From ground to cars: Mapping risks in the cobalt supply chain

Demand for electric vehicles is witnessing explosive growth. Meeting this demand requires the metal cobalt. The following report traces the cobalt supply chain and explores the risks related to its production.

Executive summary

  • A growing electric vehicle industry is pushing up the demand for cobalt, an essential component for higher grade batteries.
  • The DRC is currently, and will continue to be, the main global source of cobalt despite the country’s complex political and business environment.
  • An ongoing political crisis and fraught security environment increases the volatility of the metal’s supply chain. Other threats include poor resource governance and widespread ethical violations, which could pose regulatory and legal risks.
  • A2 Global encourages firms sourcing processed cobalt from China to take proactive steps to addresses vulnerabilities in managing these risks.
  • Demand for electric vehicles (E.V.s) is witnessing explosive growth. Meeting this demand requires the metal cobalt. The following report traces the cobalt supply chain and explores the risks related to its production.

Carmakers shift gears

The world has found a ‘greener’ alternative to combustion-engine vehicles. The world’s two largest automakers, Toyota Motor Corp. of Japan and Volkswagen Group of Germany, have pledged to mass-produce E.V.s over the next ten to 20 years.

Battery technology is advancing rapidly. The most widely manufactured battery is the lithium-ion battery, and this will likely be the case over the next five years. Although alternatives to battery electrics are available, their cost and complexity reduce the likelihood of them being produced at a comparable scale in the medium term.

In 2016, the battery industry alone accounted for 42 per cent of the world’s mined cobalt

Cobalt, a bluish-grey metal, is a key component in higher end batteries. Batteries containing the metal tend to have higher energy density, allowing vehicles to last longer on a single charge. In 2016, the battery industry alone accounted for 42 per cent of the world’s mined cobalt. It is also widely used for industrial purposes, ranging from gas turbines to chemical catalysts, where it is highly valued for qualities such as heat resistance.

Due to its economic importance, the E.U. and the U.S. have long designated cobalt as a strategic metal. China and the U.S. went even further in 2014 by stockpiling undisclosed amounts of cobalt, prompting private investors to adopt similar measures. The outcome is a tightening of supply for a metal which could be found abundantly in nature.

Yet only a few countries have exploitable quantities of cobalt. The Democratic Republic of the Congo, Australia and Canada stand out. Cobalt is rarely extracted as a primary product, but as a by-product of copper and nickel mining. As such, its quantity and prices are reliant on the mining activities for the other two metals.

Demand-side push

A foreseeable increase in the demand for electric vehicles (E.V.s) is one of the main reasons driving up the demand for cobalt. Between January and November 2017, the price of cobalt almost doubled from around USD17 to USD29 per pound. Several countries, including France, India, and the U.K., have committed to either reducing the number of combustion engine cars on their roads or incentivising electric vehicles. Yet China is to date the most ambitious in terms of the scale, extent and timeline of its plans. It views the E.V. industry not only as a means of reducing air pollution, but also as a chance to overtake Japanese and Western competitors in the global market for passenger and commercial vehicles.

China’s multi-pronged approach includes a cap-and-trade emission programme for new-energy vehicles (NEVs), comprising both E.V.s and hybrid varieties. By 2019, car companies with an annual turnover of more than 300,000 vehicles are obliged to have credits for NEVs equivalent to 10 per cent of annual sales. This quota will increase to 12 per cent for 2020, with the aim of putting 5 million E.V.s on the road by that point, up from 1 million today.

Alongside regulatory changes, Beijing has also offered incentives, subsidies and tax breaks to consumers and investors. The latter, in particular, is targeted at fostering domestic brands, and one of the beneficiaries is BYD Co. Ltd., China’s largest battery manufacturer. The firm has become the world’s largest electric car and bus maker even though it was established as recently as 2012.

Currently, most of BYD’s batteries do not use cobalt, and as such, they tend to have a lower energy density than higher power batteries. In turn, E.V.s fitted with BYD’s batteries will turn out to have lower performance due to their shorter range and the need to charge the battery more frequently. BYD has already signalled its intention to climb the value chain, and will likely require cobalt supplies for its newer products.

