EV Batteries and the Cobalt Cliff: The biggest “oops” in the history of supply chain management
Posted on
March 25, 2016 by
John Petersen
In early March, I described cobalt supply and demand dynamics as a
giga-risk for lithium-ion battery manufacturers. I subsequently
took my analysis a step further and suggested that electric vehicle (EV) manufacturers including Tesla (TSLA), General Motors (GM), Nissan (NSANY) and Porsche (POAHY) might soon find themselves coping with the biggest “oops” in the history of supply chain management.
While the statistical data was unassailable, I had a hard time answering the most common question readers asked; “
how could so many major companies make the same supply chain blunder and bet their futures on plentiful supplies of a by-product?” Since I wasn’t satisfied with my own responses, I’ve spent the last two weeks searching for hidden flaws in my hypothesis and contemplating the likely short- to medium-term impacts of the Cobalt Cliff.
The bad news is I haven’t found any flaws in my hypothesis. The worse news is I’ve concluded the short- to medium-term impacts on EV manufacturers may be catastrophic:
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- The world’s miners will not produce enough cobalt in 2016 to satisfy demand;
- There is no reason to believe cobalt production will ramp at a pace that’s adequate to satisfy expected incremental demand from EV manufacturers; and
- When it comes to free-market competition for limited cobalt supplies, battery and EV manufacturers will be the most cost-sensitive class of cobalt users.
Cobalt Resources and By-product Status
Cobalt is an unusual metal because the identified terrestrial resources are about 25 million tons and the identified sea-bottom resources are another 120 million tons. With rare exceptions, however, cobalt is produced as a minor by-product of nickel and copper mining. As a result, global cobalt production ramps up and down as nickel and copper miners respond to global demand for their primary products. Since less than 6% of global cobalt production comes from mines that produce cobalt as a primary product, cobalt supply cannot respond to normal market signals. After all, no rational nickel or copper miner will put additional pressure on prices for its primary products because it wants to sell a little more cobalt. Glencore and other international mining companies are suspending operations at marginal and unprofitable mines around the world. Therefore, cobalt production is expected to spike down in 2016 and remain at low levels until nickel and copper prices recover. While I don’t have enough data to accurately assess the magnitude of the downward spike, a 5% to 10% decline in global cobalt production seems all but certain and much larger production declines are a distinct possibility.
Country of Origin
My first table summarizes and compares the US Geological Survey’s published cobalt ore production data for
2006 and
2015 by country of origin.
A quick glance at the yellow highlight shows that the substantial bulk of production growth over the last decade came from the Democratic Republic of Congo (DRC), a country that’s been harshly criticized by
Amnesty International for child labor abuses in the artisanal cobalt mining sector that accounts for roughly 20% of the DRC’s total cobalt production. If the DRC cracks down on child labor abuses among artisanal cobalt miners, another 10% of global cobalt production could be in jeopardy.
Competition with Other Cobalt Users
The
Cobalt Development Institute (CDI) is a non-profit trade association composed of producers, users, recyclers, and traders of cobalt. According to Kim Shedd, a cobalt analyst for the US Geological Survey, the CDI is the definitive source for granular detail on refined cobalt supply and demand. My second table summarizes and compares the CDI’s published cobalt supply and demand statistics for
2006 and
2014. The CDI’s next edition of
Cobalt Facts is expected in early April.
Once again, a quick glance at the yellow highlight shows that the battery industry accounted for 2/3 of global growth in cobalt demand since 2006. The factories currently under construction around the world will increase global battery manufacturing capacity by almost 100%. Unless cobalt production soars over the next 18 months or battery manufacturers are willing to out-bid competitive cobalt users for limited supplies, those new factories could easily end up sitting idle or operating at suboptimal levels because you can’t make lithium-ion batteries if you don’t have all the required raw materials.
As you review the list of competitive uses for cobalt, it’s easy to see why most supply chain competitors are in a better position than the battery industry when it comes to protecting their critical supply chains. Cobalt superalloys are used primarily in jet engines where cobalt cost isn’t even a rounding error compared to product value. Hardened alloys for wear resistant surfaces and cutting tools for manufacturing are indispensable. The pattern holds to a greater or lesser degree for every other competitive use of cobalt. The industries that need cobalt to manufacture essential products can pay more if they have to without diminishing the competitiveness of their products. While cobalt currently sells for about $10 a pound, the price peaked at over $50 a pound before the 2008 crash and could easily surpass record levels over the next two years..
