At Stratfor, we use geopolitics to understand the constraints and advantages that geography confers on a country and the political, technological and economic decisions it compels. The exercise, taken to its logical conclusion, can extend all the way down to an atomic level. This occasional series examines the elements and the power that various combinations of protons, neutrons and electrons can exert on the world around us. In the fifth installment, we look at cobalt.
Cobalt prices will increase in the short term because of rising demand, low copper and nickel prices, and political instability in cobalt-producing regions.
The Democratic Republic of the Congo will continue to dominate the global cobalt supply in the near term, but instability will drive many consumers to either look elsewhere for cobalt or diversify their suppliers.
As battery technologies that limit or eliminate the use of cobalt are developed, cobalt's position as a key element in the transportation revolution will decline.
As the demand for electric vehicles increases over the coming decades, so, too, will the demand — and the price — for the raw materials required to produce them. Increased demand for elements such as lithium and cobalt will lead to potential supply bottlenecks over the next several years. And while the media has touted the potential of lithium — the eponymous component of lithium-ion batteries — to be the raw material that powers the gradual transition away from fossil fuel-reliant transportation, it has understated the significance of one element in the equation: cobalt. Lithium-ion batteries require lithium, yes, but they also require something else. Under the constraints of present technology, that something is, more often than not, cobalt.
From Teacups to Electric Cars
Cobalt has been utilized since the days of antiquity, when craftsmen employed it (albeit unknowingly) to give glass and ceramics a telltale dark blue color. In the 18th century, Swedish scientist Georg Brandt isolated the metal. And since then, cobalt has played a role in many niche markets, with its heat resistance and strength proving a necessity in magnetic mixtures and metal alloys such as those used in jet engines. Now, as a key component in lithium-ion batteries, cobalt has become an important commodity in the growing electronics and electric vehicle markets.
Roughly half of all cobalt consumed globally goes to produce batteries used for grid storage, consumer electronics and electric vehicles. As the popularity of electric vehicles grows, so too does the demand for cobalt. Mining heavy hitter (and major cobalt producer) Glencore estimates that if electric vehicles account for 30 percent of new car sales in 2030, three times the total amount of cobalt produced in 2016 will be required. And even if electric vehicle penetration is less than Glencore's estimate (Goldman Sachs estimates a 2.7 fold increase, for instance), the rise in demand will still be substantial. Indeed, industry expert Global Energy Metals Corp. projects 30 percent market growth for cobalt between 2016 and 2020.
Since cobalt is usually mined alongside copper, nickel and, on occasion, precious metals such as silver, its supply has traditionally been dictated by the demand for these metals with larger markets. (Though cobalt has and will continue to draw the interest of investors, it cannot, at least in the near term, match these other markets.) In recent years, low commodity prices have slowed or shuttered copper and nickel production, in turn limiting cobalt supply. Thus, the increased demand for cobalt creates the potential for a substantial imbalance between supply and demand in the coming years.
A Major Producer With Major Problems
The rise in cobalt demand will require new and expanded mining operations in the relatively small handful of countries that contain substantial cobalt reserves. Canada, Cuba, Australia and Russia all have their own ample reserves of the metal. But the Democratic Republic of the Congo, which has been the world's largest producer of cobalt for nearly a century and which produces more than half the world's supply, will continue to dominate, despite hindrances that could further contribute to a supply bottleneck.
War, unrest and political uncertainty in the Democratic Republic of the Congo have historically caused price spikes in the small cobalt market. In the past year, President Joseph Kabila has reached his term limit, and apprehension over what will happen next has contributed another level of instability. Combined with the complicated production factors and the increased demand for batteries, this has led to a 127 percent rise in cobalt prices over the course of 2017. Another factor threatening cobalt production and prices is the possibility of nationalization or changes in legislation in the Democratic Republic of the Congo that may prompt fears of a ban on raw materials exports. The country could try to move up the value chain by requiring processing to happen within its borders, which would bring the cobalt supply chain to a temporary halt.
