Energy & Resources

From Congo to cars

Why Chinese firms are snapping up cobalt mines in Africa

A member of staff brushes off dust from all-electric battery concept car called LeSEE during Auto China 2016 auto show in Beijing

King cobalt: the metal is a key component in making electric vehicles

In the early 1960s the CIA plotted to assassinate the Democratic Republic of Congo’s first freely elected, post-colonial president, Patrice Lumumba. It was the height of the Cold War and the Kennedy administration was concerned the Soviet Union would get its hands on the African country’s uranium reserves after Lumumba turned to the Russians for help preventing the mineral-rich Katanga province from seceding.

Lumumba came to a particularly grisly end after the security service funnelled money to his opponents who tortured and executed him before dissolving his body in acid. The despotic Mobutu regime, which replaced him, was only finally ousted in 1997.

In a sign of how far the world has changed since then, a new global power is trying to gain control of a valuable mineral in Katanga province: cobalt. And this time, the US seems to have stood by and let the superpower in question, China, gain access.

The Democratic Republic of Congo (DRC) holds 3.4 million tonnes of the world’s 7.1 million tonnes of known cobalt reserves and accounted for roughly 60% of global production in 2015 according to mining consultant CRU.

The Financial Times argues that there is no other commodity where China is so reliant on a single country, with Alex Vines from the London-based think tank Chatham House telling the newspaper, “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 Congo.”

Cobalt is a key component in making the lithium batteries that power electric vehicles. As we outlined in WiC323, China plans to get five million electric vehicles on the road by 2020. During 2015, sales tripled to 330,000 and the strong growth has continued throughout 2016 with sales up 150% year-on-year in April.

However, China has very little cobalt of its own. The country accounts for just 1.1% of world deposits and much of it is low grade (0.02% compared to 0.1% to 0.5% for the DRC’s reserves).

Unsurprisingly, Chinese companies are now trying to exert greater control over the global supply chain by purchasing cobalt mines in the DRC. Over the past couple of weeks, for example, Luoyang-based China Molybdenum has signed a $2.65 billion agreement with Freeport McMoRan to purchase a controlling 56% stake in its Tenke Fungurume mine in Katanga .

Freeport is the world’s second biggest cobalt miner after Glencore with a 12% market share. Its Tenke Fungurume mine produced 16,000 tonnes of the metal in 2015 and has reserves that could last up to 25 years.

The Australian-listed group has decided to offload the mine to help reduce its debt at a time of depressed commodity prices. But given concerns about rising corporate debt levels in China, the Shanghai Stock Exchange has asked China Molybdenum to explain how it proposes to fund its recent spate of M&A activity, including a $1.5 billion acquisition of Anglo American Group’s phosphates and niobium business, plus its Brazilian fertiliser businesses.

China Molybdenum Chairman, Li Chaochun tells China Business News that both acquisitions were fixed at historically low prices. The Hong Kong and Shanghai-listed company also recently announced an Rmb18 billion ($2.74 billion) share sale to raise funds.

Meanwhile, Shenwan Hongyuan Securities (SWS) reports that the country’s largest cobalt products manufacturer, Zhejiang Huayou, is also planning a Rmb2.24 billion private placement to finance acquisitions in the DRC. The company has a 25% market share in China and is also a big player in the Congo.

Earlier this year, however, Zhejiang Huayou was slammed by Amnesty International for sourcing cobalt from mines employing children as young as seven. Aside from the fact the workers are underage, Amnesty claims the children are also digging out the cobalt by hand without gloves or masks, which would help protect them from lung disease.

In the conclusion to its report, Amnesty said Shanghai-listed Huayou is not “respecting international human rights as required by UN Guiding Principles and is not implementing the five step-framework recommended in the OECD Guidance despite the fact that the latter has been recognised by the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters as the recognised international framework to conduct mineral supply due diligence.”

The Congolese government is not very happy with the Chinese either. The two other main shareholders in the Tenke Fungurume mine are Lundin Mining, which owns 24% and Congo’s own state mining company Gecamines, which owns the remaining 20%.

Lundin Mining was informed of the China Molybdenum deal and has first right of refusal to make a counter offer by August 8. However, Gecamines was not informed and the government is also annoyed that the transaction has been structured through an offshore vehicle, which means it will not be subject to domestic tax.

Equity investors, on the other hand, have responded very positively to the news. China Molybdenum’s Hong Kong-listed shares are up 61% from their mid-February low, while Zhejiang Huayou’s share price climbed nearly 200% during the same period.

The rally is also partly driven by a perceived turnaround in cobalt’s supply-demand dynamics. Cobalt prices have been falling for almost five years and there is still a supply overhang. GF Securities predicts that 15,000 tonnes of supply will be removed from the market this year, with the surplus gone by 2017.

The Chinese brokerage believes it is now the right time to invest in the sector. In a recent research report it said, “Extremely low prices, contracting supply and continuing global demand are reshaping market expectations regarding cobalt.”

CRU predicts Chinese cobalt consumption will rise from 43,500 tonnes in 2015 to 130,000 by 2020 (about 77% of its current consumption is used in batteries for electric cars and smartphones).

Analysts are also keeping a close eye on inventory stockpiles, with a small handful of Chinese companies accounting for 20,000 tonnes of the 30,000 tonnes globally stockpiled in 2015 (imports were up 39.4% year-on-year). However, SWS says stockpiles are a defensive measure. Chinese miners need to maintain sizeable reserves given the lengthy shipping time from Congo (about four months) and to cover any potential surge in new orders.

The brokerage also notes that electric car manufacturers are increasingly switching from lithium iron phosphate (LFP) technology for their batteries to ternary batteries deploying nickel-manganese cathode material (NMC) or nickel-cobalt-aluminium (NCA). SWS says this is because they cost less and have better thermal stability. It also expects a declining gap in energy density between the two types of fuel cell. Belgium’s Umicore, a materials technology firm, recently said that electric car manufacturers will use NMC in particular because the batteries offer longer driving ranges.

GF Securities further notes that government subsidies focused on battery range will act as a demand boost for ternary batteries in China.

NMC and NCA batteries will be very positive for cobalt demand too. BYD, for example, said it would it would switch to NCA technology last August. Umicore is also tripling its capacity at its two factories in China and South Korea through to 2018. And out in the Nevada desert, the world’s largest building by square footage (the size of 100 football pitches) is also taking shape as electric car manufacturer Tesla builds its $5 billion gigafactory, which will handle every aspect of NCA battery production from start to finish when it opens later this year.

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