A few months ago, Apple (NASDAQ:AAPL) was on the receiving end of some not-so-nice PR when it was accused of adjusting the performance of older iPhone models with aging batteries. That didn't sit well with consumers for obvious reasons, but the technology giant may be in the process of generating enough public goodwill to more than make up for its past mistakes concerning lithium-ion batteries.
At the end of last month, word got out that the company was in discussions with miners to directly secure future supplies of cobalt, which is one of the most important metals used in lithium-ion batteries. In fact, cobalt can contribute 15% of the mass of the most advanced battery chemistries, compared to just a few percent for lithium.
While it could forever change the cobalt market for good, the move is admittedly a bit unusual on the surface. After all, Apple doesn't actually manufacture energy storage products. If it follows through with the rumored purchases from miners, then the company will be directly competing with auto manufacturers and others that are desperately attempting to de-risk their cobalt supply chains.
So, what makes this metal so important? Is it a smart move? Here's everything you need to know about Apple's unusual pursuit of cobalt.
In late February 2018, word leaked that Apple has been in talks with miners to directly purchase a long-term supply of cobalt, with rumored agreements potentially extending five years or longer.
Cobalt is becoming an increasingly important component in lithium-ion battery chemistries for small (consumer electronics), mobile (electric vehicles), and stationary devices (grid-scale energy storage). That's a bit unusual in itself, since the market is slowly shifting toward application-specific chemistries, but cobalt provides such a significant performance boost that it warrants inclusion in chemistries serving most applications. If battery manufacturers can afford it anyway.
Severe supply chain insecurities and inefficiencies have largely caught the global market by surprise. As a result, cobalt currently sells for a whopping $83,500 per metric ton. To put that in perspective, an equivalent amount of cash would buy 44 tons of aluminum, 15 tons of copper, or five tons of lithium carbonate. Cobalt is basically the bitcoin of metals.
Therefore, even though Apple doesn't manufacture lithium-ion batteries, it wants to ensure it has enough cobalt for its trusted partners to continue manufacturing its devices for the foreseeable future. Considering smartphones currently consume 25% of global cobalt production, and seeing an avalanche of electric-car manufacturing plans on the horizon, it's easy to see why the company isn't leaving anything to chance.
What makes cobalt supply chains so risky?
Well, where do we start?
Cobalt is rarely mined by itself. Instead, it's usually a byproduct of copper and nickel production. That can be rectified with greater investments in mining operations, but the geographical distribution of the metal is a more difficult problem to solve.
Only 17% of the planet's cobalt production originates in the Northern Hemisphere, which contains 68% of the globe's land area and nearly all advanced industrial economies (read: those manufacturing lithium-ion batteries). Worse, the United States has close to no cobalt reserves. While the tiny island nation of Cuba owns 2,073% higher cobalt reserves and outproduces Uncle Sam 6-to-1, outdated American foreign policy restricts trade. A distance of 103 miles never felt so far away.
That means Apple, Tesla, and General Motors have to look below the equator to secure their current and future cobalt supplies. But it gets worse: Over 58% of global production originates in the Democratic Republic of Congo, which isn't exactly the poster child of stability, with conflicts spawned from the Congolese wars in the early 2000s still ongoing. Of course, any material with nearly 60% of its global deposits parked in just one country would come with substantial risks.
It gets worse still. A not-insignificant amount of cobalt is produced from small artisanal mines, which employ an estimated 200,000 individuals and often contribute revenue to warring factions within the Democratic Republic of Congo. Research has shown that armed groups were present at 25% of all sites evaluated and that child labor and severe safety issues were common. That has resulted in the metal sometimes being slapped with the label of "conflict mineral," which is not exactly something the world's largest multinational companies want to be associated with.
That goes a long way to explain why Apple is talking directly with miners to secure its cobalt supply, but it isn't stopping there.
So, cobalt is a conflict mineral?
Not exactly. Just because a material is produced from an artisanal mine doesn't automatically make it a conflict mineral. In fact, the World Bank estimates that 40 million people across the globe work in artisanal mines producing gold, diamonds, cobalt, and other precious metals. The problem arises from the difficulty in tracking materials back to their production site.
That's why Apple has recently included cobalt in its Supplier Responsibility Progress Report, which details how the company and its material suppliers are collaborating to improve supply chain sourcing information, enhance worker safety and income, and properly dispose wastes. In 2017, it announced that 100% of its cobalt suppliers are participating in independent third-party audits to pin down the origin of materials. It's a big step toward ensuring that it's not sourcing cobalt from conflict regions -- which is often smuggled out of the country or mixed in with more reputable supplies -- and could set new standards throughout the industry.
There's an impressive precedent to follow. In 2010, Apple became the first company to map its supply chain all the way to the smelter level for tin, tantalum, tungsten, and gold -- four metals often labeled as conflict minerals and commonly referred to as 3TG. The company acknowledges that artisanal mines are an important source of work and income for families across the world, and has worked with nongovernmental organizations and suppliers to ensure that the small operations can remain a valuable part of supply chain logistics until local economies mature.
Another smart move by Apple, right?
Well, maybe, but maybe not. It's too early to tell exactly how the global cobalt market will respond to what are expected to be sharp increases in demand from lithium-ion battery manufacturers in the coming years. Early indications (see: $83,500 per MT selling prices) aren't good, but market fundamentals may not be as bad as most headlines would lead investors to believe.
That's because mining giant Glencore (NASDAQOTH:GLCNF) is tripling its cobalt production between 2017 and 2019. Since it produced 25% of the entire planet's cobalt last year, that's kind of a big deal. It should also provide much-needed relief to cobalt purchasers and quell some of the recent pricing volatility, perhaps even resulting in significantly lower selling prices before the end of the decade.
Considering Apple is flush with hundreds of billions in cash, making the unusual move to secure cobalt supplies should be viewed as an insurance policy to protect itself in the event of a global cobalt shortage and that it doesn't suffer if the worst-case scenario fails to materialize.
More importantly, from a social responsibility perspective, the framework developed by Apple for tracking the cobalt supply chain from iPhone battery to smelter could be a game changer for the global market. And since the company has assumed a leadership position on this front, it presents a blueprint for other purchasers of cobalt to follow.
Apple could change the cobalt industry for the better
It's not every day that a company without much of a direct manufacturing presence swoops into a global market to gobble up materials, but cobalt is unlike most materials. The metal presents severe supply chain risks due to its geographic distribution (or lack thereof) and high human costs when produced in conflict regions. With expected demand increases on the horizon as well, it may not be a bad idea to enter a long-term supply agreement or two. That's especially true with cobalt prices hovering at $83,500 per metric ton.
That said, despite being a bit unusual, Apple has taken its role as a major consumer of precious and rare earth metals seriously. It understands the nuance of the situation on the ground and has put in the work to deliver socially responsible outcomes for all stakeholders involved, including shareholders. It may just fundamentally change the global cobalt markets in the process.
Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Tesla. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.