On the 18th of May, Core Consultants presented at the Cobalt Development Institute’s annual conference. The subject was the cobalt supply chain and Core presented on a way to possibly overcome poor traceability, and auditability in the supply chain using blockchain technology. The DRC has a legacy of poor governance and the background as it impacts the cobalt industry is explained in our article on cobalt controversies. In recent years, cobalt has become the poster child of Human rights violations and given he importance of this metal, there needs to be a industry-driven initiative to overcome this.
Below is a transcription of our presentation which contemplates a possible first step towards transparency, auditability and trust in the sector.
“Good morning ladies and gentleman. I would firstly like to thank David Weight and his team at the CDI for coordinating this conference and for affording Core Consultants the opportunity to address you at this forum.
For those of you who are unfamiliar with Core Consultants, we were founded in South Africa in 2009 as a market analyst firm, specialised in commodity and commodity-related sectors. Since tour inception, Core Consultants’ team of associates has grown to include bankers, IT Specialists, Process and Mining Engineers and Geologists. We undertake work globally, but our main area of focus is in Africa, with many of our associates having worked in more than 16 African countries, mainly in the Sub-Saharan and West African regions.
As regards our cobalt team and specifically with respect to this analysis of blockchain technology, the Core team of associates is comprised of John Parker, who is no stranger to the cobalt industry. John is a process engineer with over thirty years experience as a chemical and process engineer. His most recent roles include Managing Director, Head of Technology and Process Engineering and Acting Managing Director of SNC Lavalin and Bateman Engineering.
John’s experience in copper/cobalt includes an intimate involvement with the process design for the Katanga mining copper/cobalt refinery for Glencore and Kov whole ore copper leach SX/EW plant in the DRC. John also provided input to the Tenke Fungurume cobalt plant options study for Freeport McMoran and as we speak, John is back in the DRC helping ERG’s Kolwezi copper/cobalt retreatment plant as well as KCC’s plant.
Last year, Core Consultants opened a subsidiary company, Core Africa, which is headed up by David Creamer. David is a former Barclays Africa principle whose strengths lie in understanding the different regulatory environments, the key stakeholders and the cross border flow of funds between different regulatory jurisdictions in Africa and globally, and their impact on corporations doing business in Africa. David was actually the first one to suggest to us that either Blockchain or perhaps Swift could possibly be used to overcome the supply chain issues in the cobalt industry, which led us down this exploratory road.
Mike Gluckman is a software engineer and the Chief Technology Officer CTO in his own technology development business, Mercator. Mike’s expertise and experience lies in solving problems related to big data and implementations of large scale integrations. His assistance with this presentation and input into Blockchain is deeply appreciated.
My background as regards cobalt is as a market analyst. Prior to founding Core Consultants, I worked for a company that owned and managed copper/cobalt mines in the DRC and Zambia and had a stake in Kitwe’s smelter. Since the inception of Core Consultants, we have conducted numerous market studies in this area and I have been fortunate to present on various topics with respect to the cobalt market at a number of international forums.
Core Consultants was founded in 2009 with the aim of equipping top professionals and decision makers with commodity-related insights to guide them towards making informed decisions. Since this time the number of divisions have expanded to include four main service areas, including Core Consultants, Core Africa, Core Insights and Core Connect.
Core Consultants, is our management consultancy division, which offers strategic market studies, pre-feasibility and feasibility studies in accordance with our clients’ briefs.
Core Africa, headed by David Creamer, is a business and risk consultancy that assists our clients with defining their business strategy in Africa and ensuring compliance across multiple jurisdictions.
Core Insights is our subscription report services, we currently have three monthly reports as well as those reports which we offer on a regular basis in accordance with client briefs.
Our newest subscription service is Core Connect. This service facilitates private conversations with industry experts in order to provide our clients with unbiased market insights, thereby allowing them to fully understand their investment opportunities. As a subscriber, instead of commissioning a long report, which take time to develop and time to read, you can speak directly to one of our experts and get all your questions answered. Core Connect, is therefore an excellent starting point in a company’s research endeavours.
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, where we gave a presentation at the CDI conference in Hong Kong on the logistical issues of moving copper/cobalt in the DRC. You can see this presentation on our YouTube site.
