James Nicholson | Episode 2: Commodity trading in the spotlight

Our second episode in this podcast series on responsible sourcing puts the spotlight on commodity traders – the invisible hand moving natural resources around the world.

Traders connect production from artisanal miners in DRC with global customers, and as such they are critical to improving the traceability and sustainability of cobalt supply chains.

To understand the virtues and faults of commodity traders, join our conversation with James Nicholson, Head of Corporate Responsibility at Trafigura.

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Highgrade Media is a not-for-profit organisation that produces interviews and documentaries that identify, capture and disseminate analysis and insights in the field of natural resources and social progress.

Our mission is to provide open and free access to specialist knowledge and to disseminate good practice and innovation in this field. See www.highgrade.media for our portfolio of published material.

With support from the German Federal Ministry for Economic Cooperation and Development, through BGR.

Transcript

Åsa Borssén:
What goes into your car? As new minerals are rapidly making their way into our everyday life, we’re increasingly concerned about the footprint of the materials that underpin our modern lifestyles. The fungibility of natural resources has helped some business players hide behind the complexity of global supply chains. To shed light on one of the most obscure commodities, join me as I pull back the curtain on the supply chain of cobalt – from deep underground, all the way to your driveway. I’m your host Åsa Borssén, and this is Highgrade.

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Åsa Borssén: 
Welcome to Highgrade and this podcast series on responsible sourcing of minerals. Today we'll look at the role of commodity traders - the invisible hand that moves natural resources around the world. Commodity traders link sellers and buyers of cobalt, and as such, they are key to any effort to improve mineral supply chains. In particular, Trafigura is one of the largest trading companies in the world, and a main global referent among commodity traders. I'm here with James Nicholson, Head of Corporate Responsibility of Trafigura.

James, welcome to The Natural Resources Podcast.

James Nicholson: 
Åsa, thanks very much for having me. Great to be here.

Åsa Borssén: 
For most people, commodity trading is a bit of a mystery. James, if you could start by telling me what is the role of traders in the mineral supply chain?

James Nicholson:  
Sure, and indeed commodity traders are often considered mysterious, but I'm afraid commodity trading at Trafigura is perhaps not quite as mysterious as some would suggest. Now while we're a privately held business, we release a considerable amount of information related to our performance into the public domain. And in fact, our approach you could say is comparable to what you'd expect from a publicly listed company. But in terms of our role, we connect the world's markets basically with the vital resources that those markets need. So, this requires us to deploy infrastructure, skilled people, and a global network to move commodities from where they're plentiful to where they're needed, when they're needed, and in the form that they're needed. So, our goal is to really make supply chains more efficient, reliable and responsible. Just to give you a sense of size. Last year, we handled over a million tonnes of commodities every single day, and with revenues exceeding $230 billion. Our net profit amounted to about $3.1 billion.

Åsa Borssén: 
So you connect the world's markets, but why are intermediaries needed in the commodity sector?

James Nicholson: 
Sure, so commodities are rarely produced and consumed in the same place at the same time. Production occurs in locations are often really far away from the principal consumption centres. So commodities traders, like Trafigura, provide a vital support for that global model of production and consumption in a complex value chain that includes refining, processing, storage and shipping. So that's true of our oil and petroleum products business and equally, metals and minerals trading as well.

Åsa Borssén: 
Let's now turn our focus to responsible sourcing. End consumers are increasingly concerned with the origin of inputs in the products they buy. And this has led to new initiatives to trace where minerals and metals come from. But what does the concept responsible sourcing mean to you?

James Nicholson: 
We've seen a massive uptick in interest on the topic of responsible sourcing over recent years, and rightfully so. Global Witness first exposed the trade in conflict timber, and that was back in the 1990s. Conflict diamonds, then hit the public consciousness soon after, as did the trade in conflict minerals, so tin, tantalum, tungsten and gold from the DRC and its nine surrounding countries. Now, at the present day, if we just consider our stakeholders, for want of a better phrase, we've got media and NGOs more interested in metals production and processing than ever before. We got consumers really super aware of negative impacts across global supply chains. Downstream receivers, so OEMs, fabricators etc, are really plugged into these conversations, as the big brands are suitably risk averse as you'd expect. Even the suppliers, I mean miners of large size and relatively small, are pushing for or indeed are being pushed towards international ESG standards, you know, a phrase we're hearing so much right now. And then lastly, and this is a really important stakeholder group particularly for Trafigura, and that's financiers, insurers, and regulators who are requiring increased levels of assurance basically that the supply chains they support are clean and green. So what's followed is an alphabet soup effectively, of initiatives and legions of consultants who have stepped into the space demanding various standards. The baseline of standards in relation to responsible sourcing for metals and minerals. Is, is OECD guidance, which essentially provides recommendations to help companies respect human rights and avoid contributing to conflict through their mineral purchasing decisions and practices.