Finally, there are the ongoing ethical and legal threats to doing business in the Congo. Recent court cases implicate state-owned Gecamines in shady business practices regarding a joint venture with Groupe Forrest International. The venture controlled an estimated 4 percent of the world's cobalt production, and the mine involved in the case has suspended operations and could remain offline through 2020. Also in 2017, Glencore board member Telis Mistakidis stepped down from his role after questionable behavior related to mining in the Congo. And ethical questions continue to surround the use of child labor in artisanal mines. These small mining efforts often make up the difference when demand outstrips supply from more traditional operations and could limit investment from some Western operations.
Even as its manifold issues contribute to the uneven supply and demand of cobalt, the Democratic Republic of the Congo will remain a key producer in the global market. Much of the immediate expansion of cobalt production in 2018 will come from mines in the country. Glencore has multiple operations there and recently inked a deal with Contemporary Amperex Technology, one of China's officially approved battery producers, to provide 20,000 tonnes of cobalt over the course of four years for the production of batteries for Volkswagen. (Total global cobalt production in 2016 was 123,000 tonnes.) Glencore subsidiary Katanga Mining resumed operations in late 2017, after halting operations in 2015 because of low copper prices. And in 2016, China Molybdenum Co., Ltd. gained a controlling interest in the area's Tenke copper-cobalt mine, signaling China's growing interest in the region.
Though the Democratic Republic of the Congo will continue to produce the majority of the world's cobalt, the country's instability will accelerate exploration outside of Africa, specifically in Canada and the western United States. Several operations in Australia, Norway and Finland are also growing. Finnish mining company, Terramine, which has recently obtained funding to expand, is focused specifically on investments related to supply processed nickel and cobalt derivatives for batteries. And in the western United States, companies are exploring reserves in Idaho and have announced favorable feasibility studies in September 2017.
But the now-abandoned Canadian silver mining town of Cobalt has drawn the most attention from cobalt mining giants and newcomers alike. Already host to mines with names including Aquanico, McKinley and O'Brien, which harken back to the Silver Rush, the town is now poised to become a cobalt producing mecca. LiCo Energy Mineral's Teledyne plot in the area posts nearly 4 percent cobalt concentration, while Glencore's plot posts a whopping 7.64 percent. (Cobalt is a metal that can be economical at concentrations far below 1 percent.) Meanwhile, producer FirstCobalt, fresh off a merger with Cobalt One Limited, may see its operations at Canadian sites start producing cobalt as early as late 2018. Exploration for cobalt is still in the early stages, but the land's track record with previous metals and the region's existing infrastructure make it a much less risky bet than other new mining ventures.
If successful, the Cobalt, Ontario site will eventually help meet the North American demand for cobalt. (North American producers make for natural partners with North American battery manufacturers.) And while cobalt is by no means the focus of Canada's recent trade negotiations, friendly trade relationships with major battery manufacturing regions around the world could work in Canada's favor.
Built To Last?
Though select companies and countries may benefit from the cobalt supply bottleneck and any price increase, the bullish market will not last. As recycling operations and alternative battery technologies become more popular, cobalt will likely become less and less necessary to the electric vehicle "revolution." Indeed, battery recycling operations are already ramping up; the lithium-ion battery recycling sector is expected to see rapid growth over the course of the next decade and a half. Industry reports estimate as much as 22 percent compound annual growth rate through 2030, with the Asian market being the initial driver.
Furthermore, it is expected that battery technology will eventually move away from lithium-ion technology toward lithium sulfur or lithium air batteries and perhaps eventually the sodium or magnesium versions. There are already reports that numerous battery manufacturers are considering moving toward battery chemistries that use less cobalt, and in the coming decades, we can expect increasing interest in more widely available, cheaper materials, such as iron and sulfur. So while its desirability may grow over the next several years, cobalt's days are numbered, even more so than lithium's.