electric vehicles means increasing demand for both cobalt and nickel, another component in batteries. Even after last year's big price gains, cobalt has "fantastic potential" in 2017, Benedikt Sobotka, head of closely held mining company Eurasian Resources Group, said in a statement this month.

Congo supply

Expanding output to keep pace with demand may not be easy. About 63 per cent of global supplies come from the Democratic Republic of Congo, which derives as much as a fifth of its production from small-scale operations that rely on child labour to extract minerals by hand, according to an Amnesty International report last year. The pressure group called on battery-makers like South Korea's Samsung Electronics and end-users like Apple to step up efforts to ensure minerals they use aren't mined illegally in dangerous conditions.

The Amnesty International report made investors like RobecoSAM reluctant to own cobalt. The Swiss asset manager focuses on sustainable industries such as electric vehicles and green energy, with investments in lithium producers including Sociedad Quimica y Minera de Chile and Albemarle, as well as battery makers including LG Chem and Samsung SDI.

"We monitor allegations of human rights abuses closely," said Pieter Busscher, a Zurich-based portfolio manager for the Smart Materials fund at RobecoSAM. "What we don't want exposure to is a commodity that can be produced in conditions where workers aren't looked after and protected."

The increased public scrutiny could put pressure on global supplies outside the central African country. Chemical companies that supply battery makers rely on semi-refined cobalt being produced by Glencore and others in Congo.

Consumer response

"The next stage is whether we're going to see a response in supply, or whether consumers will start panicking and buying up any units they can," said Tony Southgate, a cobalt trader at Engelhart Commodities Trading Partners based in London. "If battery demand spills over into the metals market in a huge way, then the chances are prices will spike."

There's also the risk that higher cobalt prices will encourage battery makers to come up with better designs that use less of the metal.

Milewski isn't worried. Any attempts to substitute other materials will be dwarfed by the surge in overall demand for cobalt as the world's fleet of battery-powered cars increases. Analysts may be underestimating just how popular the vehicles will become, not only in the US and Europe, but in China and India, where governments are eager for ways to curb fossil fuel emissions, he said.

"So far, sales of electric vehicles have been blowing forecasts out of the water," Milewski said. "I don't see why that won't continue."