Tesla in conversation to buy Glencore Cobalt for Shanghai Car Plant

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(Bloomberg) – Glencore Plc is currently negotiating a long-term contract to supply cobalt to the new Tesla Inc. electric vehicle factory in Shanghai.

A deal would help Tesla avoid supply shortages of key battery metal as it penetrates the largest car market in the world, and would mean victory for Glencore after a difficult period in the cobalt business.

Executives from both companies set the terms before an official ceremony, which saw the first sales from the Shanghai plant earlier this month, said one of the respondents, who did not want to be identified to discuss trade negotiations. They declined to provide details of the scope and value of the delivery.

A Glencore spokesman declined to comment, while a Tesla representative did not immediately respond to a request for comment.

The contract will help Tesla secure its cobalt supply by increasing production at the so-called Gigafactory, which was built in just eleven months with substantial support from the Chinese government. The opening of the plant has helped Tesla’s shares hit new highs as investors are optimistic about Elon Musk’s ambitions to make the company a global mass market automaker.

Although the supply of cobalt is currently sufficient, the demand is likely to increase in the coming years, as Tesla expands in China and Europe and Volkswagen AG expands to BMW AG fleets of electric vehicles. Long-term bottleneck warnings led to an increase in cobalt prices in 2017 and 2018, prompting Musk to work to reduce Tesla’s dependence on metal. Still, the deal signals that the metal will remain the key to the company’s expansion in the coming years.

Despite a tense year for the auto industry, the emerging electric vehicle market offers great opportunities for manufacturers and the companies that supply them. The biggest miners want to increase the production of metals such as copper and nickel, which are needed for the electrification of cities and cars.

Glencore, the world’s largest cobalt miner, is in an excellent position to benefit from a boom in sales of electric vehicles. So far, however, it has been difficult to achieve this. The company posted losses related to cobalt last year after prices slumped in mid-2018 due to over-supply.

Read more: Cobalt’s Star Fades for Glencore traders as customer renege

With customers out of contracts due to the slump, Glencore spent the last year signing new long-term contracts with customers across the electric vehicle supply chain. BMW is committed to buying cobalt from its mines in Australia, and suppliers of battery materials, GEM Co. and Umicore SA, have also signed contracts.

Direct business with miners is rare in the automotive industry, and the agreements between Glencore, Tesla and BMW are a sign that automakers are concerned about getting enough cobalt for ethical reasons. Almost three-quarters of the world’s cobalt comes from the Democratic Republic of the Congo, and 20% of the country’s production is produced in informal makeshift mines where deaths and human rights abuses are commonplace.

Lack of liquidity in exchange-traded cobalt contracts also means that buyers have little opportunity to hedge against wild price fluctuations. As a result, the industry is seeking long-term strategic mergers so that battery chemical and cell manufacturers can pass on price risks as cobalt advances in their supply chain, said George Heppel, analyst at CRU Group.

“You have to be able to pass on these costs,” said Heppel by telephone. “It would be impossible for a battery manufacturer to enter into a long-term contract with a customer without having a clause to vary its prices based on raw material costs.”

(Updates with background information on cobalt from the sixth paragraph)

– With the support of Christoph Rauwald.

Contact reporters about this story: Mark Burton in London at mburton51@bloomberg.net, Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

Contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin, Dylan Griffiths

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