BSR 2010: Conflict Mineral Supply Headed Toward a Crisis?

BSR 2010: Conflict Mineral Supply Headed Toward a Crisis?

Image CC licensed by Flickr user Grassroots Group

The use of "conflict minerals," already a simmering issue at BSR 2009, shot up the agenda of the manufacturers attending this year's meeting which are reliant on electronics.

Under a new U.S. Securities and Exchange Commission (SEC) rule, a key deadline to file information on corporations' sources of these materials is approaching fast. And while industry is working with NGOs, governments and local miners to set up the necessary tracking rules, time may be too short to complete the work.

If not, supplies of these materials could be disrupted and the fragile war-torn economy of the African region where mining of these minerals is taking place could be grievously damaged, said Karen Hayes, director of corporate community engagement for the Africa region at Pact, a nonprofit trying to develop tracking processes for the material. Hayes participated in a panel at BSR 2010 entitled "Responsible Sourcing and Conflict Minerals."

Corporations are already at work trying to meet the SEC standard, which requires companies to identify and publicize sources of key minerals. Formal reporting of this information is due in 2012, still more than a year away. But in April 2011 the new SEC standard calls for companies to produce a timeline describing plans to comply.

That's just six months from now, very tight timing for large manufacturers who typically sign supply agreements years in advance. Corporations ranging from GE to Honda and Intel are already wrestling with vagaries of the new rule, and assessing the potential impact on their supply chains if supplies of these key minerals are disrupted. "Companies have an incredibly short timeline," Hayes said.

The minerals in question are gold and the "three Ts" -- tin, tungsten and tantalum -- all widely used in electronics and mined in the war-torn Democratic Republic of the Congo (DRC). Embroiled in a decades-old civil war that has caused five million deaths and even more displaced persons, DRC is the largest producer of the three Ts, and a major gold producer. Army factions exploit countless small-scale mining operations -- "taxing" material sales, as well as shipments -- to fund war efforts

Alternative supplies of these minerals exist. There's growing concern that by disrupting their export from the DRC, however, the SEC rules could have unintended tragic consequences by effectively embargoing all mineral exports from the region.

Hayes reported that "artisanal mining" jobs, while hard labor, were a critical source of income, as well as the DRC's largest sector. Among the possible effects of ending formal exports: thousands of workers displaced, destabilization of the economy and formal government, in parallel with a strengthening of rebel forces.

The rules present a huge challenge for manufacturers. A manufacturer such as GE Health, for instance, has good understanding -- and plenty of leverage -- with its first tier of suppliers. Yet for suppliers further down its supply chain -- those that sell subcomponents and raw components eventually integrated into components that are sold to the final manufacturer -- GE has little visibility into supply sources, or leverage to change them, explained Selig Merber, GE's international trade regulation and sourcing counsel.

Consider the long road minerals from DRC travel to make their way into a GE scanner. In the DRC, artisanal miners deliver sacks of ore -- rocky earth -- to a regional trader, who in turn might sell batches of sacks to a regional aggregator who then exports large volumes of the ore to a refiner overseas, say in Malaysia, who mixes it with ore sources from many markets.

Once refined, the pure metal is in turn sold to specialized manufacturers who make parts that can eventually end up in GE's finished products. Mapping this labyrinthine path is daunting.

"It's difficult to track the supply of manufactured parts back a couple of levels," Merber said.

"And once the ore is refined, it's impossible to distinguish where the raw ore came from," he added.

To bridge this gap, Hayes is working on a project to tag and trace sacks of the raw ore as they emerge from mining areas free of military exploitation. The project is making progress. During a three-month trial, working with artisanal miners, sacks holding 300 tons of raw minerals were tagged and successfully tracked on their way from mine to smelter. IBM is contributing the database development and management services for the project. 

Across the border, in Rwanda, which is also covered by the SEC rule, the government is moving quickly to set up a tracking system. "This can be done," she said, "but it takes a lot of work to line up the right players."

The problem now? In September, DRC's president embargoed further output from conflict mining areas, stalling Hayes' work there. "We had to let go of our staff, and are hoping to resume as soon as possible."

[Editor's note: The video below is a short chat with Karen Hayes produced by BSR.]

Image CC licensed by Flickr user Grassroots Group.