Cobalt faces a looming supply disruption threat

February 8, 2012 06:00 PM

Demand for cobalt used in cellular phones and electric vehicle batteries is expected to remain strong, but the sector could be plagued by supply disruptions because of logistics and infrastructure problems at its principal mining source in the Democratic Republic of Congo (DRC) and a looming threat of export quotas from China where most ore is shipped for refining.

Lara Smith, managing director of Johannesburg-based Core Consultants told the Investing in African Mining Indaba that the sector will see continued strong demand for cobalt driven by penetration rates of cellular phones in developing countries, as well as other portable devices, and lithium batteries for electric vehicles and robust demand from the superalloy industries.

Over 50% of the world's cobalt reserves are in the DR, but In 2011, as previous, less than 5% of cobalt was refined in the Central African region, Smith said. “Most of it was going east to China for refinement and, in fact China remains the largest exporter of cobalt to the United States,” she said.

Cobalt has numerous uses, including superalloys and catalysts, but its growth in battery applications has outpaced all other end uses and now accounts for 27% of overall consumption, compared to only 11% in 2002, Smith said.

“If you have a look at mobile phones, with respect to batteries, 3.6 grams of cobalt is used in just about every single cellular phone and since 2005 the number of mobile phone subscribers has increased from 2 billion to 5.8 billion in 2011,” Smith said. “If you consider the average global penetration rate of cellular users was 85% in 2011, then we believe that there are still substantial gains to be had in Africa and Asia, where the penetration rates are much lower. In Africa, the penetration rates are only 42% and in Asia they are still hovering around 75%.”

On a previous year when Smith spoke at the a Mining Indaba conference, those figures were calculated at 34% for Africa and around 68% for Asia, Smith said. “So you can see the startling growth in only a year in this market,” she said

Laptop and tablet computer growth since 2009 has increased 35% and production is expected to double over the next five years, requiring an estimated 11,000 tonnes of cobalt, Smith said. The most exciting development in the battery market is, however, expect to be in electric vehicles. A good approximation of use, she said, is four kilograms of cobalt for a hybrid electric vehicle and six kilograms for an electric vehicle battery.

“Based on announced plans by leading automotive manufacturers, we believe that you should see about 12 million to 13 million hybrid and electric vehicles on our roads by 2020,” Smith said. “This will necessitate as much as 20,000 to 30,000 tonnes of cobalt.”

Additionally, China is expected to produce an estimated 80 million electric bicycles by 2015 and if existing technologies are adopted for these, this would place further upward pressure on cobalt.

The use of cobalt in superalloys – which are frequently used in jet engine applications – remains a major industry demand for cobalt. She noted that Boeing Co. had recently revealed the largest commercial deal in history worth $19 billion with Southwest Airlines placing an order for 208 single-aisle aircraft. Boeing has also forecast demand for 33,500 new aircraft over the next 20 years, while Airbus has speculated that the United States will require almost 6,000 new passenger aircraft by 2030 and Asia will require 8,500 aircraft over the same period, Smith said.

In terms of cobalt supply, there are a number of new projects in the pipeline, but those projects are by and large contained in the DRC, “A region where geopolitics has been and could become again tumultuous,” Smith said. “Moreover, transport logistics in Africa as a whole is in need of a continental overhaul and is extremely problematic.”

This could bring supply disruptions, she said, noting that her firm had last year presented an analysis of the DRC’s logistical challenges to the industry’s Cobalt Institute. One of Smith slides from that analysis calculates that given announced copper, cobalt and zinc projects being developed, all which compete for the same logistical infrastructure, a future mine rate of 550,000 tonnes is expected by 2016.

“And assuming that all projects come to fruition, and no upgrades to the current infrastructure, this would result in over 500 trucks queuing at the border on route from Kolwezi by 2016 and over 700 trucks thereafter,” Smith said.

In addition to the transport constraints, she noted that cobalt consuming industries are placing increased emphasis on diversifying production away from the DRC. Japan and the European Union have adopted strategies aimed at securing strategic metals though partnerships, trade agreements and acquisitions.

The US also has facilitated diversification through creating a national stockpile and financing domestic production projects, she said. “There is the looming threat, that as China accounts for the lion’s share of cobalt refinement and indeed leads the supply of cobalt imports to the United States that China could potentially restrict exports of cobalt, as they have done with numerous other commodities, including rare earths … and tungsten,” Smith said.

Such a move by China could lead to greater price volatility and increased risk of supply disruption, she added.

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