London, 14 October 2011: Reuters

Strategic and critical minerals, including the rare earth elements, are essential to the manufacture of alternative energy systems that are crucial to the Obama Administration's program to cut oil imports by the middle of the next decade. The aggressive energy program to cut crude imports by one -third by 2025 is dependent, in part, on leveraging the use of new technology - wind turbines, electric vehicles, photovoltaic power systems and high-efficiency lighting - that will use increasing amounts of these difficult-to-extract elements.

It is now time for the administration to revisit a successful initiative to secure cobalt during the Jimmy Carter presidency and provide federal support for ensuring stable access to the critical metals needed to support the U.S. economy and the continued deployment of alternative energy infrastructure.

The global supply of strategic elements is being constrained by Chinese trade and environmental policies plus exposure to the political risk associated with mining in such developing nations as the Democratic Republic of Congo.

The risk is greatest for indium, tellurium, cobalt, and lithium as well as for nine rare earth elements that are not currently mined in the United States: yttrium, lanthanum, cerium, praseodymium, neodymium, samarium, europium, terbium and dysprosium.

Energy-related raw material constraints are not new: the Organization of the Petroleum Exporting Countries imposed an oil embargo in response to President Nixon's 1973 support for Israel, an action that resulted in a rapid decrease in oil supplies, price increases and long lines at U.S. gas stations.

Between 1977 and 1979 the world economy faced a cobalt crisis, when prices increased by 334 percent. Physical cobalt was in such short supply that it threatened to disrupt oil refining and other components of global economies. In response, the Carter administration mobilized the federal government to secure alternative sources of cobalt.

COBALT IN THE 1970s

Cobalt is used in a diversity of industrial and military applications. It is a critical component of super alloys used in the manufacture of gas turbine aircraft engines. It is also used in the production of magnets, corrosion and wearresistant alloys, high-speed steels and as a catalyst in the petroleum and chemical industries.

Behind the disruption of cobalt supplies in the 1970s were the cessation of cobalt sales from the U.S. Government's strategic stockpiles, reductions in producer inventories in what was then Zaire, a sharp increase in global demand, concentration of cobalt mining and processing at a limited number of mines in the developing world and insurrection in the Zaire portion of the central African copper belt. The country formerly named Zaire is now the Democratic Republic of Congo.

US RESPONSE TO THE COBALT CRISIS

By late 1978 oil refiners began to face critical shortages of cobalt catalysts required continued operations. In one case, a subsidiary of Royal Dutch Shell approached the Irving Trust Company - a money center bank headquartered at one Wall Street that is part of Bank of New York Mellon - for help to finance an electrowinning cobalt recovery plant at Nchanga Consolidated Copper's mining operation at Chingola, Zambia. What seemed a simple loan request turned out to be a complex undertaking, given the projects' enormous political, foreign exchange, reserve, mining, market, war, and transportation risks.  In response to the Shell's request, the bank began building a credit base for the project.

The oil company and a small U.S. metal refiner -- Hall Chemical Company of Wickliffe, Ohio, -- agreed to negotiate back-to-back cobalt purchase agreements covering the full output of the proposed electrowinning facility. The U.S. State Department expressed interest, given Zambia's precarious financial condition, dwindling foreign exchange reserves and regional instability.

To support the credit, State introduced the bank to representatives of the Overseas Private Investment Corporation (OPIC) and the U.S. Department of Defense. At the time, cobalt was considered a "strategic and critical" mineral, and the U.S. Defense Department agreed to enter into a backup purchase agreement for any cobalt not taken by Hall for delivery to the U.S. government's strategic stockpile.

The Bank, State Department, and OPIC negotiated a foreign exchange undertaking with the Zambian central bank that ensured sufficient U.S. dollars to permit the mine operator to continue operations, construct the new plant and cover debt service.

OPIC guaranteed the loan, placing the full faith and credit of the United States behind the project's debt. Once the market, political, and foreign exchange risks were addressed, officers of OPIC and the bank made their way to Zambia to inspect the Nchanga's mining and smelting operations. In Zambia, they encountered heavily armed roadblocks intended to safeguard the countryside from Rhodesian troops and Zairian insurgents.

At the mines, the bankers discovered rapidly deteriorating operating conditions. Mining equipment had been cannibalized for spare parts to permit continued but limited operations at the open pits and underground. At the smelter, workers were being exposed to such serious occupational hazards as an atmosphere heavily laden the sulfuric acid vapors.

Despite the credit's shortcomings, the loan was syndicated and funds were advanced that allowed the building of the electrowinning plant. Cobalt was exported out of Zambia by air for delivery to the United States. The loan was repaid in full, on time and without intervention from the Overseas Private Investment Corporation and the United States gained a secure source of cobalt.

With the US again facing market uncertainty with respect to the availability and cost of critical elements used in the manufacture of alternative energy related equipment, the Obama administration might well benefit from a review of the Carter administration's cobalt initiative. Adopting a project support scheme similar to the Zambian undertaking may be a solution for the country's need for access to a stable supply of critical metals.

Ends --

By Chris Kimmerle, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.