Conflict Minerals, Compliance and Quality

by | Nov 15, 2012

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Recently, the National Association of Manufacturers filed a lawsuit: National Association of Manufacturers v. U.S. Securities and Exchange Commission, 12-1422, US Court of Appeals for the District of Columbia Circuit (Washington). The complaint is that the challenge of conflict mineral disclosure is “too burdensome” for industry. More about that in a moment.

The Raw Material

The so-called Conflict Mineral rule affects companies who use tin, tantalum, tungsten or gold sourced from certain parts of Africa and who have SEC reporting obligations. Companies such as Apple, Boeing, Stanley, and lesser known companies like Kemet (NYSE: KEM), a leading manufacturer of capacitors, are among the affected.

The ruling states that businesses whose products contain these substances from unstable parts of Africa must disclose information about the minerals. Unstable parts of Africa’s in this case are largely (but not entirely) certain areas of the Democratic Republic of Congo or DRC. In these areas, business practices are known to infringe on basic human rights, and mining profits are regularly funneled into violent and unconscionable regional military activity. The first deadline for material disclosure for US companies is May of 2014.

True statement: disclosure at this level can be a beast of a problem. “Burdensome,” indeed.  But whether the problem is “too burdensome” is another thing altogether.

To decide, it is helpful to review conflict mineral rule compliance solutions. This way we can examine how, and if, the new conflict mineral ruling can be addressed by businesses. Below please find three solutions to conflict minerals traceability and compliance assurance. The common denominator of all three solutions is:  quality.  Quality is both a key benefit and a key component of the business case for moving forward with conflict mineral tracking.

Whoever Smelt It…

One option is for American companies to get into the smelting business.  In fact, some companies have gone totally vertical with their supply chain.

Take Kemet, for instance. Kemet went ahead and purchased mining rights in Africa’s DRC. In doing so they gained control their own mining processes.

Kemet has also established their own smelters in the United States. And, Kemet’s recent acquisition of a tantalum powder-manufacturing facility in Carson City, NV makes them the largest tantalum distributor in the world.

It’s an interesting trend, this, where companies capture the vertical from tip to toe.  Remember earlier this year when Delta Airlines purchased an oil refinery? It makes common sense in an old-fashioned kind of way:  If I want to sell carrot juice, why not plant some carrots and use those?  It seems wise. That is, if you can afford the investment. (And, if, that is, you can avoid being labeled a monopoly.)

America: Mine the Gap

Some say America should take over the smelting business.  This I heard from a government insider recently, on a call regarding policy and compliance next steps. What an interesting idea: for American ingenuity to make a move towards owning the smelting part of the mineral supply chain.

The business case is the quality aspect: you should really know what you’re getting when you acquire raw materials. If a supply chain has to be something you can monitor, and if details about the materials must be known and auditable, then owning the “refining” processes makes sense.

Rather than spend the money to monitor operations halfway across the world, you would save that operational cost and reduce risk— while assuring customers of material quality— simply by doing business with American smelters in, say, Idaho.  Hopefully, we’ll see some US-based industriousness in that regard moving forward.

Technology as Traceability Action

But for most companies, for the foreseeable future, trade compliance assurance software will do the trick.

Supply chain management in terms of materials doesn’t have to mean an entity owns the whole supply chain, although we’ve seen that it can mean that. Supply chain management has to mean, simply, that the materials are traceable, monitored and defensible.

For that, for now, there is conflict mineral software for managed material disclosure.

For the long term, software can continue to work – and it’s important to consider that there are some pretty interesting other ideas (such as invigorating the smelting industry stateside, and for that it would be nice to see policy that encourages that).  It’s encouraging to think that doing the right thing on a humanitarian level overseas might lead to better, leaner ways of doing business for American companies.

The Lawsuit

As for the Industry vs. SEC lawsuit that complains the conflict mineral rule is “too burdensome,” most insiders feel that the SEC followed protocols in establishing the conflict mineral ruling under Dodd-Frank, including an appropriate comment period.

Will it be challenging for businesses to comply? Certainly. But the best advice is that right now your corporate time and money is better spent on finding a reasonably priced compliance solution– preferably one that brings process and quality improvements with it– rather than throwing litigation dollars into the fire; or should we say, into the smelter.

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