LONDON/BEIJING - China's Nanjing Hanrui Cobalt, which sells the metal to a firm approved by the London Metal Exchange, said it was unable to ascertain that its products did not involve the use of child labour in Africa.
Nanjing Hanrui is a supplier to another Chinese company, Yantai Cash, which is on the LME's list of firms whose cobalt meets its quality standards.
Concerns about the sourcing of Yantai's metal have reduced interest in the LME's cobalt contract, trading sources said, although there is no proof to date that children are involved in its extraction.
The issue is sensitive because cobalt chemicals are used in batteries to power the electric vehicles whose rapid growth is revolutionising the motor industry. Car companies are worried about possible scarcities of responsibly sourced cobalt.
Nanjing Hanrui said in a statement that it was examining its cobalt supply chain in the Democratic Republic of Congo, adding that initial findings showed "a part" of its cobalt came from "small-scale mining and artisanal mining areas".
As this investigation started just over a month ago, the company still lacked experience in supply chain compliance management and it was "not yet possible to judge whether there is a risk of child labour," the statement said.
Nanjing Hanrui said it was stepping up its supply chain studies with the help of experts.
Liu Xiaohan, manager of the international trade department at Yantai Cash, said in an emailed response that the firm bought part of its cobalt from Nanjing Hanrui, which is a business partner of Yantai Cash.
"We are currently unable to confirm what you discuss about Nanjing Hanrui's artisanal mining and the risk of it involving child labour," Liu said.
This is because Yantai Cash has just started to set up a responsible management system and has not yet completed supply chain traceability, he added.
Yantai Cash's metal can be delivered against the LME's cobalt contract, which was launched in 2010.
The LME said action would be taken if any evidence was found of practices that fell below its standards.
Concerns arose in the market about the source of Yantai's metal in June after it started buying from Hanrui, sources said.
"The market is worried Yantai's cobalt is sullied by child labour, the LME should take it off the deliverable list," a source on the exchange's cobalt committee said.
The source said customers did not want to take the risk of getting Yantai metal. "They are shunning the contract."
Cobalt metal is used in alloys for jet engines, while cobalt chemicals are a key ingredient for rechargeable lithium-ion batteries used to power electric vehicles.
Consumers worried about potential scandal are under pressure to ensure the cobalt they use is not tainted by child labour in DRC, the source of about 65 percent of the world's cobalt.
Concerns about shortages of cobalt from untainted sources have prompted car makers to take steps to secure supplies for the longer term.
Volkswagen last month held talks with Glencore, China's Zhejiang Huayou Cobalt, commodity trader Traxys, U.S. miner Freeport-McMoran and Eurasian Resources Group about securing cobalt supplies.
"Besides supplies and costs, other topics in discussion include future capacity expansion, sustainability and transparency," a VW representative said.
A report last month from Amnesty International said about a fifth of cobalt production in the DRC is mined by hand, including by children, often in dangerous conditions.
"At least on a temporary basis, they have to ban Yantai Cash from the good delivery list," a cobalt industry source said, adding that worries about Yantai metal had negatively impacted prices, volumes traded and open interest, a measure of the flow of money into the market.
LME cobalt at around US$70,000 a tonne has recently traded well below benchmark prices gathered by Metal Bulletin, a trade publication.
The discount has widened since June 19, when worries about where Yantai's material was sourced from started to filter through the market. It has averaged US$4,500 a tonne since June 19 from near US$400 a tonne between Jan 2 and June 16.
Open interest crashed by more than 40 percent to 308 tonnes between June 19 and 22, while volumes traded on the LME in the third quarter at 1,949 tonnes are less than half the levels in the previous three quarters.
RESPONSIBLE SOURCING INITIATIVES
Yantai Cash said it is willing to work with companies in the cobalt supply chain "as well as other stakeholders to promote the alleviation of child labour and other human rights risks".
It recently submitted an application to join China's Responsible Cobalt Initiative (RCI). A representative of the RCI secretariat said Yantai Cash's application would be accepted by Dec. 12 if there are no objections from the RCI board.
The RCI was formed last year under the umbrella of the Chinese Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters (CCCMC). Its members agreed last month to establish the association as a legal entity with more than 20 members involved in the cobalt supply chain
The LME too has been looking at the subject of responsible sourcing and has been working with the Organisation for Economic Co-operation and Development, which gets involved in setting such standards, for several years.
"There is no international standard in this area and the jurisdictional differences between certification regimes, audits and codes are extensive," the LME spokesperson said.
Last month the exchange sent out a survey on responsible sourcing, auditing and certification of metal to all producers delivering metal against LME contracts.
"The LME’s recent survey sent to all LME-listed producers was designed to elicit further information with regard to the sourcing of materials," a statement said.
"We have been clear that any evidence of sub-standard practices that fall short of our requirements would be investigated by the LME and action would be taken," it added.
The LME said it wanted to apply international standards on responsible sourcing. These would cover sustainable environmental management and occupational health, required for producers wanting to deliver against LME contracts.
(Reporting by Pratima Desai; Additional reporting by Tom Daly; Editing by Veronica Brown and Giles Elgood)