Bloomberg is reporting that Apple (NASDAQ:AAPL) is negotiating to buy long-term supplies of cobalt directly from miners. A metric ton of cobalt cost $24,000 to $27,000 in the summer of 2016 and started to increase in late 2016 to early 2017. It had a large jump to $50,000 in March 2017 and gradually rose to $60,000 around November last year before it spiked up to the current $83,000 per ton.
Apple is well known for buying components and machinery for its suppliers. A year ago Apple had committed to buy $24 billion worth of components and products from its suppliers and at the end of September quarter it was $37.6 billion. While it decreased from the September quarter to $33.5 billion at the end of December, it did increase 40% year over year.
This wouldn’t be a cost saving move, it’s about control. Cobalt’s price increase is being driven by the increased production of electric vehicles, which can use 1,000 times more cobalt per car than an iPhone.
Apple pre-paid for the iPhone’s flash memory
In the December 2005 quarter Apple spent $750 million to pre-pay for flash memory, which increased to $1.25 billion by March 2006. Even though this was five quarters before the first iPhone was available (June 2007 quarter), the dollar amount didn’t start decreasing until the March 2007 quarter when the iPhone was first manufactured. Pre-paying for flash memory is just another example where the company has worked to guarantee supply for its products. Working directly with cobalt miners would be another “routine” instance of Apple having more control of its supply chain.
How much Cobalt does Apple need?
Robert Castellano’s Seeking Alpha article has a table outlining how much cobalt various products need. There are also multiple articles that state an iPhone uses 8 grams of cobalt. When you run the numbers Apple should need no more than 5,000 metric tons of cobalt per year, which would currently cost it about $400 million. Note that I’ve used iPhone and iPad unit sales estimates above what I believe analysts are expecting to take into account some potential growth and in case more cobalt is needed per device.
- One metric ton is 2,205 pounds
- There are 454 grams per pound
- There are 1 million grams per metric ton
iPhone cobalt usage
- 8 grams per iPhone
- 250 million sold per year (Apple sold 217 million in fiscal 2017)
- Needs 2,000 metric tons per year
iPad cobalt usage
- 35 grams per iPad
- 50 million sold per year (Apple sold 43.8 million in fiscal 2017)
- Needs 1,750 metric tons per year
MacBook cobalt usage
- 40 grams per iPad
- 20 million sold per year (Apple sold 19.3 million in fiscal 2017)
- Needs 800 metric tons per year
The potential dollar savings hardly play into the decision
Using these assumptions, Apple needs 4,550 metric tons of cobalt per year. At the current price of $83,000 per ton, this would cost the company $378 million. Even if Apple were to save 20% on cobalt, the $75 million per year is a drop in the bucket to its $64 billion in pre-tax fiscal 2017 profit, or 0.1%. Given Apple’s size, this would be a minor investment to insure its supply.
The worldwide supply of cobalt is about 110,000 tons per year. At 4% of total production it makes sense for Apple to have control of this mineral, especially given the increased competition from electric vehicles.
Better visibility into its suppliers
Apple does seem to be one of the more responsible companies when it comes to monitoring its suppliers to make sure they are being responsible and ethical. The Democratic Republic of Congo produces about 60% of global cobalt supply. There are very valid concerns about child labor being used in the country. It does appear that Apple is very concerned and has taken steps to insure its suppliers are meeting legal requirements and Apple’s standards.
It has published 11 Supplier Responsibility reports with the latest one coming out last year. In the report it states, “Similar to our work on 3TG (tin, tantalum, tungsten, and gold), we have been extensively engaged with our cobalt supply chain. We began investigating risks surrounding cobalt in late 2014, and began mapping our cobalt supply chain down to the mine level in 2015.” It also included “In 2016, we expanded our responsible sourcing efforts beyond conflict minerals to include cobalt. We’re proud to report that 100 percent of our conflict minerals and cobalt smelter/refiner partners are now participating in independent third-party audits to ensure their own business practices are conducted responsibly.”