The paper was written by Robert J. Barbera of CBO's Natural Resources and Commerce Division, under the supervision of David L. Bodde and Everett M. Ehrlich. The author would like to thank Paul Bugg, Patricia Devine, Thomas Gunther, and Stanley Miller, who provided valuable comments on earlier drafts. Scott Sibley, Mineral Commodity Specialist at the Bureau of Mines, was helpful in locating data on cobalt. The paper was edited by Francis Pierce, and typed and prepared for publication by Deborah Dove.
 

Alice M. Rivlin
Director
September 1982
 
 

SUMMARY

CHAPTER I. INTRODUCTION AND BACKGROUND

• Cobalt and Its Uses in U.S. Industry
• Current U.S. Policy
• Plan of the Paper

CHAPTER II. ANALYSIS OF COBALT DEMAND

• The Recent Price History of Cobalt and U.S. Market Responses
• The Response of Major Cobalt End Uses to Price Changes
• Examples of End Use Adjustments
• Conclusion

CHAPTER III. COBALT SUPPLY

• World Resources
• U.S. Domestic Supplies

CHAPTER IV. THE COBALT MARKET IN THE 1980S AND THE COSTS OF DISRUPTION

• Demand Projections
• Potential Supply Problems
• Costs of Disruptions
• Effects of Price Increases
• Conclusion

CHAPTER V. POLICY OPTIONS

• Strategic Stockpile
• Stockpile for Nonstrategic Uses
• Subsidization of Domestic Mine Production
• Support for Research and Development
• Access to Public Lands
• Development of Ocean Mineral Resources

The vulnerability of the United States to disruptions in the supply of imported materials considered essential to industrial production has been of concern to policymakers throughout the post-World War II era. Cobalt is a prime example of such a "strategic mineral." Cobalt alloys are important to a number of U.S. industries, especially aerospace and defense, and short-run opportunities for substitution are limited. The bulk of the world's supply of cobalt originates in central Africa (primarily Zaire and Zambia, which hold 64 percent of the world's known cobalt reserves), a politically unstable region. At present, the United States produces no cobalt. Thus, aside from cobalt stockpiles and the recycling of used materials, the United States is completely dependent on imports. This gives rise to two kinds of vulnerability. The first is essentially military in nature: the possible need to wage a war in the absence of foreign supplies of cobalt. The second is economic: the effect on the economy of a disruption in foreign supply with an attendant sudden increase in price. The fourfold price increases during the late 1970s, and the worldwide scramble for cobalt supplies at that time, have given prominence to this second kind of vulnerability.
 

THE CURRENT FEDERAL POSITION

The strategic stockpile, created to provide sufficient quantities of metals and materials for essential production during war, is below its current goals for many materials. In March 1981, the Administration initiated the purchase of 5.2 million pounds of cobalt for the stockpile--the first major purchase in 20 years. Taking a different approach, the Department of Defense announced in early 1982 that it was exploring the possibility of offering subsidies to U.S. mining companies to initiate production from otherwise uneconomic domestic cobalt ores. Congressional concern about possible cutoffs of cobalt imports prompted hearings before the Senate Banking Committee in October of 1981 focused on whether U.S. dependence on imports would justify subsidization of domestic production.
 

ANALYSIS

This paper examines in detail both the future demand for cobalt in the United States and the potential for cobalt supply shortfalls. The analysis suggests that, although significant disruptions in the supply of cobalt are a possibility throughout the 1980s, the existence of the strategic stockpile ensures that their consequences would be limited to the increased financial costs faced by cobalt users. No major loss to the national economy would be likely.

U.S. Cobalt Demand

Cobalt is usually employed as an alloy with other metals where it imparts qualities such as heat resistance, high strength, wear resistance, and superior magnetism to the materials that are formed. U.S. consumption of cobalt in 1980 totaled about 17 million pounds, divided among alloys for jet engines and stationary gas turbines, permanent magnets for electrical equipment, machinery, and nonmetallic applications.

Increases in Cobalt Prices and Resulting Demand Effects. During the late 1970s, cobalt prices rose from $5.50 per pound to $25.00 per pound; spot prices were recorded as high as $50.00; and cobalt was in short supply. The tight market resulted from a combination of factors: military conflict in Zaire, expanding industrial economies, and a change in U.S. stockpile policy. The price increases had significant effects on U.S. cobalt demand, precipitating searches for substitutes, improved conservation, and increased recycling from scrap.

