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Podcast April 13, 2022

Cobalt Market Dynamics and the Energy Transition

View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage

In this episode, we discuss the importance of cobalt in the energy transition, global market dynamics, and a very important cobalt producer: the Democratic Republic of Congo

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Roumeen Islam: This is the World Bank’s Infrastructure podcast. In this episode, we discuss the role of cobalt in the energy transition and a major exporter of the metal. 

In a recent report by the International Energy Agency, there's mention of the Clarion-Clipperton Zone. This is an area that stretches from Mexico to Hawaii and covers more than 4 million square kilometers of seabed. It is particularly rich in metals with estimates suggesting that there are six times more cobalt there than in the world's entire land-based reserves. However, these cobalt resources are deep in the water, as much as 6,000 meters deep. So, this means that not so easy to exploit. There have been technological, economic, and legal constraints to their exploitation, and when eventually they are exploited, It has to be done responsibly. Making sure we're not endangering other species, habitats, and ecosystems over the longer run. But why is cobalt so important? Because it's key to the energy transition. Why is this? And how does current supply look? How does the market work? Well, let's find out by looking at a very special country.  

Good morning and welcome. I am Roumeen Islam, host of Tell Me How, and today I have with me Remi Pelon, an expert in the mining sector and who will be talking about cobalt and its importance for the energy transition. 

Welcome, Remi.  

Remi Pelon: Thank you, Roumeen. It's great to be here.  

Roumeen Islam: So, Remi, would you begin by telling us what is cobalt and why is it important?  

Remi Pelon: Cobalt is a metal, that has become quite popular recently because of its role in battery technologies. You know, especially for electrical vehicles, EVs. Cobalt has been used for a long time across different industries and products like superalloys, magnets, electronics, and even paint. But the so-called lithium-ion batteries now account for more than 50% of the demand for cobalt today.  

Roumeen Islam: And those are the main batteries used in electric vehicles, right?  

Remi Pelon: Yeah, exactly. That particular technology has gained a lot of traction in recent years.  

Roumeen Islam: So as the demand for batteries increases, this looks good for cobalt and those who produce cobalt, right? 

Remi Pelon: Yeah, exactly. If you only take electric vehicles that should represent half of the car sales globally by 2035. Well, to enable this to happen, cobalt consumption will have to grow from about a hundred thousand tones in 2020 to 660,000 tones in 2035. So that's nearly seven fold. So imagine what it represents for the countries that are indeed mining or processing or trading that mineral. 

Roumeen Islam: Yeah, I guess it presents a unique opportunity for these countries because they get revenues from this, right?  

Remi Pelon: Exactly. That's what I'm saying. Imagine with the gas prices so high renewables are even higher in demand. And, these countries which we'll be able to pick up this opportunity will indeed see a lot of expert revenues increase. 

Roumeen Islam: So, in what form is this mineral found in countries?  

Remi Pelon: Cobalt is found together with different minerals in a range of geological contexts, but its concentration in the rocks is rarely high enough to make it exploitable. In fact, it's most of the time extracted in association with another metal like copper or Nickel. 

Roumeen Islam: I see. That's interesting. So sorry, but even with such high prices, you would say that it's not economical to mine cobalt just for cobalt? 

Remi Pelon: That's right. I mean, it really depends on the geological setting, right? I mean, it's where to find a deposit where cobalt is so rich that it could justify a mining investment as such. Morocco has one but it's really an exception. The bulk of the cobalt comes from copper or nickel mines, which has critical implications on the market. As you can imagine, consider for instance, if copper is high on demand, that could be more cobalt available on the market, which could drive prices down. And on the contrary, when there's a peak of demand for cobalt, it might take some time for a copper miner to adjust its production and catch up with the demand for what is only a byproduct for him.  

Roumeen Islam: This makes for really interesting economics, Remi.  

Remi Pelon: That's right. And there are also situations which are on the edge. If you take the Mutton mine, for instance, in the DRC, it's known as a copper mine, but it's also probably the biggest one for cobalt in the world. And at some point in 2018, when cobalt prices were high, it's possible that cobalt actually generated more profit than copper there, which changed when government introduced a special royalty for strategic minerals. 

Roumeen Islam: I see. So of course, and the tax system under which this extraction operates influences the incentives as well.  

Remi Pelon: Absolutely.  

Roumeen Islam: So, our cobalt reserves scattered around the world?  

Remi Pelon: Well, that's the most interesting feature for cobalt. The fact that it's very concentrate today. Two countries actually dominate the global production. 

You have DRC the democratic Republic of Congo at the stage of extraction and China at the stage of refining. So about two-thirds of the cobalt that is mined today comes from that one country DRC, which has more than half of the known reserves in the world. And similarly, about 60 to 70% of the mineral is processed in China. It means it goes to China to be refined into pure cobalt metal.  