The battery industry, needs between $5 and $29 of cobalt for every kWh of battery capacity. If limited cobalt supplies give rise to a bidding war, the battery industry will quickly find itself on the canvas..
Competition Within the Battery Industry
In 2014, high-cobalt LCO chemistry accounted for 1/3 of cathode material use while low-cobalt NMC and NCA chemistries accounted for 23% and 8%, respectively. My first article on cobalt supply constraints assumed for analytical purposes that the lithium-ion battery industry would abandon LCO chemistry in favor of NMC and NCA chemistries. While I believe that will occur over time because higher cobalt prices will make LCO batteries less competitive, the transition away from LCO will be the work of several years because most devices that use lithium-ion batteries are designed for the specific attributes of a particular chemistry and the manufacturers of those devices will need to modify their products to use a different battery chemistry. During the transition phase, manufacturers of EV batteries will find themselves competing with everybody else in the lithium-ion battery industry.
My last table is a hierarchy of alternative lithium-ion battery applications from the highest value per watt-hour to the lowest value per watt-hour:
|
Column 1 |
Column 2 |
| 1 |
Device |
Battery |
| 2 |
Type[/B] |
Capacity |
| 3 |
Smartphones |
5 watt-hours |
| 4 |
Laptop Computers/Tablets |
50 watt-hours |
| 5 |
Cordless Power Tools |
100 to 200 watt-hours |
| 6 |
Electric bicycles and scooters |
500 to 1,000 watt-hours |
| 7 |
Hybrid electric vehicles |
1,000 to 1,500 watt-hours |
| 8 |
Plug-in hybrid vehicles |
10,000 to 16,000 watt-hours |
| 9 |
Short-range EVs |
24,000 to 30,000 watt-hours |
| 10 |
Medium-range EVs |
60,000 watt-hours |
| 11 |
Long-range EVs |
90,000 watt-hours |
| 12 |
Utility applications |
500,000+ watt-hours |
In a normal competitive market, fungible commodities like cobalt and batteries are allocated first to high value applications and then to successively lower value applications until supplies are exhausted. In situations where supplies are constrained, high value applications that only need a little battery power for each unit of production will always be able to outbid lower value applications that need a lot of battery power for each unit of production. Therefore, EV manufacturers will invariably end up at the bottom of the food chain with the weakest bargaining position. Barring compulsion of law, the only batteries available to EV manufacturers will be the surplus that nobody else needs or wants.
Conclusion
Over the last two weeks I’ve spoken with a wide variety of professionals including battery experts, miners, the USGS and the CDI. The battery experts invariably
assumed that since cobalt trades on the LME, the world’s miners can and will quickly respond to increased demand by boosting supplies and reducing prices due to economies of scale. The miners, the USGS and the CDI agree that it simply can’t happen that way because cobalt is a by-product of copper and nickel mining and by-product availability is always constrained by demand for the primary products.
When I was a boy my mother taught me the “First Law of Cooking” –
check your pantry and don’t start if you don’t have all the required ingredients. It was my first lesson in supply chain management; a lesson that’s served me well for over a half-century.
This is more than a supply chain management oops, it’s a due diligence debacle!
- Governments should have understood the realities before adopting policies to promote or require the deployment of cobalt-intensive technologies;
- Entrepreneurs should have understood the realities before spending billions on new factories to make cobalt-intensive products;
- Financiers should have understood the realities before raising billions to finance cobalt-dependent projects; and
- Sell-side analysts should have understood the realities before encouraging investors to bid the market values of cobalt-dependent companies to unreasonable levels.
Instead of doing their homework, everybody assumed that somebody else had done a complete due diligence investigation and there was no sense in duplicating the effort.
While there’s ample room for finger pointing, I think the real culprit is a phenomenon I call “The Presumption of Plenty,” – the unquestioned assumption that all life’s necessities will be available in unlimited quantities. Unfortunately, there is no fairy godmother in a deep blue gown to solve the unavoidable cobalt supply chain catastrophe.
This is one of the few times in my life I sincerely hoped I was wrong because the due diligence debacle is so pervasive. Without concrete proof of rock-solid long-term supply contracts, I think it’s insanity for any investor to accept vague assurances of cobalt availability at face value.
- See more at:
http://investorintel.com/technology...supply-chain-management/#sthash.oBf70MKd.dpuf
