The cobalt curse: supply risk and inequality in the DRC

The heart of a smartphone is the product of a long journey. Its lithium-ion battery contains cobalt, the bluish metal mined as a by-product of copper and nickel, essential to the rechargeable battery technology found in laptops, mobile phones and electric vehicles. The metal is set for a meteoric price rise as demand rises on the back of bold announcements by the French and German governments to ban petrol and diesel car sales by 2040. Transparency Market Research estimates that by the end of 2022, the global automotive battery market will be worth more than $54.5bn, up from $30bn in 2015. Bloomberg New Energy Finance predicts cobalt demand will increase 30-fold by 2030.

“Investment in cobalt at today’s prices is a bet on the growth of new demand from electric vehicles and for rechargeable batteries. All indicators are that these markets will take off in the coming years,” says Jason Kaplan, economics associate director at analyst IHS Markit.

Supply and demand

The current market, however, is one of mounting demand and tight supply. Some 65% of the world’s cobalt resources lie in the Democratic Republic of the Congo (DRC), which is in itself perhaps the greatest challenge to supply.

“We see the demand growth really outpacing supply growth. In the next five years, we believe that is going to create a meaningful deficit,” says Andries Gerbens, head of sales at London-based Darton Commodities. “The problem is the market right now is already quite stretched, so it only takes a minor disruption on the supply side for prices to react.” 

Amid the DRC’s current political instability, this is a constant reality. President Joseph Kabila is refusing to hold elections after 16 years of rule, despite a mandate to step down in December 2016, and violence and famine in a number of provinces has led the UN to designate the country a 'Level 3' emergency, on a par with Syria and Yemen. Nonetheless, in a country the size of western Europe, some provinces are under government (rather than rebel) control. Cobalt mining operations, concentrated predominantly in the mineral-rich south-eastern province of Katanga, fall into this category, considered safe but vulnerable.

Alternative markets

Battery producers are racing to find cobalt sources outside Africa. Canada, Australia and the US are home to some mining projects, but none match the scale of the DRC’s supply.

Two major DRC projects are slated to open up supply and potentially temper prices, which have seen cobalt rise to $28 per pound from about $11 in 2016. Mining giant Glencore is reopening its previously mothballed Katanga mine, shuttered in 2015 during the global commodities downturn. Slated to begin operations in 2018, it aims for production of 22,000 tonnes per year. This would constitute about 20% of global production, currently at just under 100,000 tonnes annually.

In southern Lualaba province, Luxembourg-based Eurasia Resources Group will commence cobalt production in 2019 with a capacity of 14,000 tonnes per annum in phase one. While some analysts expect this to bring cobalt prices down, Mr Gerbens maintains that demand will continue to rise faster than supply growth. “In theory the DRC should be benefiting, but in reality it’s the bigger mining firms that are operational there,” he says.

Poor returns

A country well known for political instability and a harrowing colonial legacy, and where it has been said every element in the periodic table can be found, the DRC has for centuries produced some of the world’s richest minerals while its people remain among the world’s poorest. Its poverty rate is about 64% and the country ranked 176 out of 187 countries in the latest UN Human Development Index.

“One of the biggest obstacles to the Congolese people benefiting from the country’s cobalt wealth is the disappearance of funds derived from mining taxes,” says Jordan Anderson, Africa analyst at IHS Markit. Ethics watchdog Global Witness recently reported that between 2013 and 2015, 30% of state mining revenues paid by companies simply disappeared. “This contributes to Congolese doctors, teachers and civil servants going unpaid. Instead the money is siphoned away by other government agencies and influential individuals,” says Mr Anderson.  

This has as much to do with corruption as with a severely mismanaged tax system, according to Bady Balde, francophone Africa director at the Extractives Industry Transparency Initiative (EITI). “This is a legacy from the era of former president Mobutu Sese Seko,” he says. “It’s a free-for-all for state-owned companies, each making their own rules.” Until 2014, he adds, there was no official count of how many companies operated in the country. Additionally, provincial governments, deprived of adequate funding from the central government, engage in what Vincent Freigang, analyst at risk consultancy PGI, calls “predatory, rent-seeking behaviour, because they need the taxes to finance their own operation”.

Two steps back

Efforts by groups such as the EITI have borne some fruit. The organsiation operates in more than 50 countries and gathers officials, mining executives and civil society to publish reports and pursue greater industry transparency.

