By: Catherine Kavanaugh
January 10, 2014
As the clock ticks on a May 31 deadline to submit conflict mineral reports to the federal government, some in the plastics industry are wondering how the new law aimed at addressing a humanitarian crisis in Africa applies to them.
The Securities and Exchange Commission is requiring publicly-traded companies to determine whether their products contain gold, tantalum, tin or tungsten from mines controlled by armed groups in the Democratic Republic of Congo region.
While the so-called 3TG materials aren't mainstays of the plastics industry, privately-held manufacturers are being asked to comply with the disclosure requirements by their customers in the electronics, automotive, aerospace, medical device and appliance industries.
Private companies aren't subject to the new rule but they get picked up indirectly, said Michael Littenberg, an attorney with Schulte Roth & Zabel LLP in New York. He specializes in SEC rules and regulations and works with companies on human rights initiatives.
"If you supply to a public company, as a commercial matter you end up doing a lot of the same work around the traceability of your supply chain," Littenberg said in a telephone interview.
About 6,000 companies and as many as 280,000 of their suppliers are scrambling to satisfy the 2012 provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC has stated that it expects the cost to comply with the new rule to reach $3 billion to $4 billion for initial adherence and $207 million to $609 million in following years. However, Littenberg said for the most part the plastics industry faces more of a time investment.
"If you're building a car, think of all the components you have and how many people they come from," he said. "There are some large companies that have a thousand or more vendors. Plastics companies tend to buy from a discreet number of vendors so that takes some of the bite out of this for their industry."
Still, there is work to be done.
Tom Wood, vice president of sales for ES Plastic Products LLC, in Waterford, Wis., said he received dozens of requests to participate in supply chain audits. He wishes he and his counterparts at other companies could simply check a box that says "not applicable." But that's not acceptable for the conflict mineral reports due in four months and then annually every May.
"We're a plastic injection molder with no precious metal components in the parts we produce," Wood said in a telephone interview. "Like many of our competitors, we process general purpose resin. But we sell to recognizable Fortune 500 companies so we have to comply with the request."
The goal is for companies to come clean about whether their products contain any of the minerals that finance deadly conflicts through human rights abuses.
Rich in natural resources and rife with civil war, armed militant groups in the region have exploited the mineral trade. They use forced labor and child labor to sift muddy mountainsides with only hammers and shovels for columbite-tantalite (coltan), casserite and wolframite — ores from which tantalum, tin and tungsten are extracted, respectively.
The militants in the Democratic Republic of Congo region also resort to rape and murder to control the laborers as well as smuggling routes as they cash in on mineral wealth to buy weapons. By most estimates, 5.4 million people have died since 1996.
A lot of the conflict minerals end up in consumer electronics, such as mobile phones. Tantalum stores electricity in the devices. Tungsten is used to make the phone vibrate. Tin goes into soldering circuits, and gold coats some wires.
Tin- and tungsten-containing chemical compounds also are used in small quantities as catalysts and stabilizers to produce some plastics. A letter from the Society of the Plastics Industry Inc. to the SEC says the typical levels are less than 0.1 percent by weight, which is often in the low parts per million. SPI has asked federal officials not to subject those businesses to conflict-mineral reporting and recordkeeping.
"The commission has not yet granted SPI's request, however, SPI continues to push the SEC for clarification," Kyra Mumbauer, the trade association's senior director of global regulatory affairs, said in an email.
The push also is on by the U.S. government and social issue groups to raise awareness about conflict minerals and spur change similar to the "blood diamonds" campaign in Africa.
"It's really human rights legislation," Littenberg said. "There's been a lot of pressure for legislation intended to ease civil strife in that part of the world. There are other initiatives around this. There's an EU [European Union] conflict minerals rule expected to be proposed by the end of the first quarter of 2014. Canada proposed something last year."
On a bumpy ride
One of the more basic goals is to encourage businesses to adopt new purchasing policies and practices.
"If they're listed on the SEC, they're required to have their vendor base compliant with the standard," Wood said. "That's important. We know."
"After taking a webinar on the topic, we learned about a template form to declare general compliance for the businesses ES Plastics supplies," Wood said. "So far, that seems to be working."
Littenberg said there are a lot of templates online to help businesses at various points in the supply chain.
"When people go to their vendors they do it by questionnaire in most cases, which makes it easier for vendors to respond and provides a paper trail of the work you've done," he said.
How is everyone doing?
"There certainly are leaders and laggards like with anything else," Littenberg said. "I think a lot of companies will get the work done but it's going to be a bumpy ride. It's what you would expect the first year you have new legislation. There's a learning process."
The learning curve isn't as steep or expensive for the plastics industry, he added.
"If companies take a methodical, thoughtful approach in the plastics industry, they can deal with compliance obligations at a fairly low cost," Littenberg said. "In many cases it's going to be mostly a time investment."
Silgan Plastics has been at it for a while. The Chestefield, Missouri-based company posted a letter on its website for buyers of its blow molded bottles and packaging that says it will provide a certification for them to comply with the rule in early 2014. Silgan, which is also publicly held, conducted a "reasonable country of origin inquiry" with its suppliers.
"We have consistently been advised that either conflict minerals are not present in the materials supplied to Silgan or, if present, were not sourced from the Democratic Republic of the Congo or adjacent countries," the website says of its initial findings.
Tracking the source
Maplewood, Minn.-based 3M has asked its suppliers to fill out a survey and pass along a reporting template "upstream until the smelter/refiner is identified."
The electronics industry determined the most effective way to eliminate conflict minerals from its supply chain was to set up a verification system at the smelter level.
Companies belonging to the Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative developed a process to conduct independent, third-party audits of smelters. They keep an online list of the operations deemed conflict-free.
Littenberg said there are two points of view as to whether efforts to make conflict-free mineral products are working.
"Proponents say it is having a benefit in that part of the world. It has reduced funding to these armed groups. It is promoting civil society," he said.
However, concerns have been raised about legitimate, artisanal miners in Africa's second largest country losing income to mineral producers in other parts of the world.
"The other view is that this has resulted in an embargo that has hurt people on the ground more than it has helped," Littenberg said. "I can't tell you which view is correct; it's way beyond my area of expertise but reasonable people differ as to whether this is having the right effect."
Legal arguments also continue. Attorneys on both sides of the issue were in court Jan. 7 for a challenge of the SEC rule by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable on behalf of many of the 6,000 public companies.