Supply-side risks

The developmental state

Cobalt’s supply chain is fraught with administrative, compliance, political, legal and reputational risks for battery and E.V. makers. More than 50 per cent of the global supply for cobalt is mined in the DRC, by far the world’s biggest supplier, which also has the world’s largest cobalt deposits, according to the U.S. Geological Survey. The DRC has a highly complex business environment, which combines poor governance structures, erratic policy making and pervasive security risk.

The situation has spurred efforts to search for alternative sources, given that significant amounts of cobalt are also present in Australia and Canada. However, there is a weak incentive structure to develop mines in countries other than the DRC given that the vast quantities of easily extractable and high-quality cobalt present in the country can be mined very cheaply. For example, in developed economies, miners need almost a decade even to begin production. Furthermore, they are unable to adjust prices to reflect operating costs as cobalt prices are pegged to those of copper or nickel.

As a result, the DRC will remain the main global source of cobalt ore in the medium to long term. Most of its copper and cobalt reserves are found in the south-eastern provinces of Haut-Katanga and Lualaba, which border Zambia, and Haut-Lomami. At present about 40 copper-and-cobalt mines are active in this area, more commonly known by its former name, Katanga.

To ship cobalt to the global market, consignments typically transit through ports in east and southern African countries, such as Mozambique, South Africa, Zambia, and Zimbabwe. This reflects the remote location of the DRC’s copper-and-nickel reserves as well as its dilapidated transport system, following years of under-investment. Most goods are transported via heavy-goods vehicles travelling on unpaved roads, often resulting in heavy traffic flows which create bottlenecks along major thoroughfares near mining-trading hubs, such as Lubumbashi.

In 2013, the country’s largest cobalt producers were Mutanda Mining (a local subsidiary of Anglo-Swiss Glencore Plc.), Tenke Fungurume Mining (local subsidiary of U.S. Freeport-McMoRan Inc.), and Boss Mining (local subsidiary of U.K.-based Eurasian Natural Resources Corporation). These companies accounted for 71 per cent of copper production in the DRC that year.

Their operations are predominantly based in the Haut-Katanga province, around the provincial capital of Lubumbashi. The area is a stronghold of the opposition, and this raises the risk of violence and instability linked to efforts to oust the DRC’s president, Joseph Kabila, who has refused to step down even though obliged to by the constitution. Conflict between regime supporters and opponents in Haut-Katanga could involve the use of military-grade weapons that would pose a potentially severe threat to mine facilities and logistics routes, although A2 advises that this scenario remains unlikely in at least the one-year outlook.

A more immediate threat to mining operations is posed by Haut-Katanga’s variety of non-state armed groups. These mobilise along ethno-linguistic lines, are armed with weapons, such as A.K.-type semi-automatic rifles, and engage the central government’s forces in the mining areas of Misisi, Mukera (Fizi), and Yungu – all three located in South Kivu province – as well as the neighbouring province of Tanganyika. This trend could pose a growing security risk to mining activities and supply chains in the cobalt-mining region, particularly if the militias approach mine managers for extortion payments to fund their activity, a common tactic used in the gold-mining areas.

In addition, mining firms also face widespread criminality, ranging from harassment to armed robberies, targeting sites, assets and personnel as well as local supply chains. Militant groups or bandits have been illegally collecting ‘protection fees’ at key transport chokepoints, a lucrative source of income, particularly along the mining routes in the Katanga provinces.

The security aspect

The security environment is rapidly deteriorating in the DRC due to longstanding armed conflicts and a deepening political crisis. The failure of President Joseph Kabila to step down as the head of state in December 2016 plunged the DRC into political turmoil. Dissatisfaction with the Kabila regime is growing across the country. Armed fighting has re-erupted in the restive eastern regions of North Kivu and South Kivu, while new conflicts have emerged in the southern Kasaï provinces, and a political and religious movement is presenting characteristics of an armed rebellion in the western province of Congo-Central, as well as the capital Kinshasa. Similarly, there are signs of re-emerging political violence in the south-eastern mineral-rich provinces, formerly known as Katanga.

Katanga has been at the centre of a secessionist movement and became a central theatre of the Second Congo War between 1997 and 2003. While the region has enjoyed relative peace since then, there are indications that the protracted political crisis could augur growing unrest, and even armed hostilities over the next two years.

