SALMON-CHALLIS NATIONAL FOREST, Idaho, July 22 (Reuters)

- T he only U.S. cobalt mine sits fallow in the northern Idaho

woods, a mothballed hunk of steel and dirt that is too expensive

for its owner to operate because Chinese rivals have flooded

global markets with cheap supplies of the bluish metal used in

electric vehicle batteries and electronics.

Jervois Global ( JRVMF ), which dug the mine into the side of

a nearly 8,000-foot (2,400-meter) mountain, watched helplessly

last year as cobalt prices plunged after China's CMOC

Group opened the Kisanfu mine in the Democratic

Republic of Congo, pushing global production of the metal to an

all-time high.

The Idaho site, which Jervois bought in 2019, was idled in

June 2023 just weeks before it was set to open. More than 250

workers lost their jobs. A skeleton crew now rotates unused rock

crushing equipment weekly to keep it from flattening under its

own weight.

"We were straightforward with our staff and told them: 'This

is all about the price of cobalt,'" site manager Matthew

Lengerich told Reuters during a visit to the facility. Jervois

says cobalt prices need to reach at least $20 per pound for the

site to open. But prices sat near $12.17 in July.

A similar quandary faces BHP, Albemarle and

other Western mining companies trying to compete with metals

produced by Chinese-linked companies, some of which use

coal-generated electricity, child labor or other practices not

meeting the standards set by many governments and manufacturers.

Western miners say their competitors have inherent cost

advantages that enable rapid production expansions even as

prices for cobalt, lithium and nickel have plunged more than a

third in the past 18 months. Operational costs for many of these

Western companies have, as a result, been exceeding what market

prices will cover.

That has fueled growing calls from some policymakers and

miners, including Jervois and Albemarle, for a two-tier pricing

system with a premium for sustainably produced metals, according

to interviews with more than three dozen traders, investors,

executives, purchasing agents, and pricing agencies.

The plan is to charge more for a metal that is produced

sustainably, whether that is through direct transactions or via

multiple prices for a metal listed through futures exchanges,

depending on production methods. For example, there would be one

price for standard nickel and another for green nickel.

"Western miners simply can't compete with China, and China

has shown the willingness to drive market prices way, way down,"

said Morgan Bazilian, director of the Payne Institute for Public

Policy at the Colorado School of Mines.

Two-tier pricing could radically shift how metals needed for

energy transition have been bought and sold for centuries yet

also reduce market transparency as miners could bypass metals

exchanges to negotiate directly with customers.

It could also, two analysts told Reuters, lead to multiple

definitions of what exactly constitutes "green metal."

'COMMITMENTS HAVE A COST'

Industry leaders have pushed for two pricing structures for

several years, but the call for change started gaining more

attention from investors, policymakers and customers last fall

as Western governments grew more concerned about Chinese

competition.

In meetings across Washington and Brussels, mining

executives have been pleading with governments for some kind of

intervention until two-tiered pricing is more widely embraced,

suggesting that tariffs, supply chain transparency requirements,

or government insurance for mines could be potential remedies,

three industry sources said.

U.S. and E.U. officials have privately expressed sympathy

with the mining industry, according to two of the sources, but

have so far been loath to inject themselves into the mechanics

of how prices are set by exchanges and others.

"I don't want to say what the markets should or shouldn't do

to ensure strong ESG practices," said the U.S. State

Department's Jose Fernandez, who oversees a program designed to

facilitate metals supply deals. "But it is true that all of

those commitments have a cost."

As a result, mining industry customers such as automakers

are in the uncomfortable position of trying to keep their costs

low while maintaining secure and diverse metals supplies. Some

deals are taking shape, prodded in part by regulations tied to

emissions.

The European Union by 2027 will require EV manufacturers to

show where they procure metals and the carbon footprint for

their production. Refusal to comply would mean an EV can't be

sold in the region, a step not yet taken by the United States

but one widely seen as the most aggressive globally to boost

supply chain transparency and likely to fuel premium metals

contracts.

In Canada last year, Northern Graphite ( NGPHF ) started

successfully demanding a premium from customers wanting

guaranteed North American supplies of the battery metal.

Teck Resources ( TECK ) earlier this year started selling

a lightly processed type of copper known as concentrate to

Aurubis, a source with direct knowledge said. The

transaction does not rely on exchange pricing and guarantees

Aurubis a steady supply of ESG-compliant concentrate that it

turns into copper for sale to the auto industry.

