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The London Metal Exchange’s decision to investigate cobalt traded on its exchange highlights the problem of properly sourcing the battery metal at a time of rapidly rising demand from electric vehicles and consumer products.
The price for cobalt has jumped over 80 per cent year-to-date, generating profits for companies who can access the mineral and refine it into battery materials used for cars and smartphones. After struggling to break-even last year Huayou Cobalt, the world’s largest refiner, says its profits hit $152m in the nine months to September.
The LME, the world’s largest metals exchange, has no specific rule governing the sourcing of the raw material used in cobalt production. But is trying to take action on whether the metal stored in its warehouses could be linked to child labour as big end users such as Tesla and Apple face scrutiny about their supply chains.
Two weeks ago the LME wrote to its suppliers asking them about their processes and policies, following concerns about some of the cobalt being traded on the exchange, according to a notice seen by the Financial Times. China-based Yantai Cash, which comprises about 25 per cent of the exchange’s stocks of cobalt, is carrying out an audit on its supply chain.
“It’s going to be more pertinent as we move forward in these markets that products are ethically sourced,” says Gordon Buchanan, chairman of the LME Cobalt Committee and a trader at Stratton Metal Resources. The committee raised the issue during its September meeting, he adds. “It’s vital they [the LME] pursue this line. It absolutely has to be addressed.”
Over half of the world’s cobalt comes from the Democratic Republic of Congo before going to China to be processed into battery materials. While large miners such as Glencore and China Molybdenum operate in the DRC, an estimated 10 to 20 per cent of cobalt supply comes from small-scale miners who mine by hand.
Amnesty International said in a report last year that some of these small-scale mines employed children as young as seven.
Benedikt Sobotka, chief executive of miner Eurasian Resources Group, which has operations in the DRC, says there is “almost a 100 per cent chance that your smartphone or electric vehicle contains cobalt that comes from child workers in artisanal mines”.
Most refiners in China don’t have their own mines in the country, so they locate supply from a variety of different sources in the DRC, including small-scale mines where workers toil by hand.
The prices for so-called artisanal supply can trade at a discount of up to 10 per cent compared to material that comes from larger mines, according to traders, increasing the incentives.
“There’s a huge business here,” says Joshua Rosenzweig, an analyst at Amnesty in Hong Kong. “The profits are compounded if you can source cheaply off the backs of men and women and children who are trying to scrape by the best they can working under really hazardous conditions.”
Exacerbating the problem, Chinese companies are racing to supply battery makers who are rapidly expanding to meet the needs of carmakers. Volkswagen said last week it would invest more than €34bn in electric and self-driving cars over the next five years.
Huayou Cobalt, which represented about 20 per cent of the global market in refined cobalt products last year, says it gets about 50 per cent from its own smelter in the DRC. Of that amount, between 20 to 30 per cent comes from artisanal and small-scale mining, it says.
Over the past year Huayou has done an audit of its supply chain and stopped buying from local markets where artisanal supply can be mixed in, it says.
Other Chinese companies are also under pressure to take steps to monitor their supply chains. Nanjing Hanrui Cobalt, a cobalt producer which listed in China in March, says in its prospectus that it uses artisanal supply. Yantai Cash is listed as one of its main customers.
Still, responsible sourcing requires having a system and process in place that helps map and identify challenges in a cobalt supply chain and monitor improvements over time rather than just in response to allegations, according to Nicholas Garrett, chief executive of RCS Global, which helped Huayou audit its supply chain.
“Now it’s about application and reporting on the continuous improvement over time,” says Mr Garrett.
In September a group of companies including BASF and Volkswagen as well as non-government organisations launched a Global Battery Alliance at the World Economic Forum. The group aims to end child labour in the battery supply chain.
The LME’s move is a good first step but it is up to companies in the supply chain to be more transparent about who they source from, says Mr Rosenzweig from Amnesty.
“If companies continue to purchase cobalt from the traders that don’t carry out due diligence that sustains a market for irresponsibly sourced cobalt,” he adds. “That’s one reason why it’s important for downstream companies to make sure they can identify their cobalt smelters in the DRC and ask them questions about their sourcing policies.”