Åsa Borssén: 
So this uptick in interest, this alphabet soup, do you think we would have seen this development without the growing societal concern?

James Nicholson: 
That's a great question. Honestly, I think the pressure has ratcheted up massively over recent years. And a huge part of that was indeed NGO and media attention. And I think, you know, there's a great example of that I've referenced conflict diamonds already. But also, as we look at, say, cobalt, the plight of ASM cobalt producers would never have been brought, I don't think, to the public consciousness had it not been for the report by Amnesty International, “This is what we die for”, I think it was called and that was 2016. What was a relatively obscure material was thrust into the public domain, and of course, had consumers considering, for example, what went into their mobile phone or indeed, their electric vehicle.

Åsa Borssén: 
And as you mentioned, Trafigura trades large volumes daily. Can you know how much is versus is not responsibly mined?

James Nicholson: 
Yeah, so given the significant volumes, we trade, we have to take a risk-based approach, and I'm sure that won't surprise your listeners. So, our diligence essentially has to be targeted. Certain commodities, and indeed, certain geographies require heightened levels of attention. And in these cases, we require either specialist assessments or indeed boots on the ground to really understand that local context.

Åsa Borssén: 
I'm wondering, would you say that there is a trade-off between responsible mining and security of supply?

James Nicholson: 
The certainly shouldn't be. What's really interesting right now is, just reflecting on what we're hearing from various governments, particularly in their race to secure supply of cobalt. So what that doing is, I I'm hoping, is that it's going to trigger a much needed shot in the arm effectively for responsibly sourced artisanal and small-scale mined produced cobalt. That may seem counterintuitive, but you have to consider basically how this sudden rise in demand that we're all aware of can be accommodated when existing mines have long term supply agreements. And very few new cobalt mines are actually coming on stream. So just to look at the numbers for a second, approximately 170,000 tonnes of cobalt were produced worldwide in 21 70% of that came from the DRC and artisanal production, ASM, was a massive part of that. And so ASM become if you like a key swing factor. So while the development of mechanised mines is highly capital and resource intensive, ASM production scales really very quickly. And this actually puts an unprecedented level of pressure on what is clearly a very vulnerable supply chain. Too many people are suffering the consequences and really, this is where I get quite passionate, too few are doing anything about it. So right now, we're seeing a big influx in the number of active ASM cobalt miners. By our estimates, there's a there's between 80 and 90,000 people in the DRC who are permanently digging for cobalt, and that the number of diggers is relatively elastic so numbers can rise and fall by as much as 20,000 people per site. Now on a macro basis the production that they produce contributes between 15 and 23,000 tonnes per annum into the supply chain is massive. And that number is only going to grow as the energy transition steps up. So, if we look back on past performance, if that's anything to go on, the production of ASM ore will have no problem finding a home in the form of a refiner. Now, why do I say that? Well, we've seen a massive increase in the construction of these refining units over recent years, and these refiners are not tied to any particular mine. Now, at the moment, we believe these refiners are not working at full capacity. So, they can contain they can actually probably cater for about 36,000 tonnes of feed per annum. So, there's plenty of room to accommodate a rise in ASM volumes.

Åsa Borssén: 
Your passion is contagious. But I want to take a step back and ask from a trading point of view, how does the actual selling and buying from ASM happen?

James Nicholson: 
Right so the material is produced by as many as two 200,000 diggers across two particular provinces in the DRC. The material is typically put in sacks of around 40 kilogrammes per sack, it is then taken off and on the back of bicycles to local markets. These markets are massive. The material is swiftly purchased by a range of traders from a range of nationalities and aggregated after it has been assayed and weighed. I'm afraid that the assaying and weighing processes is typically inaccurately done. So, the digger loses out almost without exception. The material is then aggregated and international buyers will come in, they will purchase sacks and sacks of material. And that material will then end up in local refining units, those units are not connected to any mine. So they buy that material up, they convert it from ore into cobalt and hydroxide, and then they'll transport it and it will enter the international market.

Åsa Borssén: 
And is that how it works for Trafigura as well?

James Nicholson: 
For Trafigura, we've entered into a marketing agreement with the government state-owned entity, which is Entreprise Générale du Cobalt, or EGC. And by law EGC is responsible for buying any and all ASM output. A year ago, EGC launched their own standard on responsible sourcing and we played a big part in the development of that with a specialist NGO called Pact. The standard basically sets the bar on what good looks like in this context, in the context of artisanal mining. And when and where that standard is met, we'll hopefully be in a position to buy the material. But the problem that we have is that the market currently sees buyers of ASM cobalt basically flaunting the rule as set by the government. The market is willing to accommodate material from anywhere. It's not being produced under the EGC banner and instead it continues to drip out. And that's to the detriment of the diggers themselves and the DRC state. So, rather than undermining the state, what we need is international actors as they consider this, you know, meeting their demands for cobalt to really get behind EGC, the DRC state, so as to transform it from what is a great concept into reality.