Roumeen Islam: So, this is a sorry, so this is a high degree of concentration. And what do you think the implications are of this high degree of concentration source?  

Remi Pelon: Well, that actually raises risks for importers and, it's the main reason why cobalt has been listed as a critical mineral in some important countries. 

Roumeen Islam: What does it mean to be a critical mineral? 

Remi Pelon: So, if you take the definition in the sense of the European Union, a mineral is dubbed critical when it's both important economically and risky from a supply point of view. So essentially the degree of concentration of the supply would determine this risk on the supply side. 

Roumeen Islam: Right. Because if anything were to disturb that source of supply and then that would have very large market effects. So, cobalt indeed has a very high level of concentration in source, but it's sort of surprising that there aren't other places where cobalt can be mined. So let's take that as a given for now and let me ask you how effective is the recycling of cobalt. Could you do that to increase the supply?  

Remi Pelon: Yeah, you could. I mean, recycling is another important source actually, even today one estimates that about 30% of the cobalt from electronic waste is recycled. But when you compare to other minerals, that's low, if you compare to copper, for instance, but that high, if you compare to other critical minerals. Only 5%, let's say of the lithium-ion batteries are recycled. 

Roumeen Islam: That's really a small percentage, I think. 

Remi Pelon: That's right and that's why the EU has taken action on this to improve the security of supply and at the same time to make the economy more circular, it has recently proposed a new battery regulation, which would have mandatory minimum levels of recycled content in batteries for different minerals and for cobalt, I think it's a 12% by 2030 and 20% by 2035. 

Roumeen Islam: So again, we see the impact of policy on actions taken by producers and users. We had the taxes before and now the regulation by the EU. I conclude that recycling is not cost-effective at this stage, and that is why they have this new regulation and could you speak a bit more about that? Why is it not cost-effective? 

Remi Pelon: It depends. I mean, It's cost-effective depending on which product I was more talking about the battery supply chain at that moment, which needs to be organized, you know, that really to gain in efficiency. As I said, that the recycling of electronic waste is a little more organized at this point in time. 

So, but it's a lot about the logistics of the recycling chains and the environmental impacts as well, because when you recycle that you actually need a lot of chemicals.  

Roumeen Islam: What about energy, do you need energy?   

Remi Pelon: Absolutely. You need chemicals for the processing, but you need energy to run the industrial processes and that of course has a carbon footprint.  

Roumeen Islam: All right. Well, let us move on. I understand that most of the cobalt is mined from one place, probably because it's much cheaper to mine here than elsewhere. So, we can say that DRC has a comparative advantage in the production of cobalt. 

Remi Pelon: Yeah, we can definitely say so. 

Roumeen Islam: And its export destinations are also concentrated. Now, this I don’t think I completely understood. Why is it that its export destination is also concentrated?  

Remi Pelon: So that's a good question. And it's a lot about the history of growth in, in China, there has been an increase in demand for raw materials in China and China companies have sought to secure supply for their needs. 

So, in the DRC, China's gained control for more than 50% of the industrial production, Eight of the 14 largest cobalt miners. For example, in Congo are now Chinese-owned, even though some of them are in joint ventures with the DRC state-owned company. China has also dramatically developed its domestic refining business over the years and not just for cobalt, we've seen that in many other minerals, including mediums one of those like iron aluminum. So, China is so cost-competitive we could say that some refineries elsewhere in the world had to close.  

Roumeen Islam: I see. So, are there plans for DRC to enter refining? I mean, they could refine their own cobalt and export that, and that way you would, I guess have a diversified export destination from the perspective of the DRC. 

Remi Pelon: DRC comparative advantage is mainly upstream today. Government has indeed introduced rules in the mining law to make the transformation of minerals mandatory before export, but it's proved hard to fully enforce. Given the lack of available energy, only the first stage of processing is usually taking place at the mine site or in the mining cities like Kolwesi or Lubambashi. 

Roumeen Islam: So, let me just stop you one minute to hear, cause you said something very important, which is that the lack of electricity, in fact, is a constraint moving up the chain. The value-added chain.  

Remi Pelon: Yeah. I mean, electricity or other sources of energy in the DRC it's difficult to get a sufficient power, even though the government would like to beneficiate. The minerals it's extremely energy-intensive and it cannot happen overnight.  

Roumeen Islam: All right. I interrupted you, please go on. 

Remi Pelon: No, that's exactly what they wanted to say. I mean, a lot of countries want to further develop downstream. Bcause it makes sense in terms of generating jobs and taxes, right? If you take Chile, which is a much richer country and the biggest copper producer in the world, it had announced back in 2018, that several factories would be built in the country to produce battery parts. 

