Cobalt could prove major speedbump for EV and battery growth

Volkswagen has failed to secure a 5-year tender supply deal for cobalt, a rare metal used in the production of Lithium-Ion batteries used in Electric Vehicles (EVs). The pushback from suppliers is an indicator of the difficulties automakers will face in securing raw materials for batteries, and will likely cause them to seek out new battery cell chemistries, as they prepare to produce EVs on a mass market scale.

VW put off miners by suggesting a price for the tender that was below the current market price for the metal – which currently stands at $62,000 per ton on the London Metal Exchange. Sources familiar with deal said, “VW was being arrogant because they’re automotive and used to doing it.” Market prices for cobalt have jumped 80% this year, and no supplier is prepared to risk missing out on further price hikes in the precious metal.

VW says it is committed to spending $70bn to electrify 300 car models by 2030. The failed attempt to secure its battery supply chain comes as BMW, Ford, and Tesla are also trying to lock in future supplies of cobalt for their own vehicles – according to reports.

While it did not give a specific amount of cobalt required, based on the tender VW would need 80,000 to 130,000 tons of cobalt, the total size of the current cobalt market is around 120,000 tons, indicating the massive growth in demand EVs will create for the metal. This gap in supply and demand could be a large problem for all battery powered devices, and the smart grid sector in particular.

Cobalt is used in the cathode part of the battery, along with nickel and manganese. Some are already anticipating battery manufacturers and automakers will shift cell chemistries to higher concentrations of nickel and lower cobalt, which could reduce demand for the cobalt in each battery. However, even factoring potential future changes in cell chemistry, growth in the demand for EVs and batteries more generally has given commodity consultancy firm CRU reason to forecast that global demand for cobalt will grow by 27% in each of the next five years.

Cobalt is of course not the only material found in lithium-ion batteries. The prices of lithium and graphite also look set to be deeply affected by a rapid growth in EVs. However, cobalt faces the issue of limited reserves, whereas for the other materials, current production capacity is the only bottleneck. At 2015 levels of consumption of cobalt there is an estimated 58 years’ worth of known reserves of the metal.

Some are already beginning to ask whether a lack of cobalt could impact EV adoption – either through surging prices in the metal slowing the battery cost reduction trend, or ending the trend entirely. Even if some automakers can move away from using cobalt, the likes of Tesla, Nissan and GM are already locked into the using cobalt in their current generation of EVs – and would struggle to shift away any time soon.

The position of the automakers is further compromised by the limited number of number of companies mining cobalt, the main ones being Glencore, China Molybdenum, and Eurasian Resource Group. A small number of miners and a limited known supply dramatically weakens the bargaining position of the automakers. This will come as yet another culture shock provoked by EVs for OEMs, who are used to throwing their weight around with suppliers.

Over 60% of the global supply of cobalt is currently mined out of the Democratic Republic of Congo. The country has a turbulent political environment, a factor that could also potentially unsettle the supply chain for the resource and cause prices to fluctuate.

Speculator have also entered the market for cobalt, purchasing and storing an estimated 17% of global production last year. One of the speculators, Swiss Pala Investment has even created the opportunity for investors to ride the increase in cobalt prices, setting up a shell company Cobalt27 that will hold reserves of the metal and trades on the Toronto Exchange – raising $200m from investors and holding 2,160 tons of cobalt. Speculation for cobalt is likely to further aggravate OEMs, as the reserves are of the metal are only made available when prices increase.

The extent to which the supply of cobalt might affect EV prices and adoption is still unclear, but companies surrounding the automotive ecosystem are beginning to prepare themselves for the adoption of the EVs. A reflection of this trend can be seen most prominently among the big oil companies – with Shell purchasing EV charging point company NewMotion this week, in an effort to retain some kind of hold on the future vehicle fuel supply business.

NewMotion provides home charging equipment for 30,000 private home electric charging points, as well as 50,000 public sites. The purchase of NewMotion will give Shell a footing in the market for selling power to people charging their vehicle at homes and offices, where an estimated 80% of the charging will take place for idle EVs.