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Åsa Borssén: 
Are the products we are buying guilty of human and environmental degradation? You are listening to a Highgrade podcast series on responsible sourcing looking at the cobalt supply chain. In this episode, I'm talking to James Nicholson from Trafigura as we explore the role of commodity traders.

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Åsa Borssén: 
We've talked a lot about ASM now and I'd like to explore the circumstances around ASM. I've heard people describe some mines as hell on earth with poor working conditions, unfair compensation, child labour, etc. But what would you say, what is it like to work in ASM today?

James Nicholson: 
So, over the last 20 years I spent I spent a lot of time on ASM sites. I have not mind myself. But these sites can typically operate within or even they can often supply large scale mining operations. In other contexts, of course, the relationship between formal and informal is adversarial, or ASM is frequently totally disconnected from large scale mining situated in remote locations or even actually in the case of Kolwezi in the DRC within urban areas. Now the social and environmental impacts of uncontrolled non-formalised ASM include child labour, forced or compulsory labour, it can involve excessive and often prolonged manual handling, exposure to noise, dust, heat, stress, dehydration, etc. Rock falls and pit collapses are common; their impact disastrous. As a major participant in the metals and minerals industry, we've been super clear about the risks and problems involved in ASM. Frankly, it would be ideal if the world's growing needs for metals were met through production from industrial mining operations, but the reality is that there are perhaps 14 million people who earn a living from the sector. And okay, their work is illegal in many cases. It's not sufficiently regulated, and it can be really dangerous. But as we continue to state, this is not an activity that can be ignored, it can't be wished away. We we need to find a better way. And we need basically to ensure that ASM provides a vector for development if you like, and not the reverse.

Åsa Borssén: 
I'd say that there are basically two different approaches to this. Either you avoid buying from irresponsible sources, or you engage to try and improve standards. And as you've talked about now, Trafigura has adopted the latter approach. But I'm interested in understanding how was this decision made?

James Nicholson:  
So if I may, let's consider the easy approach, which would be to deny there's an issue. To state there's no ASM material in your supply chain, or in its margins, you could say that anyone engaged in ASM should be told to farm and not to mine. That pumping money into philanthropic projects is surely going to be enough. But it's not. So I guess let's stop beating that particular drum. And don't get me wrong engaging with this topic is not straightforward. And certainly, in my experience in conversation with miners, for example, many have personal tales of what happens when interventions in relation to ASM - not necessarily in support of ASM - are not sustained and lead to conflict. But key to our approach is the view that commercial and developmental interests need to be better aligned. So responsibly sourced ASM should have a legitimate and recognised place in the supply chain. And I referenced earlier this the OECD guidance, and it's important. And what it really focuses on is progressive improvement. So as buyers, it's a given, we have to conduct due diligence. But for Trafigura where we're really I guess, we're different is that we're going further. So we're trying to support capacity building programmes around the negative issues we identify. And we've got some really cool projects worldwide, that where we're doing that.

Åsa Borssén: 
Is there any one in particular that you would like to highlight?

James Nicholson: 
Probably the most illustrative in the context of actually addressing the challenge of ASM is where we've worked with a supplier called Chemaf. Chemaf has one of the largest portfolios of cobalt concessions in the DRC. Before we entered into a supply agreement, we conducted as you would expect, considerable amount of due diligence and within the contract, we've actually ensured that we play a role and they are open to us supporting their responsible sourcing. Now, the challenge that they had was a particular concession that they wanted to develop, called Mutoshi, hosted no fewer than about 5000 people who depended on ASM for their livelihoods. Now, at the time, this was 2017-2018, we refused to accept any SM material from that site until controls could actually be introduced and upheld. And what followed was this great partnership with DRC Government, the NGO Pact and Chemaf to really look at how we could help formalise ASM cobalt production. What was the outcome of that? As I said, we maintained a constant presence, but we wanted to understand the outcome and the impact more fully. So, what we saw, having recruited a socio-economic assessment, was a massive improvement in working conditions. In short, the site prior to our intervention that there were there were multiple fatalities. Over the course of our two-year programme, I think we surpass 3 million hours worked without a lost time injury. So big improvement in working conditions. We had complementary health care services. So again, really, really benefited the local people. From a local economic perspective of course, we saw businesses springing up around the operation. And what we calculated was, for every 1000 miners on the site, the local economic impact amounted to about a million dollars per year. And then lastly, and this was not something that we foresaw, was that female miners operating on the project earned about two and a half times more than their counterparts working on mines elsewhere. So the key learning from the exercise was that unless we step up and actually work with our suppliers, many of them are in remote locations, we're basically going to be failing in our fundamental duties as partners. But we're also exposing ourselves to risk and a loss of social licence by any one of our suppliers has really far-reaching implications. Trafigura is a service-driven company and offering support to our counterparts are providing detailed assurance, the market on responsible sourcing. It just makes clear commercial sense. Beyond the human impact, you know, it's the right thing to do. But it really is starting to differentiate our approach from the approach of others in the sector.

