China plays long game on cobalt and electric batteries

Date: 30 May 2016

As China Molybdenum announced it was buying one of Africa’s largest copper mines earlier this month one thing was soon clear: the acquisition was about far more than the red metal.

The $2.65bn deal, the biggest private investment in the Democratic Republic of Congo’s history, is instead designed to secure China’s supplies of cobalt, a once niche raw material that is crucial to developing batteries for electric cars.

The purchase of the Tenke mine, which contains one of the world’s largest known deposits of copper and cobalt, shows how Chinese companies are now moving to take a dominant position in battery materials as the country prepares to shift its economy from heavily polluting industries.

Companies that make batteries for carmakers, from Tesla Motors to General Motors, will be increasingly reliant on Chinese-controlled supply chains as they scale up production of the electric cars Western policymakers hope will help cut emissions and reliance on imported oil.

“The majority of the cobalt is heading straight to China,” said Edward Spencer, an analyst at metals consultancy CRU. “Their global hold is huge.”

If the Tenke mine deal goes through, Chinese companies will be responsible for around 62% of global refined cobalt production next year, according to CRU estimates. Demand for the material is expected to soar by more than two-thirds over the next decade.

In many ways, China is following a familiar playbook. At the turn of the millennium, the country moved to secure supplies of traditional commodities like oil and industrial metals, sometimes through acquisitions, other times through investments and loans-for-oil deals with countries such as Angola and Venezuela that held big deposits of the raw materials.

But China’s control of other commodities during the last decade raised strategic concerns in Washington and Tokyo, after so-called rare earth metals — which were then primarily mined in China — were subject to export restrictions.

Beijing is now pushing the development of its electric vehicle market as a strategic goal, aiming to make its carmakers more competitive abroad while reducing air pollution at home.

China Moly’s largest shareholders are Luoyang Mining Group, a municipal-owned company, and Cathay Fortune Corp, a Shanghai-based private equity company.

China Moly said in an emailed response to questions that it maintains an extensive international customer base and is committed to continuing Freeport’s customer relationships.

The DRC, one of the world’s poorest countries, accounts for over half of the world’s supply of cobalt, which is also used in smartphone batteries. The Tenke mine, which lies in the southeast of the DRC, some 175km northwest of the provincial capital of Lubumbashi, produced 16,000 tonnes of cobalt last year and it has reserves that could last 25 years, according to the company.

“Chinese strategists have long seen the DRC as one of the prime places for Chinese access to raw material, including cobalt,” says Alex Vines, head of the Africa programme at Chatham House. “I’ve always suspected the natural resources-for infrastructure model that happened in Angola was actually a testing of a model they wanted to deploy in the DRC.”

Around 93% of China’s cobalt units originate in the DRC, according to analysts at Macquarie, the highest proportion of commodity supply from a single country. That is unlike other battery commodities such as lithium, where China can supply 17% of its own supply.

“There’s no other commodity where China is so reliant on a single country,” says Colin Hamilton, an analyst at Macquarie. “When you have that concentration risk they want some degree of security.”

The move into cobalt partly reflects the rise of Asian battery companies, which already account for the bulk of the world’s production of lithium-ion batteries, the main type of battery used in most modern electrical devices, from smartphones to electric vehicles. Over 90% of new lithium-ion battery manufacturing projects in the pipeline are expected to be in China.

The main exception is Tesla Motor’s giant new gigafactory under construction in Nevada. The company is ramping up production of its new Model 3 mass market car, aiming for 500,000 vehicles by 2018, though analysts question where it will source the raw materials for its batteries.

While battery makers are reducing the amount of cobalt they use in favour of other metals such as nickel or manganese, it is not expected to fall below 10% to 20% in the most popular battery technologies for cars in the 2015-2020 timeframe, according to Adam Collins, an analyst at Liberum.

Belgium-based Umicore, which supplies cathode materials to major battery makers, said last month it would triple production of nickel-manganese-cobalt materials at its plants in South Korea and China over the next three years. That was confirmation the NMC cathode is “the technology of choice for the vast majority of platforms”, the company’s CEO Marc Grynberg said.

“This is unlikely to change in the near future, and the technology road map shows NMC as having great potential to enable batteries to reach the car manufacturers’ target in terms of both driving range and system costs,” he said.

Still, there are some versions of the lithium-ion battery, such as the lithium iron phosphate technology, that does not use any cobalt. But while such batteries are safer, analysts say they lack the energy density of other lithium-ion technologies, limiting their uses.

“Though we don’t believe the narrative that there is a cobalt crisis,” said Chris Berry, an analyst at House Mountain Partners in New York. “We do see higher looming cobalt prices as China plays the ‘long game’ to dominate the cobalt supply chain.”

(Source: Financial Times)

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