Cobalt Investing Alert: The Hidden Pitfall!

Investing in metals and minerals has always been a complex game, fraught with challenges and frustrations. Yet, for those with the patience and insight, the rewards can be substantial. This is especially true when it comes to one of the most crucial elements in modern technology: cobalt.

Cobalt: The Unsung Hero of Battery Technology

Cobalt is an essential metal in today’s battery technology. Without it, the efficiency and longevity of batteries would significantly diminish. In fact, a typical electric vehicle (EV) battery weighing around 400 pounds contains over 13 pounds of lithium and more than 17.5 pounds of cobalt. But cobalt’s utility extends far beyond just powering EVs.

According to the U.S. Geological Survey (USGS), cobalt is indispensable in various industries, from military applications to everyday consumer goods. The USGS explains, “Superalloys, which are used to make parts for gas turbine engines, are another major use for cobalt. Cobalt is also used to make airbags in automobiles; catalysts for the petroleum and chemical industries; cemented carbides (also called hard metals) and diamond tools; corrosion- and wear-resistant alloys; drying agents for paints, varnishes, and inks; dyes and pigments; ground coats for porcelain enamels; high-speed steels; magnetic recording media; magnets; and steel-belted radial tires.”

With such extensive applications, it’s no wonder that global demand for cobalt is skyrocketing. The USGS estimates that the world’s cobalt reserves total 7.6 million metric tons, about a third of the global lithium reserves. Given that current EV batteries require more cobalt than lithium, this poses a significant supply challenge.

The Supply Challenge

The soaring demand for cobalt brings us to a critical question: where does all this cobalt come from? The answer is troubling. Approximately 80-90% of cobalt is produced as a byproduct of copper and nickel mining. This means that unless the economics of copper and nickel are favorable, cobalt production might not even occur.

However, there is an alternative method known as “artisanal” mining, which can yield up to 10-15 times higher grade cobalt than traditional industrial mining. But “artisanal” is a euphemism for hand-mining, a process predominantly carried out in the Democratic Republic of Congo (DRC). This method, while producing a significant portion of the world’s cobalt, involves severe human rights violations, including unsafe working conditions and the exploitation of impoverished locals.

Despite these harsh realities, the DRC remains the world’s largest producer of cobalt. In 2022, the DRC produced nearly 145,000 metric tons of cobalt, accounting for approximately 74% of the world’s supply. Indonesia, the next largest producer, produced just 9,454 metric tons, a figure that pales in comparison.

Government Regulations and the Future of Cobalt

The Biden Administration’s Inflation Reduction Act (IRA) is a substantial financial boon for companies in the renewable energy sector, allocating roughly $360 billion in incentives. However, these incentives come with stringent restrictions. A 2023 report from the Cobalt Institute outlines the Act’s requirements: “The Act stipulates that a certain percentage of the value of critical minerals in a battery be mined or processed in the US or in a country with which it has a Free Trade Agreement (FTA), in order to qualify for the credits… batteries must not contain components that are manufactured or assembled by a foreign entity of concern (FEOC) as well as critical minerals that are extracted, processed, or recycled by a FEOC…”

This regulation poses a significant challenge because the two largest producers of cobalt—the DRC and Indonesia—do not comply with the IRA’s stipulations. With nearly 80% of the world’s cobalt coming from these two countries, meeting the IRA’s criteria for domestic production becomes a daunting task. The rest of the world’s cobalt production is insufficient to meet the demands set by the IRA.

The Investment Opportunity

The ethical dilemma of supporting the DRC’s mining practices is undeniable. However, the global demand for cobalt is insatiable, and the largest sources of this critical metal remain in regions that do not align with U.S. policy requirements. This imbalance in supply and demand could make any successful domestic cobalt mine an extremely attractive investment opportunity.

In conclusion, the cobalt market is at a crossroads. Government regulations, global demand, and ethical considerations are all converging to create a situation where investing in cobalt—if done wisely—could yield substantial rewards. For investors, keeping a close eye on domestic developments in cobalt production might be the key to navigating this challenging but potentially lucrative market.