Teck declined to comment. Aurubis said it sees "the way to a

green-friendly copper industry as a joint task for the entire

value chain, which needs to be honored from the raw material

supplier to the end consumer."

Customers for now do not face a penalty if they do not

source sustainable metals, but they increasingly face a

reputational risk.

"The question is really for car companies: Are you OK with

something that might be priced lower or are you willing to pay

premiums knowing that this is sourced sustainably in the correct

way?" said Michael Scherb, CEO of Appian Capital Advisory, a

private equity firm that invests in mining companies.

'WEATHER THE STORM'

BHP, the world's largest mining company, said this month it

would suspend operations at its Australia nickel mines due to

"the substantial economic challenges driven by a global

oversupply of nickel."

The move was a blow to a company that had unsuccessfully bet

its customers would be willing to pay a premium for nickel

produced in a country that mines sustainably.

BHP warned that nearly two-thirds of Australia's nickel

market is in danger of closing amid low market prices fueled by

a 153% increase in Indonesia's nickel from 2020 through the end

of last year due to Huayou Cobalt and others -

production that environmentalists say has partly come by tearing

up the country's vast rainforests.

U.S. officials are encouraging Jakarta to improve the

country's mining standards. Huayou Cobalt did not respond to a

request for comment.

Australia's nickel industry is among the cleanest in the

world largely due to how it handles carbon emissions, according

to data from ESG consultancy Skarn Associates. Nickel processed

in Indonesia emits more than five times the amount of carbon as

production in Australia, the data show, with emissions from

China's nickel industry nearly seven times worse than Australia.

Albemarle, the top global producer of lithium, laid off

staff in January amid low prices caused in part by ramped up

production from Yongxing Special Materials Technology

and others in China.

"If there isn't an incentive above current prices, you're

not going to get the investment you need to build the domestic

(U.S.) supply chain," said Eric Norris, who oversees Albemarle's

lithium operations.

Fernandez, the U.S. State official, expects rising minerals

demand to offset current "global oversupplies," but acknowledged

that miners, for now, are in a bind.

"We have to find ways to weather the storm," Fernandez said.

TRANSPARENCY

Since January, world leaders have taken a range of steps to

offset China's market control.

President Joe Biden imposed tariffs in May on critical

minerals produced in China, saying "(metals) prices are unfairly

low because Chinese companies don't need to worry about a

profit."

Jim Chalmers, Australia's treasurer, in February said

governments should consider support for "a differentiated

international trading market for resources produced to higher

ESG standards."

Chrystia Freeland, Canada's deputy prime minister, in April

said Ottawa would fight the dumping of critical minerals by

China, Indonesia and others.

The Chinese mission to the United Nations did not respond to

a request for comment. China has in the last year banned exports

of graphite and other metals.

Multiple U.S. senators from both parties have said they are

considering legislation to offer price insurance for metals,

similar to a government insurance program for crops, according

to Senate aides. Such a move would guarantee miners a price for

their metals, regardless of market conditions.

Automakers have been moving cautiously as this trend for

green pricing premiums evolves, conscious that consumers are

reluctant to pay more for EVs.

General Motors ( GM ), the largest U.S. automaker, believes

critical minerals should be produced sustainably but does not

want to pay a premium out of concern that it will be unable to

compete with Chinese rivals, according to a source directly

involved in the company's minerals procurement.

GM told Reuters it requires suppliers to comply with high

standards, a stance echoed by Volkswagen, BMW and Stellantis ( STLA ).

Tesla and Ford, which is building an

Indonesian nickel processing plant with Huayou Cobalt and PT

Vale Indonesia, did not respond to requests for

comment.

EXCHANGES

The London Metal Exchange (LME) said it has received

"positive market feedback" regarding its move to price

sustainable nickel. Its partner Metalshub, a German online

metals auction platform, sold 144 metric tons of low-carbon

nickel in May and plans to publish a corresponding price when

there are more transactions.

Benchmark Mineral Intelligence, a UK-based provider of

critical minerals pricing and data, has launched green metals

pricing contracts, with each price derived from how a mining

company adheres to 79 criterion that Benchmark said reflect high

production standards.

"You will not be able to guarantee by any stretch of the

imagination a non-China supply of certain metals unless you're

willing to pay some degree of a premium for that product," said

Benchmark's Daniel Fletcher-Manuel.

That's the message that Jervois has been pushing,

unsuccessfully.

"Ultimately, ESG has a cost," said Bryce Crocker, the

company's CEO. "It's a worthwhile cost."