Glencore & Volkswagen: When Carmakers Drove into the Mining Industry
The inside track on how VW tried to buy-up the cobalt market
In November last year, executives at car giant VW shuffled into the Wolfsburg football stadium in Germany.
The stadium sits on the edge of a huge car making complex first built in the 1930s, complete with two power stations, a test track and its own sausage factory. With more than 100 plants around the world producing €231bn ($259bn) and 10.9m vehicles last year, VW is the world's biggest car company, ahead of Toyota and General Motors. The task of its top executives that day was to lock-up future supplies of cobalt, a rare metal critical to the production of electric car batteries and VW's next generation of vehicles, from hatchbacks to all-electric lorries.
There is around 10kg of cobalt in an electric car battery, according to bank BMO, and prices have rocketed from $23,000 to $58,000 per tonne in the last three years as electric cars have become a mass-market reality. But with supplies tight, car groups will fail to make the transition to electric technology if they cannot get the metals required.
Across the table at Wolfsburg was Franck Schulders, a trader from Swiss commodities giant Glencore, the world's biggest cobalt producer. Unknown even in the mining industry, Schulders is head of cobalt trading for Glencore, known for its cocky, no-prisoners culture.
Both companies were keen to land a deal: Glencore had largely lucked into its cobalt position, generated as byproduct from its base metals mines from Africa to the Arctic Circle, and wanted to cash in on surging prices. But talks failed almost immediately. The two sides walked away.
The stumbling block was price. Whilst Glencore wanted a mega-deal, VW was unaccustomed to dealing with a mining company. From aluminium wheels to a car's steel chassis, it is more used to buying metal on a just-in-time basis at market prices, hedging any risk via its bankers in Frankfurt.
Instead it was being asked to commit huge sums to a niche commodity that may not even be used in cars in five years time: battery technology is changing at pace and cell makers including Sony and Panasonic are increasingly edging cobalt out of their battery packs, turning to new formulas that use a higher percentage of nickel, aluminium and manganese.
Adding in huge uncertainties in the car industry, from government incentives to vehicle-sharing and a global shortage of charging points, and cobalt becomes almost impossible to properly value. Miles away from each other on price, Glencore and VW left Wolfsburg empty-handed.
“The automative companies do not understand mining well, that's evident,” says the director of one company competing against Glencore in the battery metal market. Carmakers have “huge capital commitments coming up over the next decade just to make this transition, so their priorities are to look after their own business, but they also realise that they can't miss the boat on raw materials.”
Four months after Wolfsburg, VW announced a $25bn deal with battery companies including Samsung and LG Chem. It was one of the biggest purchasing agreements the car industry has ever seen, but has already been expanded to $48bn.
16 Volkswagen factories will begin rolling-out electric vehicles by 2022, up from three currently. A day later, Glencore agreed to sell roughly a third of its future cobalt to GEM, a recycling company in China.
“Electric vehicles are not about cleaning up the environment,” one mining director says. “Electric vehicles are about who will
dominate the global automative industry. China knows they will never catch the Europeans or the Japanese in the development of an internal combustion engine, but they can leapfrog the industry by going straight to an electric drivetrain. That's really what this thematic is about.”
Electric cars have changed the dynamic in the metal market, according to mining investor Robert Friedland. From Tesla to VW, large metal buyers have been taking supply for granted, but are now being forced to negotiate with mining companies directly. In addition to cobalt, there is around 80kg of copper in an electric car, according to UBS, roughly four times more than in petrol or diesel vehicles, and auto players are struggling to put their foot on the raw materials.
“There are not enough batteries, not enough motors,” Renault boss Carlos Ghosn said at a press briefing at the Paris auto show earlier this month. “We cannot fulfil demand.” It is the “revenge of the miners”, according to Friedland, who has investments in copper, platinum and cobalt in Africa and Australia.
Others say it is two-way traffic. Despite having sold its tonnage to China, Glencore is quietly longing for a good relationship with VW, its insiders say. California-based Tesla dominates headlines in the electric car market but has struggled to ramp-up production, whereas Volkswagen has the capacity and clout to dominate the industry for decades to come. In 2019 it is planning to announce a new electric model almost every month. Its sister companies, including Audi and Porsche, are also making the jump: Porsche is pumping $7bn into its electric range and pledged last month to make its future “diesel-free”.
Glencore is also trying to stop its cobalt becoming tarnished in the eyes of buyers. The bulk of its production comes from mines in the Democratic Republic of Congo, one of the world's most corrupt countries, where car groups have already been criticised for using metal mined in hazardous conditions.
Glencore is currently under investigation by bribery and corruption investigators over its links to Dan Gertler, an Israeli mining billionaire who has been sanctioned by the US for his “close relationship” to the DRC’s government. Consumer-facing groups are meanwhile under increasing pressure to act tough in tightening-up their supply chains, blacklisting companies with questionable practices: Panasonic recently blocked cobalt shipments from one mining company over concerns that it broke US sanctions, the London Metal Exchange has started banning contracts that fail to meet its guidelines and Daimler, which owns Mercedes, has promised to audit any cobalt it uses up to the mine level.
The ultimate winners from Wolfsburg may be those mining companies that can produce specialist metals without risking their reputations in volatile countries. “The automotive space has woken up to the risks around the raw material supply chain,” says Sam Riggall, a former lawyer for Rio Tinto who is now chief executive of ASX-listed CleanTeq, which is building a nickel-cobalt complex in Australia.
“I'm seeing really strong engagement between mining companies and car manufacturers.” Riggall says. “I've never seen a time in my career when the entire supply chain integrates to try and resolve a problem.”
CORRECTION: An earlier version of this article incorrectly stated that cobalt is more flammable than nickel and that Glencore is off-limits for ethical and sustainable funds
Chief executive Shaun Usmar has closed $700m of royalty deals in two years. “We can do that very easily.”
From Freeport’s copper mines in Arizona to the $6bn Cobre Panama project, the market is awash with copper assets
Before dawn in the D.R.C., a mercenary is sitting in a truck parked-up on the edge of the country’s largest mine
133 years after designer Karl Benz first put a petrol engine inside a carriage (creating the first automobile) batteries are finally replacing the internal combustion engine:
Electric car sales are due to go through 2m this year, up from 1.3m last year. But with total global vehicle sales of over 80m last year, “this is only the beginning,” say analysts at Wood Mackenzie
There is roughly 10kg of cobalt in an electric car battery, worth $580 at current prices. That adds up to $1.2bn of cobalt each year, but if sales continue at their current rate there will be a tenfold increase in demand every five years
68 per cent
The Democratic Republic of Congo is expected to produce 91,000 tonnes of cobalt this year, equal to 68 per cent of global production. Other big producers include Canada, Russia and Australia