EP12: Does it make sense for US taxpayer money to go to “fix”’ the Lobito Atlantic Railway (LAR) Benguela railway corridor?

Summary:

In this episode we explore the economic feasibility of investing US taxpayer money to improve the Lobito Atlantic Railway (LAR) in Angola, aiming to facilitate the transportation of cobalt, lithium, rare earth metals, and copper from the Democratic Republic of Congo (DRC), Zambia, and Angola to the Atlantic port of Lobito for eventual US consumption. We raise concerns about the feasibility of this project due to the significant Chinese presence in cobalt mining and processing in the DRC, with Chinese companies controlling a large majority of cobalt production and refining. Additionally, we question the impact of the project on US consumption given that most non-Chinese cobalt refineries are located far from the proposed Atlantic port, suggesting that the investment might not significantly increase US access to these critical minerals.

Questions to consider as you read/listen:

1. What is the impact of Chinese control over cobalt mining and processing on US economic interests and national security?
2. How viable is the proposed "fixing" of the Lobito Atlantic Railway (LAR) to enhance US access to critical minerals from the DRC?
3. How does the current global cobalt refining landscape affect the potential benefits of the Lobito Atlantic Railway (LAR) project for the US?

Long format:

Does it make sense for US taxpayer money to go to “fix”’ the Lobito Atlantic Railway (LAR) Benguela railway corridor?

I wish to look at this project strictly from an apolitical fact-based economic perspective. Good old fashioned ROI.

I freely acknowledge that $250m is on the scale of US government backed investment is minor/small, but as I understand the hypothesis of this project, it still makes me scratch my head leading me to ask myself “what am I missing?”

As I gather the hypothesis behind this investment is:

By “fixing” or enhancing the Lobito Atlantic Railway (LAR) for train-based shipping along the Benguela railway corridor, it will allow for the practical possibility of shipping cobalt, lithium, rare earth metals and copper from primarily the DRC as well as Zambia and Angola to the Atlantic port of Lobito. Further in producing this capacity or expanding it with “opening” of the west African Atlantic port of Lobito will make these materials more practically available for eventual US consumption.

If I have stated the hypothesis correctly then we can evaluate it, right? I only had time this morning to evaluate it based upon the variable of cobalt mining.

In doing so I discovered this:

If you want to really oversimplify cobalt mining in this region, it can be divided into traditional mining and artisanal miners (miners who are not officially employed by a mining company and use their own resources to mine and often do not mine on their own land). While it is not known precisely the percentage between the two, according to multiple sources, artisanal mining in the Democratic Republic of Congo (DRC) accounts for roughly 10-20% (one study says up to 30%) of the country's total cobalt production, meaning a not insignificant portion of cobalt mining in the DRC is done by artisanal miners.

Why does this matter? Who controls the physical removal of the resource from the ground controls to a large degree where it goes. Yes, there are supply and demand influences, but the law of capture matters.

Who controls the physical removal of cobalt in the DRC, for example?

Chinese companies own or have stakes in 15 of the 19 cobalt mines in the DRC. This would be the traditional mining operations. This gives China control over 80% of the DRC's cobalt output in and of itself. When you add into it the high penetration of Chinese citizens or small outfits as intermediaries between artisanal miners to the eventual export referring to the fact that in a lot of neighborhoods the miners who extract ore go to Chinese individuals or small outfits, called Négociants, to sell the ore and then those first level intermediaries then sell to larger area intermediaries (depots) that are also largely Chinese, then upwards to eventual export. Although there are no great technical papers on how many steps along the way exist from artesian extraction to export, according to the Fair Cobalt Alliance from anecdote that it may be as few as four to as much as a dozen. According to their limited case studies and anecdote, each step was Chinese or largely Chinese.

These intermediaries and aggregators get a vote on where the cobalt goes. Will it be influenced by supply and demand pricing, sure but to what degree?

In terms of our hypothesis stated above, does the law of capture referring to the Chinese penetration falsify our hypothesis? I don’t know but it sure has potential to falsify our hypothesis, I think.

