Apple's potential mining play is about more than money, industry experts say

Key Points
  • Reports that Apple is in talks to procure cobalt, the essential component in smartphone batteries, direct from mining companies reveal concerns over an impending supply shortage.
  • More than 60 percent of the world's cobalt is found in the Democratic Republic of Congo, where rights groups have exposed evidence of child labor in mines.
  • Demand for, and the price of, cobalt has skyrocketed since early 2016 on projections of fast-growing demand for electric vehicles, whose lithium-ion rechargeable batteries are dependent on the metal.
Apple mobile phones iPhone 6 on screens of which we can see the battery charge indicator.
Chesnot | Getty Images

Recent reports that Apple is looking to procure cobalt, an essential component in smartphone batteries, directly from mining companies have highlighted a growing concern about the valuable metal's impending supply shortage.

But just as important as securing a supply of the limited resource may be what one expert calls a "21st century factor" — ethics and human rights.

"Apple is a buyer of batteries, not a buyer of battery components, and it's a number of steps away from the raw materials side. So this is significant — the reason they're doing it is supply chain visibility," Simon Moores, managing director of Benchmark Minerals, told CNBC. "They need to ensure that their cobalt isn't sourced from illegal mining operations, especially those using child labor."

"It might be a supply concern, but really Apple's biggest concern over the last five years has been where are our components coming from and are they mined and produced responsibly?" Moores added. Apple declined to comment on the reports, which cited unnamed sources.

More than 60 percent of the world's cobalt is found in the Democratic Republic of Congo. In 2016, Amnesty International unveiled evidence of child labor in mines whose cobalt, through a long and complex supply chain spanning several continents, has wound up in Apple's smartphones, among several other major device makers. In 2012, Unicef estimated that 40,000 children worked in mines in the DRC's south.

A mine worker displays a handful of cobalt metal nuggets in Chingola, Zambia.
Waldo Swiegers | Bloomberg | Getty Images

In response to significant criticism, Apple, along with Samsung, Sony and HP, joined the Chinese-led Responsible Cobalt Initiative to pursue greater supply chain transparency. The non-profit Enough Project would later praise the iPhone producer, writing in a November report that Apple "has committed substantial resources to developing processes for sourcing minerals from mines that benefit Congolese communities." Amnesty International also listed Apple as best performer among tech companies for ethical supply chain practices.

By moving to buy straight from the source, Apple would be "guaranteeing their supply chain is clean, and to me what is most newsworthy is that new factor. It's a 21st century factor," Moores said. "It's the first case I know of where the nonconflict cobalt story is potentially going to result in a company like Apple buying direct."

Skyrocketing demand and price

Demand for, and the price of, cobalt has skyrocketed since early 2016 on projections of fast-growing demand for electric vehicles, whose lithium-ion rechargeable batteries are also dependent on the metal.

The French and German governments last year announced bans on gasoline and diesel car sales by 2040, and China is ramping up EV production. Transparency Market Research has estimated that by the end of 2022, the global automotive battery market will be worth more than $54.5 billion, up from $30 billion in 2015.

So it makes sense that Apple would be looking to secure supply and potentially save a lot of money, too. This strategy could save it "hundreds of billions of dollars over the next two to three years," Daniel Ives, chief strategy officer and head of technology research at GBH Insights, told CNBC.

Cobalt prices stand at $80,000 per metric ton, up from $20,000 in January 2016, and global demand for 2018 is estimated at more than 110,000 metric tons, according to Reuters. Bloomberg New Energy Finance predicted last year that cobalt demand will increase 30-fold by 2030.

A Tesla Inc. Model S 90D electric vehicle is charged.
SeongJoon Cho | Bloomberg | Getty Images

In terms of ethical versus cost concerns, "the simple answer is a combination of both," said Tony Southgate, head of strategic cobalt marketing at Eurasian Resources Group.

"There is a concern about availability, as the EV growth is very, very rapid. Concerns over the growth of EV will impact the availability of batteries, but also buying direct from large-scale miners can ensure the material is ethically sourced."

'Bullish sentiment' set to continue

Andries Gerbens, a trader at London-based Darton Commodities, agreed. "I'd say it's a combination of factors. Certainly, the ethical issue has been key priority for them, and it has proven quite difficult to obtain good supply-chain visibility in the case of cobalt," he said. "It certainly does remove that element of uncertainty."

"Meanwhile, security of supply has definitely been a major concern for [Apple]," Gerbens added. "Everyone agrees that cobalt is likely to be in deficit in the coming years, and for a company like Apple, lithium-ion batteries are key, and therefore security of supply of the raw materials going into those batteries is crucial."

While Gerbens did not foresee an immediate impact on market prices, what this potential move would do is "further strengthen the bullish sentiment that's already seen in cobalt today and has been for awhile," he predicted.

And it's likely we will see other major electronics manufacturers like Samsung and LG Chem follow suit, opting for longer-term contracts with major cobalt miners to secure future supply.

"I think it demonstrates that indeed there is a genuine concern among the bigger consumers that availability is going be an issue going forward," he said.