LONDON (Reuters) - A tussle between Glencore (GLEN.L) and its former partner over Congo cobalt royalties highlights the nascent electric vehicle sector’s vulnerability, with an escalation seen crippling supplies of the key battery metal.
Glencore won an injunction in a London court last week against freezing orders brought by a company affiliated with its former partner Dan Gertler, who is seeking up to $3 billion in unpaid and future royalties.
The orders, served on Glencore subsidiaries Mutanda Mining and Kamoto Copper Co (KCC), would allow local authorities to freeze certain bank accounts, mining titles and assets, potentially affecting production.
Congo is the world's largest producer of cobalt and this latest development reinforces the risks to global supplies created by a controversial mining code signed into law by President Joseph Kabila in March. (Congo's cobalt dominance: reut.rs/2IbnGQ1)
Valued for its ability to stop batteries from overheating and bursting into flames, cobalt is a key component in the rechargeable lithium-ion batteries used to power mobile devices and electric vehicles.
Congo accounts for around 60 percent of global supply - estimated at around 110,000 tonnes this year.
“The DRC’s dominance of cobalt supply does bring with it a significant amount of political risk,” CRU analyst George Heppel said. “But the trouble is that there isn’t really anywhere else on earth with the same quality of reserves or mineralogy.”
Exploration in countries such as Canada, the United States and Australia could contribute some cobalt to global supplies, but Congo will remain the dominant supplier.(Glencore cobalt output as a share of world production: reut.rs/2JRsEPj)
The legal battle is the latest drama in the Congo after Glencore’s partner on the Kamoto copper and cobalt project, state miner Gecamines, said last week it was starting legal proceedings to dissolve Kamoto because of persistent high debts.
Glencore's shares sank 3 percent on the day after the freezing orders were made public but have since moderated.(LME cobalt prices: reut.rs/2rjG2VB)
Additionally, RBC analysts recently downgraded Glencore from “Top pick” to “outperform” due to the additional risk of uncertainty around the Congo’s mining code, and cut expectations for core earnings over the next two years.
An immediate complete production halt is unlikely, but sources say the risk exists.
Glencore plans to ramp up production from the Katanga and Mutanda mines to 36,000 tonnes in 2018 and 59,000 tonnes in 2019.
“If (Glencore’s) two main assets are taken out of the system in a market that is already very stretched certainly we would see a very big price reaction,” said Caspar Rawles, an analyst at Benchmark Mineral Intelligence.
Prices of cobalt metal on the London Metal Exchange CBD3 hit $90,500 a tonne in March, a record high for the contract launched in 2010. It is now trading at $88,750 per tonne.
"If (Katanga's mine ramp-up) is disrupted then this could lead to significant shortages in the short term, and the market would most likely return to a deficit next year as a result," CRU's Heppel said.(Glencore shares showing recent Congo events: reut.rs/2rqAgBu)
“Pretty much all cobalt mine production growth expected over the next five years will come from the DRC.”
UBS estimates 15 million electric vehicles will be on the road by 2025.
Reporting by Zandi Shabalala; Editing by Veronica Brown and Susan Fenton