“The EITI made a lot of progress with the DRC between 2013 and 2016, under prime minister Matata Ponyo, who was very keen on the issue. It improved substantial information on licences, payments, revenues and contract transparency,” Mr Balde says. Since the prime minister’s resignation in 2016, however, leadership and support for reform has faltered.

“The current Congolese government is not making a meaningful effort to tackle these problems, because it is in many ways built on networks of patronage which depends on them, and from which senior government figures hugely benefit,” says Mr Anderson. The importance of these networks is only increasing as Mr Kabila further delays elections and extends his hold on power.    

A dangerous environment

Tied to the cobalt mining industry in the DRC is a slew of human rights abuses, a depressing irony given the metal’s adoption by socially conscious companies such as Tesla, which are developing electronic vehicle batteries to mitigate the environmental damages of carbon-emitting engines. Amnesty International’s 2016 report ‘This is what we die for’ provided evidence of child labour, low pay and dangerous working conditions in artisanal mines, which are smaller, cheaper and less regulated than industrial mines and account for about 13% of the DRC’s cobalt production. In 2012, Unicef estimated that 40,000 children worked in mines in the country’s south.

“That put the public’s attention on this issue. Many companies, certainly not all, but some of the bigger Chinese mining companies mentioned in that report, have since been put under serious pressure by their downstream customers to improve working conditions,” says Mr Gerbens. Significant reform initiatives have been launched to clean up the cobalt supply chain, the most prominent of which is the Responsible Cobalt Initiative, led by the Chinese Chamber of Commerce for Metals, Minerals and Chemicals Importers and Exporters, and supported by the OECD. Apple, Samsung, Sony and HP have joined the initiative, creating a “real voice” on the issue, according to Rosalind Kainyah, founder of Africa advisory firm Kina Advisory.

“There’s no way you’re going to do it on your own,” she says, “but they’ve got big brands and they can use their voices positively.” As with the Kimberly process, which mandated due diligence to prevent sales of conflict diamonds, Ms Kainyah adds: “You’re beginning to force from downstream a better process for ensuring you don’t have bad environmental and social practices upstream. I think the cobalt industry can certainly take examples from initiatives in the diamond industry.” While monitoring the complex supply chain is notoriously difficult, she says, it is not impossible.    

A complicated relationship

Much of the artisanally mined cobalt is used by Chinese companies, whose presence in the DRC has long been controversial. China’s massive refining and electronics industries make the country the world’s largest importer of raw cobalt. Yet China also provides vital infrastructure investment in the DRC that will “continue to play an important role going forward”, says Alisa Strobel, a senior economist at IHS Markit. The DRC’s economy is inextricably linked to Chinese growth: China is the DRC’s largest trading partner, and minerals still represent more than 80% of the DRC’s exports. 

China’s Sino-Congolese Co-operation Agreement included pledges to invest $3bn in railways, roads and other infrastructure between 2009 and 2019. “The DRC needs huge infrastructure investments, particularly in energy and transportation, to unlock significant foreign investment, given the general lack of infrastructure and the decrepit state of what little does exist,” says Ms Strobel. “State finances are too low to provide essential infrastructure, so this FDI is fundamentally necessary.” Further pressure from the Congolese government, downstream customers and advocacy groups will be needed to curb unethical practices in the cobalt industry.

Contractual and political uncertainty, predatory behaviour by security forces and an opaque regulatory environment continue to burden investors in the DRC. Taxes are frequently applied inconsistently, and the government still owes mining companies some $700m in VAT reimbursements. In early 2017, Glencore paid $534m to Israeli mining tycoon Dan Gertler to buy him out of their shared DRC copper mines in an effort to distance itself from scandal: Mr Gertler was accused of paying millions in bribes to Mr Kabila in return for special mining rights. The case highlights the ongoing risks for companies operating in a country where the rule of law is widely viewed as unevenly applied at best.       

Meanwhile, the Congolese government continues to defer elections as opposition figures foment unrest among their followers. “Right now it’s hard to be optimistic about the DRC because everything hangs on the political environment,” says the EITI’s Mr Balde. “Those who are coming in don’t necessarily have long-term objectives. You have a much more short-term survival mechanism going on. That makes it more difficult for us.”