Our concern around ethical cobalt supply chains and whether it was possible to solve this issue, started in 2014, where we undertook a major consultancy project on behalf of a US-based multinational technology company, whose aim was to potentially roll out an electric vehicle and if successful would increase demand for cobalt by 20-25%. As such they needed to ensure a suitable supplier in the DRC that would not tarnish their reputation from an ethics perspective.
Core’s role was to evaluate potential cobalt producers and conduct a due diligence and shortlist suitable suppliers. And I can tell you, it was a major undertaking and required us getting people on the ground, surveying mines and mineworkers, speaking to traders, end users, suppliers and at the end of this we thought that there needs to be some kind of automated solution. The solution to solving this issue needs to be technology based.
From there we evaluated a few technologies, I spent some time in Tel Aviv and attended a number of hi-tech presentations, looking at some of the cutting edge technologies. And then it was suggested again that perhaps Blockchain is the way forward. Already IBM are looking at applying Blockchain to the diamond industry and there’s a successful pilot in the fishing industry being applied in Asia. And since it is already being applied to commodities, it didn’t seem like that much of a leap to applying it to a metal-supply chain.
So with this as background, we outline in this presentation a high-level description of the cobalt industry and the problems facing us. From there we explain blockchain and provide a hypothesis on how we thing it can be used. And then we look at some of the challenges and next steps needed to implement this strategy. As a caveat I need to stress, that at this stage, we are presenting a theory based on our research. If the industry agrees, we would have to undertake further work to provide a proof of concept.
The majority of this audience is familiar with the above slide, so I would just say, that there are relatively few integrated producers existing within national boundaries and therefore ores, intermediaries and refined metals are all traded internationally.
In terms of raw materials, just over 50% comes from the DRC. In terms of recipients of these ores, most of this goes to China.
If we focus on the DRC, legitimate sources as a proportion is increasing. ERG is bringing 20,000 tonnes by the end of the year. Katanga is expected to bring 20,000 to 30,000 tonnes by the middle of next year depending on their mine plan. Vedanta will probably expand by around 3,000 tonnes and other marginal increases are expected.
Artisinal mining as a proportion is therefore declining. Not only due to expansion plans of industrial players, but also this is natural due to grade depletion of accessible sources. But the concern is that as cobalt prices have risen to over $55/lb, compared to when I started in the industry when prices were at around $4/lb, a rising tide lifts all boats. So the profit margin across the supply chain may spur even more artisinals and high quantities of artisinal material. Further, conditions for these workers may worsen as these miners are lowered into deeper pits to access what has become precious material.
Despite the fact that as a proportion, legitimate sources of cobalt is increasing, there is still the risk that some of this artisinal material ultimately ends 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 in the supply chain, auditability and transparency is very weak.
Our understanding of how artisinal material moves through he supply chain is still quite obscure, but what we know from our research is that artisinals dig, crush, wash and sort heterogenite into 50kg bags. The contained cobalt is anywhere from 3-20%. These bags are then sold to licensed traders who in turn sell the aggregated volumes to intermediaries or wholesalers. The intermediaries sell the heterogenite onto concentrators which then upgrades the material for export, mainly to China.
The question we should by now be asking ourselves is why this issue of ethical sourcing is coming up now and we have had half a day yesterday at this event already dedicated to responsible sourcing.
We know that extreme poverty, lack of skills and jobs, corruption has enabled illegitimate sources of cobalt extraction to thrive. And in fact, since the 90’s the subject of responsible sourcing has been on the agenda.
But technology has opened the floodgates to information. Higher levels of consumer awareness is championing demand for a cleaner supply chain.
Also if we consider cobalt specifically, it’s main application was mainly in superalloys for industrial applications. Now just about all of us hold a piece of cobalt in our pockets. When demand for a material suddenly increases, we get a spotlight shone on the industry which is what is happening today with cobalt. As such, the cobalt industry, rightly or wrongly, has become the poster child for human rights violations.
And 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.
For the first time ever, we now have the Responsible Cobalt Initiative, led by Chinese Business Groups, with buy-in from the tech giants, which are the ultimate end-users.
The pledge with this initiative is to follow OECD guidelines of responsible sourcing, but to date, no one has been able to trace exactly how cobalt is extracted and transported across the supply chain.
So the solution needs to be technology based, implemented by the industry and the difficulty is the industry has various stakeholders, all governed by differing incentives.