The former governor of Katanga, Moїse Katumbi, has emerged as a key opposition figure. His supporters are hostile to the Kabila regime, and they have alleged that it is attempting to reduce the region’s economic influence, not least through its decision in 2015 to divide the region into four provinces: Haut-Katanga, Haut-Lomami, Lualaba, and Tanganyika. Protests occur sporadically in Lubumbashi, particularly over issues concerning the funding of provincial administrations, arrest of opposition politicians, including last year’s issuance of an international arrest warrant against Katumbi. Such unrest tends to be violent, as security forces typically use disproportionate force to disperse rallying crowds, and have the capacity to disrupt mining, processing and logistics operations in the region.

Should the political crisis worsen, it is probable that civil-society groups or newly formed non-state armed groups (NSAGs) could attempt to seize control over mining assets or transport links. Furthermore, many Katangans hold central positions in the state-security apparatus, and as frustration with Kabila grows, it is probable that such elites could turn against him.

Another concern is the eruption, spread and intensification of various old and new armed conflicts in the eastern and southern parts of the country since 2016. In the eastern South Kivu province, the Maї-Maї Yakutumba, a local self-defence militia, has taken up arms again and intensified attacks on government targets. In late September, its leader called for an armed rebellion against Kabila, courting other self-defence militias and NSAGs in the area to join them. The group traditionally mobilises its fighters along ethnic lines, with the political aim of ousting ‘Rwandophone’ elites – alleging that Kabila is part of this group – from the government and the military. It views the ‘Rwandophone’ community as foreigners, and targets them in xenophobic attacks.

Since September, the Maї-Maї Yakutumba’s well-armed militants have engaged the armed forces (FARDC) in heavy fighting in South Kivu, but also in the southward provinces of Maniema and Tanganyika. There are indications that the group’s activities could spread south-west towards Katanga in the medium term, as it is looking to forge alliances with other armed groups in eastern and southern DRC.

In addition to the direct threat of violence to miners and transporters, the Maї-Maї Yakutumba is also involved in criminal activities, including extortion and kidnap-for-ransom, to fund its political agenda. These activities are often related to mining in the area, particularly relating to control over mining sites and transport routes. While most of the affected areas are in Misisi, Mukera (Fizi), and Yungu, as well as Lake Tanganyika, where the primary metal is gold, it is possible that as the appetite for cobalt grows, so will its threat exposure to NSAGs.

Another group which has resurfaced amid the political crisis is the Bundu dia Kongo (BDK), a religious sect which is active in the south-western province of Kongo-Central, and the capital Kinshasa. The BDK also views Kabila as a ‘Rwandophone’ elite ‘invading’ the DRC. Although most of its members are poorly equipped with low-grade weapons, such as knives, machetes, and sticks, the group appears to be increasing its capabilities. On 16 May 2017, the BDK was responsible for a spectacular prison break at the Makala prison in Kinshasa to free its leader Ne Muanda Nsemi. For mining firms, it is also alarming that it enjoys strong support in the port city of Matadi, about 330km south-west of Kinshasa, and the country’s main commercial port. In August 2017, violent protests which erupted in Matadi left at least two people dead. It is possible that further civil unrest will disrupt the port’s supply chains.

In addition to the threat from NSAGs, fighting has also intensified in the southern provinces of Kasaї, Kasaї-Central, Kasaї-Oriental and Lomami following a violent uprising in August 2016 after government forces killed the Kamwina Nsapu, a local traditional chief. Several smaller self-defence groups took up arms, primarily against the FARDC, but also against each other as they compete for control of transport links and land. The general state of violence began spreading to neighbouring provinces, including Lualaba, and this was without any specific individual or group leading the campaign. A severely deteriorated security environment in the southern Kasaї regions could disrupt transport flows between Matadi and Lubumbashi, as well as Kolwezi, another mining-trading hub in the region.

Finally, crime is a growing concern, with incidents of banditry commonly occurring along important transport routes, where freight forwarders are often victims of racketeering or extortion, and foreign workers are kidnapped-for-ransom. As the demand for cobalt goes up, and with infrastructure still being in an extremely poor state, organised crime groups are likely to specifically target the many chokepoints in southern DRC.

Poor resource governance

At a national level, the lack of transparency and rampant corruption in the DRC’s mining sector pose regulatory and legal risks for corporates. This is most evident in the government’s repeated attempts to privatise state-owned firm Générale des Carrières et des Mines (Gécamines), a central but opaque actor in the country’s mining sector.

