Smelter Reform Seen as Answer to Conflict-Free Minerals Sourcing

May 22, 2014

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Intel and HP recently presented an update of their work in the Conflict-Free Smelter Program, designed to get the world's smelters to source minerals only from mines that have proven not to be funding armed rebel groups in the Congo.

Two of the world’s most influential information technology companies continue to work on removing conflict minerals from global supply chains as a long-anticipated U.S. regulatory deadline finally approaches, and they want others to join in on coalition efforts to establish a clean minerals trade.

At the end of this month, chipmaker Intel, IT product producer HP, and as many as 6,000 other publicly traded U.S. companies are due to file their first specialized disclosures and conflict minerals reports (CMRs) with the Securities and Exchange Commission. After the May 31 deadline, issuers will be required to file annual disclosures and CMRs annually thereafter.

As Intel and HP submit their first SEC filings, called Form SDs, both companies are locked in on a multinational initiative called the Conflict-Free Smelter Program for establishing transparency and reform at smelters and refiners that process the four minerals in question -- cassiterite, columbrite-tantalite, wolframite, and gold -- respectively into tin, tantalum, tungsten, and gold (3TG) necessary for the manufacture of countless products.

Although conflict minerals continue to come out of militia-controlled mines in the Democratic Republic of the Congo (DRC) and nine surrounding war-torn nations, their global trade is muddled, mixing in and out of legitimate and criminal networks. The way the materials change hands between multinational traders, minerals exchanges, and importers and exporters before they arrive at smelting facilities halfway across the world poses traceability challenges for manufacturers and their suppliers now required to perform annual audits on their supply chains.

“You don’t know where the minerals are coming from at the smelters,” said Bryan Fiereck, Intel’s conflict minerals program manager. “This is a reality-check moment. However, there’s only a handful of smelters in the world.” At the recent International Supply Management Conference in Las Vegas, both Intel and HP presented the latest on their global auditing and reform work.

In attempting to neutralize conflict minerals in metals supply chains, targeting the smelters and refiners could prove to be the best strategy, say Intel and HP, since all 3TG ores being mined across the globe funnel to just a few hundred of them. And because 3TGs, even in trace amounts, are found throughout consumer and industrial products -- from toys, jewelry, and power tools to just about every electronic device -- their supply chains all converge back on the same smelters and mineral processors.

For HP, tin solder paste is used in the production of printed circuit boards going into over 300,000 printing machines, servers, and personal computing products its global suppliers ship out every day. Intel's microchips contain all four metals.

“We shouldn’t focus around products but rather on the metals supply chain because the smelting facilties are [the common denominator] in many product supply chains of companies,” said Jay Celorie, global program manager for HP. “Hundreds of thousands of companies are currently using conflict minerals.”

Celorie says the smelters make a good control point in the supply chain and can prevent blood-tainted metals from moving on to manufacturers and product assemblers. If more manufacturers and organizations can get them to procure only minerals from sources proven not be funding rebel and militant groups, it would weed out flagrant minerals and choke off sales for the criminals.

“We need to pressure the smelters to get into the Conflict-Free Smelter Program,” urged Celorie, who says a critical mass of CFSP smelters would cause a tipping point toward reformed minerals trade. “Lots of firms are asking for this,” he said. As more smelters get on the international CFSP list, and as more companies buy only from them, then it simply becomes good business to be conflict free.

Many firms are still trying to determine whether conflict minerals simply exist in their supply chains, as government reporting rules are tightening up. The SEC’s allowance period for reporting “conflict undeterminable” ends after this year, which will force companies to make definitive yes or no responses, as well as determine the countries of origin for their minerals and produce independent-audit information to back up their declarations.

While the reporting rule doesn’t outright ban their use, companies are already feeling the weight of having to remove conflict minerals from their manufacturing streams. “If you’re not conflict-free, there will be pressures from a brand perspective,” said Rose Kelly-Falls, senior vice president of supply chain risk management for New York-based Rapid Ratings International, who moderated a panel on the issue at the Las Vegas conference.

