Why it is difficult to avoid these risks: risk multipliers

In addition to the risks identified above, there are rising external pressures that act as risk multipliers and are further bringing the issue of responsible sourcing in to sharp focus and driving the need for action.

Supply shortages and concentrated production

First, the growing demand and competition for battery metals, not least in cobalt and lithium, will further constrict downstream actors’ ability to be selective when establishing supply chains. Analysts project the cobalt supply deficit to increase by 83% to 5,340 tonnes between 2018 and 202027. A compounding factor for supply bottlenecks is the long lead time in developing new mines (development can take up to 10 years28). Automotive industry representatives have also stated that supplies of lithium are of the greatest concern to carmakers, as production struggles to keep up with demand. Annual lithium production would need to grow by 94% over the next 20 years to satisfy the projected demand from the EV market29. What is more, lithium production is dominated by only four companies. Some experts see a potential risk of cartels developing in lithium and cobalt30.

Mismatches between supply and demand in the short and medium-term could increase producer leverage while weakening the downstream’s ability to re-direct supply chains away from high-risk producers.

What is more, the production and reserves of battery metals are either concentrated in a small number of countries, come from countries that have been identified as sources of responsible sourcing risks in earlier (see the Map in Figure 3 ), or both.

What this means for companies in the battery supply chain: Due to supply shortages, it will be difficult for companies to be selective and easily avoid potentially high-risk suppliers and pressure will remain on the supply side to produce. Due to the concentrated production, it is furthermore likely that companies are sourcing from – and will continue to rely on – the countries mentioned above. Strikingly, several of these countries have been identified earlier as potential sources for responsible sourcing risks, including the DRC, China, Russia, the Philippines, the ‘lithium triangle’ in South America, Namibia, and South Africa.

Increasing public scrutiny

The lithium-ion battery market is also facing rising pressure directed at their responsible sourcing practices by the media, campaigning NGOs, a growing number of trade, regulatory and legislative bodies, and consumers themselves.

And public scrutiny – and with-it stakeholder awareness – around the responsible sourcing risks associated with battery metals will continue to increase:

  • A growing number of articles from internationally reputable news sources are focusing on risks in battery supply chains, including the Washington Post (cobalt, graphite, lithium), the New York Times (nickel), NBC (nickel), The Guardian (nickel), the Financial Times (nickel, cobalt) and Forbes (nickel).
  • Leading downstream companies have started internally re-classifying cobalt as a ‘conflict mineral’ and treat it with the same scrutiny as tin, tantalum, tungsten and gold (3TG), which are subject to conflict minerals legislation in the United States and the EU
  • Investors and investment analysts are also increasingly factoring due diligence risk in to investment assessments.
  • New responsible sourcing initiatives are focusing on batteries and already count amongst their members large electronics and car companies:
    • The World Economic Forum’s Clean Battery Alliance;
    • The Responsible Battery Coalition and the Electronic Industry Citizenship Coalition’s (EICC) Responsible Raw Materials Initiative (RRMI);
    • The Cobalt Institute, which represents the world’s major cobalt producers, processors, and traders, is currently developing – with assistance from RCS Global – a responsible sourcing framework.
  • Mining companies in the upstream, such as ERG, are – with assistance from RCS Global - actively working on putting the management systems in place to ensure their risk exposure is minimized and their production complies with the market expectations of downstream industries.
  • The OECD is preparing to publish a handbook on risks associated with the production of natural resources which will cover, amongst other raw materials, cobalt, lithium, nickel, and manganese. The OECD’s ‘soft law’ approach towards norms and standards is increasingly becoming actual regulation and law in many countries, including the EU, Colombia, Turkey, the United Arab Emirates, and the United States.
  • Recent legislation, such as the US Trade Facilitation and Trade Enforcement Act, France’s corporate vigilance law, or the UK’s Modern Slavery Act could be applied to problems such as child labour in mineral supply chains.

Based on our experience in conflict minerals and the lessons learnt in the cobalt sector since January 2016 the following predictions can be made about battery metals:

The first three steps are already happening in battery metals. It is thus likely that more standards and initiatives specific to battery metals will appear, followed by increased debate on legislation.

What this means for companies in the battery supply chain: If sufficient due diligence is not conducted, a company may risk not complying with increasingly strict industry standards (which may result in loss of business relationships and reputational damage) or, worse, international and domestic laws (which may result in loss of business licenses or lawsuits).

27   Maquarie, http://www.reuters.com/article/us-cobalt-demand-investors-idUSKBN15T1VR
28   http://energypolicy.columbia.edu/sites/default/files/energy/CGEPTheGeopoliticsOfRenewables.pdf
29   https://www.ft.com/content/90d65356-4a9d-11e7-919a-1e14ce4af89b
30   http://energypolicy.columbia.edu/sites/default/files/energy/CGEPTheGeopoliticsOfRenewables.pdf

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