So to recap, if we reframe the problem in another way. Just under a quarter of the word’s cobalt is currently mined using artisinal mining methods. If we just consider the imbalance between what the miner receives, the price of cobalt which is currently touching $55/lb and and cost of a smartphone, we have to acknowledge the discrepancy and start acknowledging the fact that underlying all these issues is a human element that needs to be addressed.
So what is the solution. We know what can’t be measured, can’t be managed. 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 having considered a few technological options, and you are welcome to come and speak to me about those during the break, we propose using blockchain.
A blockchain is another type of database for recording transactions. Data in a blockchain is stored in fixed structures called blocks; the structure of the blockchain is based on trust in a single entity, but on cryptographic proof.
A blockchain system has two important qualities, namely it is decentralised-so there is no single owner and it is immutable-so no one can tamper with data on the blockchain.
The reason that blockchain is so compelling is that it directly addresses the issues of providing transparency, auditable and trust.
You’ve all heard of bitcoin, the technology underlying this is blockchain. In the case of bitcoin, this is a public ledger, meaning that all actions can be seen by anyone using the blockchain, but the players are not known. Anyone can access the blockchain, but we don’t know who the players are.
What we propose is an industry-specific blockchain whereby every action taken by a role player can be seen by every other role player on that system, which addressed 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.
In this last part of the presentation, I am going to take you through a hypothetical blockchain, focusing on artisinal supply chain, but the process can be applied to other lines. This is intended as a high-level overview of how we envisage these steps.
What the blockchain actually captures is the physical movement of goods and records his electronically. So the round circles represent the cobalt flowing through the various stages of the supply chain.
The dotted line is the associated flow of digital information and then there’s the blocks and those three components, the physical, digital and the blocks make up the blockchain solution.
So in this first leg you have a trusted entity, such as an NGO, registering the artisinal miner as a user or role player on the blockchain. The miner may use something like a smart tag or mobile number or biometrics or some kind of unique identification that can be used to verify him. This information is digitally stored on the block chain network.
What this slide shows is that the artisinal miner takes his physical bag of cobalt to the trader. The trader will weigh the bag using a standard scale and using a standard spectrometer, he will identify the contained cobalt. This information will be digitally captured on the blockchain.
The cobalt is given a bar code, which is registered on the blockchain.
The payment to the artisinal miner is processed- that payment is recorded and he is given an amount of money. So we have a physical transaction, digitally recorded: Cash in exchange for goods.
So now what we have is evidence of the miner bringing the cobalt to the traders and the traders paying for this cobalt based on weight and contained cobalt. So the evidence is recorded and this evidence can be viewed by everyone on the blockchain.
Now we have the processors. 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.
So they receive the cobalt, scan the bar code and this code is recorded on the blockchain. The processor upgrades the material and sends it on, and is paid for the processed material. This payment is digitally recorded on the blockchain.
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.
In the same way as the previous steps, we can set up the end user as a role player on the blockchain to record when they have purchased cathode material or cobalt-containing product from the manufacturer. We can have a bar code or QR code on the device that identifies the source of the cathode which can signal that this battery or product was sourced responsibly by material on a blockchain.
We recognise that blockchain is not a panacea to all these problems and at this stage, as I have stressed before, we are only presenting a hypothesis or a proposal as a starting point to finding a viable solution.
There are definitely technical challenges to blockchain. For instance, blockchain technology does not have the capabilities to guarantee the reliability of information recorded. Thus a blockchain’s implementation could face several limitations and might require a third party of 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, we assume some kind of verifiable data such as an artisinal’s biometric information or mobile number. Is this even possible?
And the other challenge is non-technical and centered around 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 to go for it.
So what are the next steps. As mentioned this is a hypothesis, so we need a due diligence to fully understand the point of entry where the artisinally mined material might come into contact with the legitimate material.
Then, as part of the due diligence, we need to understand whether this type of blockchain can be used and the costs of implementation.
Our idea would be to start with the first block in Slide 14, namely just getting a digital footprint recording of the bags of artisinal material to the traders. This would provide a starting point for a discussion around farer pay and working conditions for these miners which is at least a step in the right direction.
We need to take small wins. It’s not possible to clean up the supply chain in one shot, but if we can improve the lives even marginally of these miners, then this is the first step.