It's it's an ongoing process, you know, that's not happening overnight increasing value addition by promoting beneficiation is really a long-term strategy.  

Roumeen Islam: Right. So it requires sustained commitment and a vision for the future that is implemented over the longer term. Are there other elements of the cobalt supply chain and the DRC that stand out? 

Remi Pelon: Yes. So far, we've spoken mainly about industrial mining, but much of the attention has been put for some time on artisanal mining, which is about 10 to 20% of DRC cobalt output. This is cobalt mined by individuals or small entities working with rudimentary means. Digging the ground with picks and shovels carrying the ore in heavy sacks on their back. 

This may sound familiar to everyone who heard about conflict diamonds, gold rush, or Colton in the DRC. You know Colton? this mineral for Tantalum, another critical one that goes into your smartphone.  

Roumeen Islam: Actually, I had never heard of Colton until you just mentioned it.  

Remi Pelon: So, that is Columbo-Tantalite It's the name. It's the short name. The nickname, if you want to have a for the mineral. The main one for Tantalum. It made the news at some point earlier in the 2000s. When people realized that again, artisans were mining this mineral and it was supplied to the high-tech industry without the necessary due diligence on the potential social impact. 

Roumeen Islam: I interrupted you with my discussion on Colton. You were going to say. 

Remi Pelon: Yeah, for all these minerals, thousands of Congolese mine almost manually and often informally and this activity provides them with a very necessary livelihood. But also raises significant challenges in terms of social and environmental impacts. 

I think that that's the point there's, there's a potential link as well between artisanal mining and conflict, at least in the east of the country, and the link between this activity and other issues like child labor or gender-based violence.  

Roumeen Islam: Well, these are some very important factors to consider. 

Let's talk about this a bit more. Could you, but first, could you continue explaining how the supply chain actually works for artisanal mining?  

Remi Pelon: Yes, absolutely. I mean, in the past snow miners were simply digging the ground and selling freely to trading warehouses called depo. Who were mixing materials coming from different sources and doing the first stage refining and then exporting it and things have slowly changed. Government created a new state owned company. Called Entreprise Générale du Cobalt (EGC) that was back in early 2020, and EGC is supposed to become the sole legal buyer of artisanal Cobalt. This is a part of a strategy to improve the working conditions of these miners, as well as the traceability of the product. And this is also a way for the government to try and stabilize the market.  

Roumeen Islam: So those intentions, the stated intentions of the government in establishing EGC, but would you please expand on how EGC could stabilize markets? I'm not sure. I understood that.  

Remi Pelon: Well, the artisinal mining subsector and the DRC has been viewed as a swing producer. We will discuss a little bit the specificities of the cobalt market. And as a result, its price can be very volatile. Artisanal mining tends to bridge the gap between cobalt, supply, and cobalt demand. When cobalt prices go up. More artisans come down to the mine sites and sell their products in a very reactive manner. And when cobalt prices fall, artisanal miners tend to switch to other activities or other minerals like copper, which have more stable prices. So that's what happened back in 2018/19 when cobalt prices plummeted from US$90,000 down to $30,000 per tonne. 

Roumeen Islam: That's a big jump down.  

Remi Pelon: That's right. That's the volatility we're talking about. Yeah. So government wants to limit these swings and with EGC, it's trying to limit the amount of cobalt that would arrive on the market when prices are high to avoid prices going down. So, there are risks associated with this approach, and we think it'd be useful to study it further tounderstand its effect on the market its distributional impacts and its fiscal impact. Most likely it'd be easier to get broader gains to the people, If some competition is maintained  

Roumeen Islam: Yes, I definitely see that. And, I understand why you think further study of this would be important. Risk perceptions regarding the supply chain and trade are high and have increased. Why is that? 

Remi Pelon: The perception of risk is indeed very high in the cobalt supply chain. The price it’s always the ultimate variable to find some balance in the market, but price does not necessarily reflect all the hidden externalities. I would say that the risk are symmetrical of two kinds. The first one is a security of supply risk. As we eluded some companies and countries believe that the level of concentration of cobalt imports is too high given its economic importance and to mitigate this risk, the market factors are doing what they've always done to improve security and price stability. They try to diversify supply, improve recycling or encourage substitution.  

Roumeen Islam: So, these are some excellent points you just made, and you also hinted at some of their limitations earlier, but could you give an example of how a company is trying to mitigate the risk? 

Remi Pelon: An interesting example is Tesla's effort to reduce and potentially eliminate cobalt from its batteries. To produce the model three in China, Tesla chose to favor lithium iron phosphate batteries, LFP that actually do not contain cobalt. So, that shows you that substitution is really something real.  

