Cobalt: High in Demand Following Scarcity Outlook

Cobalt: High in Demand Following Scarcity Outlook

Executive Summary

  • Cobalt, a key ingredient in lithium-ion batteries mainly used in electronic products and electric cars, is high in demand by automotive and tech companies.
  • Reports suggest that Apple Inc. has been in talks with cobalt suppliers to acquire resources directly from the Democratic Republic of the Congo (DRC) to ensure sufficient supply of cobalt for its productions. Automotive firms are also in the race to manufacture different models of electric cars which will rely heavily on cobalt batteries.
  • There is fear of cobalt scarcity, as it is mainly produced in DRC, where issues of political, ethical and operational complexities are present. DHL Everstream Analytics’ Risk Exposure Index rates DRC at 76 on the scale of 100, with 100 being the highest risk possible.
  • Despite the challenges and exploration of cobalt reserves in other countries, DRC still plays a dominant role in the cobalt market share. The government is already taking advantage of its position by increasing royalty payments.
  • As market for products requiring lithium-ion batteries continue to grow in popularity, cobalt supply is likely to remain a key consideration in the coming years. This report explores the implications for supply chain visibility and risk mitigation.

Background

Today’s technology evolution has led to increasing demands for electronic devices and products that are made out of lithium-ion batteries. Cobalt, a chemical element, is a key ingredient in making high-end rechargeable batteries which are mainly used by automotive and tech companies. What makes cobalt special is that, it is a byproduct of copper and nickel mining and has the unique ability to conduct electricity. According to industry experts, it is a hard component to substitute and any replacement of the metal would cause the batteries to underperform and compromise quality. That cobalt is widely considered a ‘conflict mineral’ ignites further complexities.

The Democratic Republic of the Congo (DRC) reportedly produces around two-thirds of the world’s cobalt, which is more than 60 percent of the world’s production. In 2016, it was reported that DRC mined 54 percent of the 123,000 tonnes of cobalt production worldwide. As demands and productions ramp up, mining companies such as Glencore, Eurasian Natural Resources Group and China Molybdenum are reportedly planning to invest more money into DRC. No further details on their operations have been stated. Media sources are reporting that large manufacturers that produce lithium-ion battery based products have begun to seek long-term, secure, supply of cobalt directly with miners in DRC. This indicates that the cobalt supply chain is disproportionately reliant on DRC, which is not only risky but also has the potential to disrupt supply chains and in turn, affect cobalt prices. While DRC has been a reliable producer of cobalt for more than a decade, an unstable political condition and years of civil war has left the country in poverty. Most of the country’s export income comes from mining, which means that the country’s employment relies on this sector. Everstream Analytics Risk Exposure Index rates DRC at 76 on the scale of 100, with 100 being the highest risk possible. This overall score can be broken down to political violence index at 75, socio-political index at 83 and sustainability index at 86. Almost all the scores are at the high end of the scale, which confirms that there are bound to be challenges and risks, driven by child labor issues and political instability in DRC.

Cobalt’s Risky Supply Chain

In 2015, Amnesty International exposed the involvement of child labor in cobalt mining processes in DRC. The report, published in November 2017, highlighted that major electronics firms and automotive manufacturers have not been taking sufficient actions to ensure their cobalt supply chains are free from human rights abuses. The report rated industry giants over a five-tier ranking (ranging from ‘all possible actions taken’, ‘adequate action taken’, ‘moderate action taken’, ‘minimal action taken’, and ‘no actiontaken’) pertaining to their cobalt sourcing practices since January 2016. It included giant technology firms such as Apple, Amperex Technology, Dell, HP, Huawei, LG Chem, Lenovo, Microsoft, Samsung Electronics, Samsung SDI, Sony, Vodafone and ZTE. For automotive manufacturers, it listed General Motors, Volkswagen, Fiat, Chrysler, Daimler, Renault and BYD and other battery manufacturing firms such as Tianjin B&M, L&F, Hunan Shanshan, Tianjin Lishen, Coslight and Shenzhan Bak Battery. Apple and Samsung SDI reportedly ranked at the second top tier, implying that “adequate actions” had been taken, whereas most of the automotive firms are still hovering at the second last and at the bottom of the tier.

Although artisanal mining is legal in DRC, it is poorly regulated. According to media sources, businesses in China have set up a Responsible Cobalt Initiative as part of their Corporate Social Responsibility act to make cobalt more sustainable as demands grows. The initiative has been joined by Apple and Samsung. There are also reports of a pilot scheme which will be launched this year to use blockchain technology in the hopes to ensure firms and its battery manufacturers are using cobalt materials that were not mined by children. Despite the good intentions, there are also challenges to the project. Firstly, it is difficult to track and monitor informal cobalt mines and secondly, it is difficult to access accurate electronic data which will need to be transmitted from remote areas. More importantly, all industry players in the cobalt supply chain would need to adhere to the scheme. It is unclear which organization would take the initiative to conduct this scheme. Despite these challenges, companies must ensure that their suppliers are taking steps to introduce proper conditions with safety items and improved tunnel constructions to minimize health issues for mining workers.