Over the 1977-1979 period, these adjustments accounted for an estimated 19 percent reduction in what would otherwise have been the demand for cobalt. The experience was, for consumers of cobalt, a vivid illustration of the potential for future cobalt price swings and supply shortfalls. Accordingly, many U.S. industry efforts to identify cobalt substitutes continue, in spite of recent price declines. As of May 1982, cobalt's price had fallen to $12.50 per pound.

Future Problems in the Cobalt Market

Demand for cobalt is extremely difficult to forecast because of the mineral's specialized applications. Year-to-year fluctuations in cobalt use are often dramatic. Given the high levels of activity expected in a number of industrial sectors that traditionally use cobalt, in particular aerospace and electronics, estimates of about 30 million pounds of cobalt use by 1990 appear reasonable, although the further development of cobalt substitutes could appreciably reduce this estimate. More importantly, the development of substitutes would reduce U.S. vulnerability to supply shortfalls.

Cobalt and Direct Military Conflicts. U.S. involvement in a direct military conflict could conceivably result in a shutoff of cobalt supplies to the United States. Thus some contingency plan that will supply cobalt for defense purposes appears warranted.

Economic Vulnerability to Nonmilitary Shortfalls. Concentration of the world's cobalt reserves in central Africa suggests that the threat of price increases and supply disruptions will continue throughout this decade.

Significant adjustment to a supply disruption is possible. Private inventories and in-pipeline supplies would provide an initial buffer. Suppliers of cobalt unaffected by the political disturbance could also be expected to increase their output. Scrap recovery would also increase. Substitution possibilities exist for a number of cobalt uses, and some have already been applied; the price rises attending a shortfall should accelerate their introduction. These adjustments and others appear to be sufficient to limit the effects of supply shortfalls largely to the payment of higher prices for cobalt and its substitutes.

Potential Effects on the U.S. Economy. The financial costs of higher cobalt prices, although potentially devastating to particular cobalt users, appear inconsequential to the economy as a whole. Although severe shortfalls could generate tenfold price increases, these would amount to less than $2 billion in a $3 trillion economy, and the value of imports would be less than 5 percent of the costs of U.S. petroleum imports from OPEC countries in 1981.
 

POLICY OPTIONS

The Strategic Stockpile for Wartime Use

The Strategic and Critical Materials Stockpiling Act of 1946 requires that stockpiling of cobalt be done in sufficient quantities to provide supplies necessary for military, industrial, and essential civilian needs for the fighting of a three-year war. Executive agencies have translated this directive into a stockpile goal for cobalt of 85.4 million pounds, about one-half of which has been stockpiled so far.

As previously noted, the costs of shortfalls to the United States are likely to be quite limited in peactime. Nonetheless, the possibility of a cutoff of cobalt supplies in wartime justifies some contingency plan for defense purposes. The strategic stockpile, given current cobalt prices, is probably the least expensive solution. The government recently purchased cobalt at $15 per pound for the stockpile, a price significantly below the estimated $25 cost for domestically produced ores. Moreover, the protection afforded by stockpiled cobalt extends beyond the mandatory three years, since domestic ore bodies could be brought on-line within that time and greatly extend the years of protection afforded by the stockpile.

Finally, the recent development of significant substitutes for cobalt suggests that the stockpile goal may be in need of reevaluation. Any reduction in the goal would reduce the cost of the stockpile.

Alternative Policies

A number of alternatives to the present policy are conceivable:

• A separate "economic stockpile" that could be drawn upon to moderate cobalt price swings;
  
  
• Subsidies to induce domestic ore production;
  
  
• Increased federal funding for research and development to expand the supply of cobalt and its substitutes;
  
  
• Expanded access to public lands for the location and development of domestic ore; and
  
  
• Accelerated development of ocean mining to tap the vast stores of cobalt contained in marine manganese nodules.

Any of these alternatives would afford a certain degree of protection against supply hazards--but each would entail some cost.

An economic stockpile, designed to moderate the impact of cobalt price increases to U.S. users of cobalt, would be an expensive form of protection in relation to the limited nature of the costs to the United States associated with such increases. The same would be true of subsidies for domestic ore production.

Increased research and development efforts could enable U.S. consumers of cobalt to substitute other metals, and also expand cobalt supply possibilities. Judgments about the appropriate level for research and development funding are always difficult to assess. In any event, it is noteworthy that substitution of other metals helped to mitigate the impact of the 1977-1979 price increases.

It does not appear that cobalt's strategic importance should be a major consideration in decisions relating to public lands or accelerated ocean mineral development.

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