Roumeen Islam: That's actually very interesting. So, the more technological advances we've got, the substitution possibilities will probably emerge over time. Andthat is a risk for the producers right now as well. So, what is the second risk that you were speaking about?  

Remi Pelon: Yeah, the second risk is more of a reputational risk because the world's largest cobalt supplier is DRC, where up to a fifth of production is generated by artisanal miners working in dangerous conditions. Consumers will want reassurance that they're raising demand for a greener economy does not have unintended consequences on the environment or in terms of human rights. 

Roumeen Islam: What is the market doing to mitigate this risk? You mentioned Tesla's efforts to substitute, but are there other actions to mitigate this sort of reputational risk? 

Remi Pelon: Yeah, absolutely. I mean, some companies have put in place measures to prevent any artisanal cobalt from the DRC from entering the supply chain. Claiming to source ASM-free cobalt. ASM stands for artisanal and small-scale mining, but more constructive efforts have focused on responsible sourcing. That's an approach to sourcing minerals that guarantee to the consumer that certain standards have been followed throughout the supply chain. Material must come from a compliant source and must be independently, audited, and verified to protect stakeholders from potential legal action. So, when it comes to cobalt, the efforts have focused on labor conditions and preventing child labor from mining sites.  

Roumeen Islam: Right. I guess we see the power of market actors in action, as well as, you know, government policies in this discussion so far. Are there other concerns regarding the way cobalt is mined and traded? 

Remi Pelon: Well, the hope is that a country like DRC that faces so many challenges for its young and expanding population will take advantage of the opportunity it has with cobalt to improve the prosperity of its citizen, but for this governance of the sector and its sustainability will be critical. One dimension of this is that the best deposits are rapidly being exhausted and to keep attracting new investments in the sector, The DRC government will need to invest heavily in geology to help discover new deposits. Companies will also have to invest in new processing equipment to explore the deeper and harder rocks. And, they will look for stability and transparency, which has proved hard in the past to obtain in the DRC. 

Roumeen Islam: Of course, companies will look for stability and transparency. If they're going to make new large long-term investments. Are there lessons from other countries or markets?  

Remi Pelon: Yeah, this story on cobalt in DRC is unique in many ways, but it does illustrate major trends that are taking place globally. 

First, the energy transition will be mineral intensive. So, the efforts to source minerals around the world in accordance with sustainable practices should be continuously promoted. That's why the World Bank has developed this approach Climate-smart mining on which you, I think, did a podcast before.  

Roumeen Islam: Yes, thank you. I did. 

Remi Pelon: Some people have even gone further and called for a new international minerals agency, based on the model of the International Energy Agency. Second, I think responsible sourcing should be part of the whole circular economy agenda. We know that recycling will not suffice to provide the needed minerals of the future. Cobalt is just one example. The battery regulation that the EU is proposing covers other minerals like lithium, Nickel, etc. 

For all of them, there will be challenges associated with sourcing from overseas and consumers will more and more require that high standards be applied and guaranteed throughout the supply chain. The OECD has been leading an effort on the responsible sourcing standards and on cobalt, there are multiple international initiatives, like the Fair Cobalt Alliance, the Cobalt Action Partnership, the Responsible Cobalt Initiative that are following or customizing these OECD guidance. 

Roumeen Islam: So Remi, I didn't know that there were so many alliances and associations on cobalt alone. I guess there's quite some concern about the cobalt market. Is there anything you'd like to add to this?  

Remi Pelon: Well, I just maybe want to add this point on domestic solutions because you know, we're an international organization, we should continue to promote good international practices and key principles like transparency, sustainability, but we should always continue to learn more about the local dynamics and search for new ways to support developing countries, to take advantage of their unique mineral wealth for the benefit of their population. 

Roumeen Islam: Thank you very much Remi. That was very informative. Thank you.  

Remi Pelon: Thank you. Roumeen. 

Roumeen Islam: Well listeners, what did we learn? Firstly, cobalt production today is concentrated in a few geographical areas.

Secondly, cobalt prices like other commodity prices tend to be volatile and add complexity to this. Cobalt production does not just respond to its own price, but also to copper prices. Because the two are mined together. Of course, domestic conditions and large producers, like whether there's competition in the market, also affect global prices.

Thirdly, cobalt demand is high and has been rising because of its importance in the energy transition. The DRC, other cobalt producers and their citizens can benefit from this. But this depends on a number of factors important among which is good policy.

Finally, reputational risk associated with poor governance of the market, particularly in main producers, including conditions that affect labor, we'll tend to shift consumer demand away to sources where risks are lower and to new technologies.

Thank you. And bye for now.