Battery revolution: Will Apple do to cobalt, what Tesla did for lithium?

Tesla Apple lithium cobalt battery metals revolution

Apple, one of the world’s leading electronics manufacturers could be in trouble.

The company sells over 100 million devices such as its iconic iPhone, iPad and iMac products every year and wields one of the largest software libraries including its very own marketplace for content-hungry users.

But to maintain its assertive position as a leading device manufacturer, Apple needs to secure ample amounts of key raw materials such as graphite, lithium, cobalt and other rare earth minerals.

By far the most worrisome commodities that have thrown multiple manufacturers into ethical dilemmas have been lithium and cobalt.

The largest reserves of these two commodities are located in regions with questionable mining practices and challenging operating conditions for Western miners.

Already this year, Democratic Republic of Congo (DRC) officials have set pulses racing amongst Western cobalt miners operating in the DRC after abolishing cornerstone tax exemptions, introducing a 50% “super-tax” on most productive miners and is considering raising its tax royalty rate from the current 2% to as high as 10%, if the government decides to label cobalt a strategic metal.

The two metals are rather different but are having a rather familiar effect on both consumers and producers. The price of both metals has risen exponentially over the past 2 years, with several analysts predicting that what we’ve seen so far is only the start of the so-called ‘lithium-ion battery boom’.

Cobalt electric vehicles lithium-ion batteries future demand

If we look at just how much cobalt and lithium go into the average modern battery, it’s clear that the future of Energy is largely dependent on a slew of commodities with unique properties.

Cobalt Apple device iPhone iPad Macbook

However, booming sales of lithium-ion batteries and greater use of storage-energy championed so efficiently by Tesla, is causing supply-side bottlenecks due to a combination of poor management and poorly understood geology.

The lax approach to mining standards has seen several companies go public in their criticism of countries such as the DRC and Mozambique, with some companies flat out refusing to source their raw materials from suppliers that do not fit pre-set criteria.

It may come as no surprise that Apple is reportedly in talks with cobalt miners directly, with powerhouse names like Glencore and Eurasian Resources Group mentioned as producers capable of satiating Apple’s large demand schedule.

According to Daniel Ives, Chief Strategy Officer at GBH Insights, “Apple could potentially save hundreds of billions of dollars over the next two to three years if it secures cobalt supplies,” which could explain why the tech giant has entered into discussions to secure enough to forward-dated cobalt supply to meet its hefty requirements.

Bloomberg analyst Jack Farchy believes that several large miners are in the frame to assist Apple, as well as many other device manufacturers, with its growing appetite for raw materials.

With Apple now in talks to buy long-term cobalt supplies for the first time, market analysts are expecting cobalt price uncertainty to keep growing, with spot prices already trading at record highs of around $80,000 per tonne.

The price inflation seen in cobalt has also been reflected in other battery-enabling commodities such as graphite, zinc and possibly most famously of all, in lithium.

Tesla’s lithium story in Nevada

A great example of what Apple could potentially be on course to achieving is currently being exemplified by Tesla in Nevada.

Elon Musk, Tesla’s enigmatic CEO, has embarked on a gargantuan mission to produce around 35 gigawatt-hours (GWh) of power from Tesla’s “Gigafactory” in Nevada, in close proximity to large reserves of lithium scattered around its operational area.

Early-stage explorers have already begun to strike offtake deals with Tesla, to supply its rapidly growing demand for high-grade lithium, graphite, cobalt and other rare earth minerals.

Pure Energy announced an offtake deal with Tesla back in 2014, which in itself could set a precedent for Apple to follow with respects to its own raw materials requirement for cobalt.

Deals over deals

The signing of new offtake deals for both lithium and cobalt is ramping up alongside broad consumer awareness of cobalt and lithium.

Bacanora Minerals and Rare Earth Minerals are currently in a joint-venture partnership to develop the Sonora project in Mexico.

Bacanora has already signed a deal with Tesla and has recently added another battery manufacturer in the form of Japan-based Hanwa Corporation, that will see the company acquire up to 100% of its lithium output coming from Sonora.