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The goal of establishing a network of smelters that source only "green," or conflict-free, minerals will be aided by continuing international-community efforts to rid central Africa's mining centers of rebel gangs and corrupt bureaucrats. Credit: duron123 at FreeDigitalPhotos.net

Many organizations already have to adhere to self-imposed corporate social responsibility requirements for ethical sourcing. Pressure is also coming from advocacy and human rights groups that are closely watching the direction firms take on the issue. The risk of revenue damage from negative public exposure may be too great for companies to feel that simply complying with reporting requirements is enough. “A brand impact is going to impact a company’s bottom line,” said Kelly-Falls.

“No company wants to be associated with human rights atrocities,” said Celorie. He has been working on steering HP to conflict-free sourcing for the last four years. Efforts, including visits to the DRC and smelters, led to HP’s development of “closed-pipe” projects ensuring conflict-free supply channels in the DRC.

Kelly-Falls points out that the CFSP is not intended to boycott the Congo region but rather to restore and protect its mining and trading activities. "We don't want to wipe out the DRC, but to encourage responsible investment," she noted. Of course, corporate-sector efforts could only augment continued political, diplomatic, and humanitarian efforts to clean up the mines and corruption.

Both Intel and HP have already made declarations in the market that their supply chains are free of conflict minerals, with Intel notably making a high-profile announcement at the Consumer Electronics Show. Their SEC filings and conflict minerals reports (CMRs) will do likewise.

“All of our microprocessors contain 3TG,” Intel’s Fiereck said. The electronics maker's 3TG supply chain involves 350 suppliers responsible for 8,000 parts and components. The company performed its first conflict minerals audits in 2009, and then audited suppliers again in 2011 and once more in 2013. “We were confident with where our supply chain was at the end of 2012,” Fiereck noted.

While HP and Intel have blazed separate paths to responsible mineral sourcing, establishing their own internal systems and processes, their collaborative work with other stakeholders in advancing the CFSP -- like the international governing body the Organisation for Economic Co-operation and Development -- has made the program an effective instrument in engaging and propagating changes at smelters and refiners.

At Intel, it started with asking its suppliers to identify the smelters they were purchasing from for their 3TGs. Fiereck says the firm has traveled to 85 smelters in 21 countries to educate processing facilities on conflict minerals and encourage them to join the CFSP.

He has worked with them to participate in third-party auditing and identify the countries of origin for the materials they take in, “escalating” uncooperative suppliers and reaffirming relationships with compliant ones. Practices in place now include documentation and record-keeping of the ores they purchase and oversight by local governmental authorities.

“I’ve visited smelters and said, ‘Show me the bags of minerals and concentrates,’” Fiereck explained. “You have to visit and establish relationships in person. Do you trust their responses? You can continue the relationship, temporarily suspend the relationship, or disengage it.”

If that seems like threats to close supply partners, Kelly-Falls notes what inaction could mean: “Think about the values of your company.” Industry giants like HP and Intel wield the power to make sweeping changes, and that is why she says smaller companies should either join coalitions such as the Conflict-Free Sourcing Initiative (CFSI), which runs the CFSP, or form their own. “Industry-wide approaches will be easier. No single company can do this.”

Fiereck confirmed the strength-in-numbers tactic. “It’s practical for industry associations to do the heavy lifting rather than individual companies doing the audits themselves,” he said. “People are still getting used to what to do about this.”

The standardized auditing procedures, protocols, data sharing, and reporting systems that Intel and HP helped to develop are now being used by third-party auditors in the CFSP to validate those 3TG suppliers that have put practices and systems in place to source conflict-free minerals and voluntarily undergone audits. The CFSP publishes on its website a list of conflict-free smelters and refiners as well as a list of “active” facilities that have committed to the program, been audited, or are working toward compliance.

Currently, there are around 85 compliant processors across the four 3TG metals. Twenty-five of the 28 CFSI-identified tantalum smelters and refiners are already compliant. “We’re halfway there for gold, we still have a ways to go with tungsten, and there’s some work to do as well in tin,” Celorie noted.

Created by the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI), the CFSP is CFSI’s flagship program. The initiative has already existed for six years, and the coalition has expanded to include 150 companies and associations from seven different industries.

“There will be a race to conflict-free sourcing,” said Celorie. “The end goal is to get all smelting facilities on the CFSP.”

READ MORE: Supply Management Needs to Take Charge of Compliance
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