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Cobalt Supply Chain: Transparency, Auditability And Trust Using Blockchain Technology

Summary

Can Blockchain be used to overcome the issue of conflict minerals?

Extracted from presentation given at the Cobalt Development Institute in 2017, proposing a starting point for blockchain implementation.

The potential for smart contracts and fair pay for artisinal miners.

On the 18th of May, 2017, Lara presented at the Cobalt Development Institute’s annual conference on the cobalt supply chain and how blockchain could be employed to overcome its poor traceability and auditability. In recent years, cobalt has become the poster child of human rights violationsnand, given the increasing importance of the metal, there must be an industry-driven initiative to overcome this.

Cobalt markets have always been a key part of Core Consultants’ business since our inception in 2009. Our interest in cobalt supply chains specifically dates back to 2010, when we raised concerns over the logistical issues of moving copper/cobalt in the DRC during a presentation at the CDI conference in Hong Kong.

In terms of raw materials, just over 50% comes from the DRC, with most going to China. Legitimate sources as a proportion are increasing in the DRC, however: ERG was to bring 20,000 tonnes online by the end of 2017. Katanga was expected to bring 20,000 to 30,000 tonnes by the middle of 2018 depending on their mine plan; Vedanta was likely to expand by around 3,000 tonnes, and other increases are expected.

Artisanal mining as a proportion is declining. Not only due to expansion plans of industrial players, but also thanks to natural grade depletion of accessible sources. A rising tide lifts all boats, however, and cobalt prices have risen to over $55/lb (compared to when I started in the industry when prices were at around $4/lb), so the profit margin across the supply chain could very well encourage considerable artisanal activity. Moreover, conditions for these workers may worsen as these miners are lowered into ever deeper pits to access what is now a precious material.

Despite the fact that legitimate sources of cobalt are increasing, there is still the risk that some of this artisanal material will ultimately end up in the same pot as legitimate sources.

We have seen various reports, including the Washington Post, Amnesty International’s “What We Die For” and from other NGO’s which have all highlighted weakness in the supply chain. And given the lack of controls, auditability and transparency are both weak.

Our understanding of how artisanal material moves through the supply chain is still quite obscure, but what we know from our research is that they dig, crush, wash and sort heterogenite into 50kg bags, with cobalt grades of 3-20%. These bags are then sold to licensed traders who sell the aggregated volumes to intermediaries and wholesalers. The intermediaries sell the heterogenite onto concentrators who then upgrade the material for export, mainly to China.

We know that extreme poverty, lack of skills and jobs, and rife corruption have enabled illegitimate sources of cobalt extraction to thrive. In fact, since the 90’s, the subject of responsible sourcing has been on the agenda, but higher levels of consumer awareness, driven by modern interconnectivity, are championing demand for a cleaner supply chain.

Over the years there have been various initiatives and associations trying to implement standards and guidelines, but it’s an industry problem that requires an industry solution. We now have the Responsible Cobalt Initiative, led by Chinese Business Groups, with buy-in from the tech giants (the ultimate end-users). This initiative pledges to follow OECD guidelines around responsible sourcing; however, no one has ever been able to trace exactly how cobalt is extracted and transported across the supply chain. The solution can only be technology-based and must be implemented by the industry; the difficulty being that the industry’s various stakeholders are all governed by conflicting incentives.

Just under a quarter of the word’s cobalt is currently mined using artisanal mining methods. If we consider the imbalance between what the miner receives, the price of cobalt, which is currently approaching $40/lb, and the cost of a smartphone, we have to acknowledge the discrepancy and that the human element must be addressed.

Having researched first-hand how to source legitimate cobalt, I am the first to say that there is a need for technology to intervene, and we propose and support blockchain in this regard. A blockchain is a secure public ledger for recording transactions. Data in a blockchain is stored in fixed structures called blocks; the structure of the blockchain is based on cryptographic proof rather than trust in a single central entity. The system has two important qualities: It is decentralised and immutable, providing transparency, auditable and trust.

In the case of bitcoin, all actions can be seen by anyone using the blockchain, but the players remain unknown. All activity is public, but with no identifying tags. What we propose is an industry-specific blockchain whereby every action taken by a player can be seen by every other player on that system to address the issue of transparency. Every transaction has an associated digital fingerprint, which uniquely identifies the owner of that transaction and creates auditability. Trust is enabled by cryptographic algorithms by ensuring transactions are immutable.

What the blockchain actually captures is the physical movement of goods. In the first leg, there is a trusted entity, such as an NGO, registering the artisanal miner as a user or player on the blockchain. The miner may use something like a smart tag or some kind of unique identification that can be used to verify identity, which is also digitally stored on the blockchain network.

The artisanal miner takes his physical bag of cobalt to the trader. The trader will weigh the bag using a standard scale and a standard spectrometer, identifying the contained cobalt, which will also be digitally captured on the blockchain as a barcode. The payment to the artisanal miner is processed and he is given an amount of money. So we have a physical transaction, digitally recorded: Cash in exchange for goods.

So we have evidence of the miner bringing the cobalt to the traders, and the traders paying for this cobalt based on weight and grade, and this evidence can be viewed by everyone on the blockchain.

The processors’ responsibility is to receive the cobalt from these traders or mines and process it into a usable state and deliver it to the manufacturers. They receive the cobalt, scan the barcode, upgrade the material, send it on and get paid, each stage being recorded on the ledger.

The manufacturers main role is to receive the cobalt from the processor and ultimately produce a product for the end user market. These steps again are all captured digitally and placed onto the blockchain.

The end user can be given a role on the blockchain to record when they have purchased cathode material or cobalt-containing product from the manufacturer. A barcode or QR code on the device could identify the source of the cathode, which can then accurately verify that this battery or product was sourced responsibly by material as recorded by the blockchain.

We recognise that blockchain is not a panacea to all these problems and at this stage, and we are simply presenting a hypothesis or a proposal as a starting point to finding a viable solution. There are many technical challenges to implementing the technology, blockchain, for example, cannot guarantee the reliability of the information recorded, and may even require a third party or a very secure tracking device to maintain the trustworthiness of the records. Another challenge is that, for this to work, we assume an internet connection exists, as well as verifiable data on artisanal miners such as a mobile number, which may very well be impossible.

A further challenge arises when considering incentives. Is it profitable to implement a blockchain? If you run a sweatshop in your supply chain and it’s profitable, do you want everyone to know about it? There needs to be some clear incentive for all parties to want to be transparent. Transparency and trust needs to have a positive impact on the bottom line for companies to want it.

We need additional due diligence to fully understand the point of entry where the hand-mined material might come into contact with the legitimate stuff. As part of this due diligence, we must understand whether this type of blockchain can be used and calculate the cost of implementation.

We recommend starting with the digital footprint that records the bags of artisanal material heading to the traders. This would provide a starting point for a discussion around fair pay and working conditions for the miners, which has to be our primary concern. We need to take small wins. It’s not possible to clean up the supply chain in one shot, but to improve the lives, even marginally, of these miners, this is the first step.