In May 2016, Bacanora secured an $11 million investment from Blackrock on the back of a recently-completed pre-feasibility study that showed Sonora has at least 2.1 million tonnes of lithium carbonate.

Since it became known that lithium and cobalt would be likely candidates for strong offtake demand by battery manufacturers, an almost limitless troop of lithium explorers has entered the fray to explore for the strategic metal.

Likewise with cobalt, since forecasts for its impending demand schedule began to be analysed, its price has soared and persuaded dozens of explorers to switch their attention away from less commercially-viable base metals into rapidly emerging energy-storage enablers such as cobalt and lithium.

Tesla doesn’t intend to stop with one Gigafactory. The carmaker is expected to build a series of factories in both the US and Europe and has started signing offtake deals with well-positioned producers.

Tesla Gigafactory lithium Nevada
Tesla’s Gigafactory located near lithium mines in Nevada.

By the end of this year, Tesla’s first Gigactory is expected to reach full capacity and be producing lithium-ion batteries for at least 500,000 new electric cars each year.

Tesla’s supply-side issues seem to be largely resolved as offtake deals from proven mining locations are estimated to meet its anticipated demand. For Apple, the challenge is far greater and its path towards securing its required cobalt supply is only just beginning.

As offtake deals continue to be signed, it’s not just Apple and Tesla that are feeling the supply-side pinch. Apple and Tesla are vying for the same commodities as other powerhouse manufacturers such as BMW, Samsung and Volkswagen as just a few examples.

If we include Chinese electric car markers such as Warren Buffett-backed BYD — it is clear that manufacturers across the world are embracing battery technology rather quickly; maybe even a bit too quickly for miners to adapt in such a short time.

The world’s top manufacturers are forming orderly queues to secure reliable lithium/cobalt supplies to meet their ambitious targets with the biggest side-effect being the sharp price inflation seen in both lithium and cobalt over the past 2 years.

Closer to home, Australian Mines (ASX: AUZ) is currently developing the Sconi mine in Queensland.

Just recently, the company agreed to a cobalt and nickel offtake deal with SK Innovation Co, South Korea’s top oil refiner, worth around A$5 billion.

In this particular deal, SK Innovation has agreed to buy all of the project’s planned output for seven years, with the option to extend for a further six years.

Apple setting an example in mining ethics

Apple is tackling the problem of poor mining standards by setting a high example and forcing any potential suitors for its steep demand schedule to follow it.

Apple calls it “mapping the supply chain,” a systematic method of weeding out undesirable producers while setting the example of what Apple expects from future suppliers.

Apple has reiterated on many occasions that “100% of our conflict minerals and cobalt smelter/refiner partners are now participating in independent third-party audits to ensure their own business practices are conducted responsibly.”

In a comprehensive “Supplier Responsibility” report published last year, Apple said that its “commitment to responsible sourcing will not waiver and we will continue to drive our standards deep in our supply chain.”

In 2010, Apple was the first large devices manufacturer to map its supply chain to the smelter level for tin, tantalum, tungsten, and gold.

In contrast, about a fifth of the DRC’s cobalt production is mined by hand by informal miners including children, often in dangerous conditions, according to rights group Amnesty International.

Apple says that working with independent assessors is a way of making sure its suppliers adhere to strict due diligence requirements and reports it partnered with the China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters (“CCCMC”) in 2016, to develop a third-party audit program for cobalt.

Additionally, Apple conducts dozens of spot audits on production suppliers to assess their accordance with set guidelines. Despite its efforts to stamp out poor mining practices, especially within artisanal cobalt mining, Apple says that it removed 22 smelters from its supply chain in 2016 because they were “either unwilling or unable to comply with Apple’s standards.”

With respect to artisanal mines in particular, Apple says that “these mines will be allowed into our supply chain when we are confident that the appropriate protections are in place,” and adds that, “we have also partnered with numerous NGOs to drive change, including Pact, who are working to provide essential health and safety training to artisanal mining communities.”

George is an award-winning market analyst who has authored articles and editorial opinion pieces for multiple publications around the world. He has written about a wide variety of topics including financial markets, stocks, trading, politics and economics.