But we can go one level deeper in our analysis, I suggest. As stated above I stated part of the hypothesis as “… Further in producing this capacity or expanding it with “opening” of the west African Atlantic port of Lobito will make these materials more practically available for eventual US consumption.” I want to focus on this part. Will opening up an Atlantic based port to export these materials mean in practical reality as it exists now that it will impact US consumption? Here is what I discovered.

According to available information, China processes approximately 80% of the world's cobalt. This means that a super majority of global cobalt refining happens in China.

Opening a port to the Atlantic when a supermajority of cobalt refining is in China does what in practical reality? Beats me.

Perhaps the thought is that by opening the POSSIBILITY of an Atlantic export that the non-Chinese refiners to the east of DRC (Atlantic side of West Africa) could grow. That’s a theory. Let’s look….

Here are some major cobalt processing plants outside of China:

• Sumitomo: Produces cobalt in the Philippines and refines it in Japan
• Vale: Produces cobalt in New Caledonia and Canada and refines it in Sudbury
• Nornickel: Produces cobalt in the Kola division of Russia
• Glencore: Produces cobalt in Western Australia and Canada and refines it in Norway
• Sherritt International and General Nickel: Mines cobalt in Cuba and refines it in Fort Saskatchewan, Canada
• MCC: Mines cobalt in Papua New Guinea
• Cengiz Holding: Mines and refines cobalt in Turkey
• Cubaniquel: Mines cobalt in Cuba
• Ambatovy: Mines and refines cobalt in Madagascar

So of the list above not many of them are to the east of the DRC benefiting an Atlantic sea port on the West of Africa. The major three outside of China are in Finland (north), Indonesia (west) and Madagascar (west) which combine to provided 17% of the world’s cobalt refining. In 2023, Finland accounted for 8.8% of the world's refined cobalt production. The other ones outside of China, Finland, Indonesia and Madagascar are much smaller in scope.

All of that leads me to the question that if the major non-Chinese cobalt refineries are not to the east of the DRC where a port on the western side of Africa with the Atlantic would help, does opening a port to the east of the DRC on the western side of Africa with the Atlantic actually do anything? Recall Finland (north), Indonesia (west) and Madagascar (west).

I suppose a theory might be that we (the US) would stand up its own domestic cobalt refineries. Again, being practical, I just don’t see the US allowing (heavy regulations and environmental concerns) or finding margins (due to high labor costs, cost of capital, and that cobalt is a volatile commodity in the market) for standing up our own cobalt refining. The Westin Elements project is very unique and the Ohio Nth Cycle project looks at recycling not true ore refining.

This is a long-winded way of me asking “what am I missing?”

Sources:

https://www.iied.org/formalising-artisanal-cobalt-mining-drc-much-work-remains

https://www.iied.org/formalising-artisanal-cobalt-mining-drc-much-work-remains

https://www.cfr.org/blog/why-cobalt-mining-drc-needs-urgent-attention#:~:text=More%20than%2070%20percent%20of,large%20mining%20firms%20are%20recurrent

https://www.faircobaltalliance.org/app/uploads/2024/07/FCA-Impact-and-Financial-Report-2023-EN-1507-low.pdf

https://www.cecc.gov/events/hearings/from-cobalt-to-cars-how-china-exploits-child-and-forced-labor-in-the-congo#:~:text=80%25%20of%20the%20DRC's%20cobalt,battery%20makers%20around%20the%20world

https://www.csis.org/analysis/window-opportunity-build-critical-mineral-security-africa#:~:text=In%20the%20Democratic%20Republic%20of,a%20Chinese%20one%20in%202020

https://www.nationaldefensemagazine.org/articles/2022/8/3/united-states-seeking-alternatives-to-chinese-cobalt#:~:text=Almost%20all%20the%20cobalt%20mined,percent%20of%20the%20world's%20cobalt

https://www.cobaltinstitute.org/wp-content/uploads/2022/05/FINAL_Cobalt-Market-Report-2021_Cobalt-Institute-1.pdf

https://www.economist.com/united-states/2024/02/29/a-millennial-is-building-americas-first-nickel-cobalt-refinery