With international pressure, the government in DRC had begun to crack down on illegal cobalt mines. However, it remains difficult for battery manufacturers to identify where their cobalt supply comes from due to the mixture of political and operational complexity in DRC. Although other mining companies are exploring alternative options for cobalt in Australia and Canada, neither of these countries has proven reserves like the ones in DRC. Other reports suggest that Chile will contribute at least 500,000 tons of lithium production in the coming years which may balance out cobalt’s supply and demand in the future. In terms of the political landscape in DRC, there is a risk for businesses to operate in an environment with high political instability. Joseph Kabila, the current president of DRC, has refused to give up power following the end of his presidential term last year. The government is also fully aware of its dominant position and is already looking for ways to increase its control of assets and profit making. In September 2017, the local authorities blocked copper and cobalt exports by the China-Congo joint venture Sicomines due to a dispute over local refining and in October 2017, President Kabila issued an increase in royalty payments on cobalt to 3.5 percent from 2 percent.

Ambitious Plans in the Automotive Industry

Due to eco-friendly campaigns, most countries are now moving towards electric cars to cut carbon emissions from fuel engines. Major automakers are pledging to manufacture millions of electric cars to replace traditional engines. According to industry sources, the demand for cobalt in vehicle battery materials is expected to increase over 40 percent in 2018. As of late 2017, cobalt has a market worth of USD 6.6 billion annually and business analysis forecast that it is likely to increase sharply in the coming years. Reports suggest that the power unit in a typical electric car may contain about 15 kilograms of cobalt, though some varieties may use less than 5 kilograms. It is stated that if electrified vehicles continue to gain market share, any stabilization on cobalt supply may be short lived.

Industry sources indicate that Tesla is targeting a sale of 400,000 electric cars by the end of 2018 whereas Volkswagen is reportedly investing EUR 20 billion by 2030 to manufacture electric cars, with another EUR 50 billion reserved for lithium-ion batteries. Volvo reportedly stated that it will have five different electric models by 2021 and Daimler is investing USD 1 billion to increase its electric car productions in the US alone. Analysts have stated that despite these ambitious plans by automotive manufacturers, not many of them have considered the risks involving the cobalt supply chain.

Apple’s Outreach for Cobalt Supply

According to the recent reports by Bloomberg, Apple Inc. has been in talks with cobalt suppliers to acquire resources directly to ensure that its battery manufacturing partners have an ample supply of cobalt to meet its large scale productions. Unidentified sources from Bloomberg indicated that the firm has secured contracts to buy thousands of metric tons of cobalt annually for the next five years. This underscores cobalt’s importance in the production of Apple products. Of particular significance, though, is that Apple has left the task of buying cobalt materials to its battery manufacturers.

Some have praised Apple’s intention to deal directly with cobalt suppliers. By acquiring large quantity, Apple has a better position to negotiate cobalt prices when comparing with other small manufacturers who are unlikely to buy a large amount. Such an arrangement eliminates intermediaries and puts Apple in the forefront of the cobalt supply chain by enticing other smaller firms to take similar steps.

Others speculate that there are possibilities that the talk may fall apart. Despite the controversies, Apple has yet to publicly acknowledge or confirm the matter. In the event that Apple does purchase directly from cobalt suppliers, the tech firm is likely to face competition from automotive manufacturers like BMW and Volkswagen, as well as other battery producers, in scrambling to secure cobalt supply to stay ahead of the competition despite uncertain market predictions. Moreover, Apple’s ambitious deal to engage directly with cobalt producers has opened up other challenges, particularly on visibility pertaining to child labor issues in mining operations.

Outlook

It is highly likely that cobalt price will double in the coming years and is expected to remain strong in both near and long-term future. The demand in cobalt has increased from 40,000 tonnes in 2000 to an estimation of 100,000 tonnes in 2018; around 55 percent of cobalt is already going into rechargeable batteries. When Glencore announced that it will double their productions in DRC in December 2017, the market was not affected which means that the demand and an increase in price of cobalt has been expected. This indicates that as long as the market for products requiring lithium-ion batteries remain in the mainstream, demand for cobalt will likely follow an upward trend. A report by the BMO Capital Markets stated that it expects automotive industries to invest more money in their research & development sectors with the hope of finding solutions to reduce dependency on cobalt or replace it all together to eliminate the heavy reliance of raw materials from DRC. While it is possible that engineers are likely to find ways to design electric cars or use substitute elements without the need for cobalt, industry experts says the vision may be hard to achieve at least in another three decades.

Recommendations

Everstream Analytics customers in technology and automotive industries should keep abreast of the latest developments by monitoring macro trends in the cobalt supply chain. Disruption to businesses can be mitigated by creating transparencies on where their cobalt supplies come from, identifying relevant risks and by conducting due diligence on third party businesses that are dealing with cobalt sourcing through mining operations in DRC or elsewhere. Companies need to also have the confidence that their suppliers understand cobalt sourcing risks and have the capacity to manage these risks effectively on an ongoing basis. It is good to also note that a ‘one-size-fits-all’ approach to supply chain environment may not work if the management approach fails to adapt to changing circumstances, particularly when operating in a volatile environment.

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