Åsa Borssén: 
And when you then go on to sell this product, do you inform your customers that this is responsibly sourced ASM cobalt? Or how does it work on the sales side of things?

James Nicholson: 
Thank you for asking that question. Because I spent a lot of time with the receivers as the project developed to ensure that they were with us effectively on that journey. And the receivers were large scale brands. Sure, they tested us. But what was really exciting was that they really got it, they saw the developmental impact that such a project could have. Over the course of the project, we could report back in real time on how the project was going. We hosted multiple visits to the site. And it changed the conversation from this boycott mentality, which serves absolutely no one - in fact, it makes the situation worse. And if you consider that if the world was to say, we will only buy mechanised cobalt, what does that do? It will most likely push the price up and result in an increased number of ASM diggers. So, it's clear from that perspective that you have to engage ASM; that you can find a legitimate place for it in the market, assuming one can communicate openly with the receivers and they're super clear on what they're getting both the benefits and also the disadvantages. We built up, you know, an important base of supporters and I'm really confident that we can take that much further and it almost it sort of plays into the space of fair trade products. Because although you shouldn't differentiate, you shouldn't have to differentiate ASM from mechanised if it's if it's responsibly mined, I think the consumers would really benefit from knowing that, for example, in that project alone, for example, there were 5000 people engaged. That's a lot more than you would normally have on a mechanised project that might employ 300 to 1000, many of whom are contractors. And there's an appetite to see us take that to scale. That's what we're I get really excited with this relationship with EGC in the DRC. I think we can do that. We can deliver this concept of development cobalt.

Åsa Borssén: 
James, all these efforts you're talking about, and it's been evident from what we've been hearing throughout this series that raising standards across the supply chain, it takes effort. Would you say that responsible sourcing is more expensive?

James Nicholson: 
Yeah. So I'll speak from Trafigura’ perspective, running a responsible sourcing team as I do. Yes, it comes at a cost. But the activity, firstly, it upholds access to markets and increasingly so. It underpins our service offering, as I've mentioned. It also supports access to and can actually reduce the cost of finance, and let me just explain that. So, as I said at the start, Trafigura is a privately held business. So, our commercial activities depend on financial lines exceeding about $60 billion each year from about 140 different banks. Now, last year, we closed our first sustainability linked loan, which amounted to over $3 billion. Now, the sustainability linked loan essentially enables us to reduce the cost of borrowing. We borrow a lot of money, as I explained, and then so indirectly, it saves us money, we're able to reinvest that back into upholding these activities and on an international scale, but also domestically, and this is where I, you know, I see significant focus in future.

Åsa Borssén: 
Final question, James. If responsible sourcing continues to gain prominence for society, some companies may be tempted to secure access to critical minerals by acquiring their own mines. Is vertical integration part of the solution?

James Nicholson: 
So for some, it appears to be to be a solution. But I guess I question whether it was the right path to take. As Trafigura we've got the expertise and scope really to underpin consistent and responsibly sourced flows of commodities and as I said, from a diverse range of locations. So basically, the downstream can stick to what they know. We manage the risk, they receive the product when they need us in the form they need it. And I think this speaks to the value add that commodity traders like Trafigura bring to those customer relationships.

Åsa Borssén:  
James, thank you so much for joining us today.

James Nicholson: 
Åsa, thank you.

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Åsa Borssén: 
Thank you for tuning into Highgrade and this Natural Resources Podcast series on responsible sourcing. 

To feed the demand from global customers, commodity traders must often source cobalt from small artisanal mines, where extremely precarious working conditions prevail. Should these rudimentary producers be shut out of responsible supply chains? No, says James Nicholson of Trafigura. Responsible local producers and ASM have a legitimate place in the supply chain. They should be supported to increase the level of formalisation and improve operating standards. 

Thank you to our sponsor, the German Federal Ministry for Economic Cooperation and Development through BGR. Our next episode in this series will focus on the battery producers and their role in establishing responsible supply chains. Do come back to join me. Until then, so long!