Its privatisation process, which began in 2009, has been poorly planned and implemented, with reported cases of political interference from the highest levels. A notable case is when the government in 2009 expropriated a tailings site operated by Canadian miner First Quantum Minerals and the World Bank’s International Finance Corporation. The authorities subsequently transferred the asset to shell companies linked to Dan Gertler, an Israeli billionaire businessman and a friend of Kabila.

the lack of transparency and rampant corruption in the DRC’s mining sector pose regulatory and legal risks for corporates

Furthermore, the government’s often erratic approach towards regulating the mining sector fuels further volatility in the cobalt supply chain. In the past year, the government has taken a protectionist turn in its management approach. In October 2017, the authorities ordered Sicomines – a joint venture between DRC firm Sinohydro Corp and China Railway Group Ltd. – to stop exporting unprocessed minerals, in an attempt to increase the production value in the mining industry.

Earlier, in February 2017, a ‘national preference’ clause was added to the mining code to limit the share of goods and services firms can sub-contract to foreign entities. Moreover, foreign mining firms are also required to set up local subsidiaries in order to create more jobs for local workers. More often than not, these directives tend to have short deadlines, but lack substantive details regarding their implementation and enforcement.

Ethical concerns

Cobalt mining in the DRC is associated with a host of unethical practices, one of which is exposing local communities to an elevated health-and-safety risk due to toxic pollution from mining operations as a result of the DRC’s weak environmental legislation. This could potentially contradict the corporate image of battery and E.V. makers which champion their ‘green’ image. Another concern is the impact of mining projects on large-scale displacement of local communities and land-grabs, which often fuel conflict in south-eastern DRC. Unclear land law, weak institutions coupled with overlapping legal frameworks often complicate this problem for foreign investors.

Furthermore, the cobalt industry has also been linked to widespread labour-rights violations. Most of the controversy surrounds artisanal or small-scale mining, and the involvement of child labourers, many of whom work long hours and in hazardous conditions. A 2015 report by human-rights advocacy group Amnesty International accused multinational corporates, such as Apple Inc., of fuelling such practices through Chinese mining and refining firms with supply chains in the DRC. One of these Chinese companies is Zhejiang Huayou Cobalt Co. and its Congolese subsidiary, which is one of the largest mineral processors in the DRC. This illustrates cobalt’s long and complex supply chain, in which foreign corporates are at risk of being indirectly implicated in human rights abuse allegations.

ASSESSMENT

As the transition to electric vehicles appears to be intensifying over the next five years, demand for cobalt from the DRC is set to increase, exposing more companies – knowingly or unknowingly – to a host of security, regulatory and reputational risks.

Western governments have yet to designate cobalt among ‘conflict minerals’; these are commodities mined in conflict zones, particularly in the DRC and adjoining countries, whose proceeds purportedly fund violence. The U.S. Dodd-Frank Act on conflict minerals lists cassiterite, columbite-tantalite (commonly referred to as coltan), gold and wolframite as conflict minerals. Ongoing lobbying efforts for the inclusion of cobalt to this list are unlikely to gain traction over the next three years, given that U.S. President Donald J. Trump is proposing a suspension of this portion of the law.

Nevertheless, the risk of prosecution remains. Under the U.K. Modern Slavery Act, public companies with a turnover in excess of GBP36 million are required to demonstrate that slavery and human trafficking are not present in their business or supply chains. In 2016, the Ministry of Justice brought 51 new prosecutions, four times more cases than a year before when the act came into force, indicating a willingness to enforce it.

In addition to compliance risks, brands could also face reputational damage, as consumers are increasingly demanding companies to exhibit good corporate behaviour and responsibility. This is likely to be a greater threat for the automotive and consumer electronics goods sectors, which have a lower resilience to reputational challenges than the extractive industries.

U.S. technology giant Apple Inc. is a case in point. Following an internal audit in 2013 and a more recent report in 2015 by Amnesty International that the company sources cobalt from suppliers involved in child exploitation in the DRC, Apple has temporarily suspended its cobalt supply, expanded third-party audits on its supply chain and worked with NGOs on child labour and human-rights abuses in the DRC.

A2 Global advises firms, particularly those sourcing processed cobalt from China, to adopt a proactive stance towards managing their supply chain risks. This should involve conducting risk assessments to identify the highest risk areas, having a robust framework to tackle the issue, communicating the company’s standards across the supply chain, and auditing their third parties at regular intervals.

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