Glencore's Investor Update Confirmed My Analysis Of Tesla's Cobalt Supply Chain Risk

Summary

• Glencore, the world’s largest cobalt producer, recently predicted that increased demand for electric vehicles will quadruple global cobalt demand over the next 13 years.
• Even under highly optimistic cobalt production assumptions, demand will exceed supply by 42% in 2025 and 170% in 2030.
• Currently, the time required to convert exploration success into a new mine is about 30 years.
• Without relevant scale solutions that can be quickly implemented, the cobalt cliff will be an existential threat to Tesla and the EV revolution.
• The only project I’ve seen that approaches relevant scale is a Hail Mary effort to harvest cobalt rich manganese nodules from the ocean floor around the Cook Islands.

In March 2016, I penned an article titled “Tesla: Another Thing To Worry About” that described an evolving supply chain dynamic in the battery industry that represents an existential threat to Tesla (NASDAQ:TSLA) and its lofty ambitions for an EV revolution. Since then I’ve published nine more articles that examine the issue in greater detail, including:

• Cheap Lithium-ion Batteries for EVs vs. The Cobalt Cliff
• Tesla’s Evolving Cobalt Nightmare
• A Deeper Dive into Tesla’s Evolving Cobalt Nightmare
• Cobalt, The Weak Link In Tesla’s Supply Chain
• Morgan Stanley's Cobalt Report Mirrors My Analysis Of Tesla's Supply Chain Risks
• The Cobalt Cliff Will Crush Tesla's Business And May Restore Some Sanity To The EV Industry
• Has China Quietly Pushed Tesla, GM, VW And The Rest Of The Auto Industry Over The Brink Of The Cobalt Cliff?
• The Cobalt Cliff Will Cap Tesla's Model 3 Production Capacity At 250,000 Units Per Year
• The Cobalt Cliff, Two Dire Warnings And A Musk Soliloquy

On December 12, 2017, Glencore (OTCPK:GLCNF) included this slide in its Investor Update to explain the expected impact of the EV revolution on the mining industry in general and Glencore in particular. It’s an amazingly stark confirmation that without relevant scale solutions that can be quickly implemented, the cobalt cliff will be an existential threat to Tesla and the EV revolution.

Since the Glencore slide focuses on incremental demand for copper, nickel and cobalt from the EV industry, it’s important to remember that while the EV industry will be an important driver of cobalt demand over the next 13 years, it also will be the most price sensitive cobalt user and its access to cobalt supplies will be limited to metal that other users don’t need.

The following table combines Glencore’s cobalt demand forecast for the EV sector with recent cobalt demand values from Morgan Stanley for the non-EV battery sector and for non-battery industrial applications. Since Morgan Stanley’s forecast period ended in 2025, the 2030 values in the table are simple trend-line extrapolations.

Readers who have followed my work consistently will no doubt wonder why the 2020 supply and demand balance shows a surplus instead of the deficit I’ve previously discussed. The simple answer is Glencore. While prior forecasts expected Glencore’s cobalt production to ramp by 15 to 20 KTPY over the next few years, Glencore’s Investor Update forecasts a cobalt production ramp of 36 KTPY from 27 KT in 2016 to 63 KT ±3 KT by 2020. That change in Glencore’s expected production together with a modest adjustment of the expected cobalt production from Eurasian Minerals' Roan Tailings Project was enough to eradicate the small short-term deficit I previously expected and give rise to a modest surplus if there's no timeline slippage and the world’s miners decide to flood the market.

Once you get past 2020, however, all hell breaks loose. Go back to the table and take another look at the growth in total cobalt demand. For the three years from 2017 through 2020, annual cobalt demand growth will average 6.7 KTPY. For the five years from 2021 through 2025, annual cobalt demand growth will average 18.3 KTPY. For the final five years from 2026 through 2030, annual cobalt demand growth will average 43.7 KTPY.

Since more than 90% of the world’s cobalt is produced as a byproduct of copper mines in the DRC and nickel mines in other parts of the world, there's no reasonable expectation that the world’s miners can keep up. In a March 2017 report titled “Electric Revolution: Investing in the Car of the Future,” Bernstein Research reported:

“Over the more recent years, the pace of discovery has slowed sharply and the return on exploration expenditure has, with a few notable exceptions, declined accordingly. At the same time, the lead time required for conversion of exploration success into an operating mine has lengthened considerably and now stands at ~30 years. The implication of this is clear; it is the current asset/resource base whose exploitation and development will be required if we are to deliver the rapid transition to electric vehicles that the world seems to want.”

Without a black swan event, the cobalt cliff will crush Tesla and the EV revolution because you can’t make long-range EVs without high energy lithium-ion batteries and you can’t make high energy lithium-ion batteries without cobalt. It really is that simple.

I was recently retained to help a privately held Houston company prepare offering disclosures for their ambitious plan to harvest cobalt-rich manganese nodules from the ocean floor around the Cook Islands. While the technical and economic risks of harvesting fist-sized polymetallic nodules in 15,000 feet of water are enormous, their NI 43-101 compliant inferred resource base includes a million tonnes of cobalt, their operating staff is the cream of the deep-water oil and gas and mining industries and their initial work in the Cook Islands was conducted under a DoD contract to evaluate the rare earth metals potential of ocean floor sediments. While the project can only be described as a Hail Mary effort, it’s the only project I’ve seen that can fill the gap between cobalt supply and demand in a timely fashion.

Investment Conclusion

The looming cobalt shortages are not necessarily the kind of "right-now" issues that would support a short sale strategy because experience has shown that facts aren’t always enough to overcome the quasi-religious conviction of Tesla longs. The problems are, however, critical and clear enough that prudent investors should consider hedging their risk or seeking the safety of the sidelines. While a black swan development is possible, without a black swan Tesla and the EV revolution are doomed.

Later this month I plan to launch “Storage Space: Batteries EVs Metals,” a premium research service in the Seeking Alpha Marketplace for data and diligence driven professional investors who need to be able to distinguish between hype and the vulgar exigencies of objective truth.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.