Steel Buyers Basics: Conflict Minerals

Warring gangs who use child and slave labor mine these conflict minerals.  Sales of these minerals are used to finance their operations – similar to the well-known conflict diamonds.  Section 1502 of the Dodd-Frank law seeks to remove the US market for these minerals – specifically gold, cassiterite (the ore for tin), columbite-tantalite (tantalum) and wolframite (tungsten) – by forcing companies that use these minerals to disclosure their sources.

This law is affecting everyone who makes something, including everyone in the steel industry.  The SEC has given large firms until 2015 to comply and smaller firms until 2017 to comply.  The SEC has outlined three steps required to comply with the law.  (The exception to these requirements are for firms that reprocess scrap, they are exempt.)

In step 1, the company must find out if any of these conflict minerals are used in the manufacture of their product.  If not, no action is required but, if so, step 2 is required.  

In step 2, companies that use any of these four minerals must conduct a “reasonable country of origin inquiry.”  If the country of origin is not from the area of the DRC then a report is filed with the SEC briefly describing the “reasonable inquiry.”  If the minerals do come from the DRC region, then step 3 is required.

In step 3 the firm must undertake a “chain of custody” investigation of the conflict minerals it uses, submit a report to the SEC and have their investigation audited.

In my experience, no publically traded firm wants to have any conflict minerals in their supply chain.  Nor do they want to do the investigation and reporting required in step 3.  These firms therefore ask all of their suppliers to certify that either these minerals are not present in any of their products or, if they are used, that they do not originate from central Africa.  In turn, every supplier to such a firm has to ask all of their suppliers the same question and so on throughout the supply chain.  Even the smallest local supplier is going to be affected by this law.

All of the large Steel Mills have responded to the need to be conflict mineral free.  They have posted statements online that they are certain (or at least reasonable certain) that all of their ingredients are conflict free.  Many, but not all, smaller suppliers also have such statements.  

I suspect that at the end of 2014 a large number of purchasing departments will be in panic mode trying to contact all of their suppliers regarding this issue.  So my advice is to get started now.  Make a list of all your suppliers, create a letter for them to sign certifying they are conflict free and let them know that if they do not do so, you can’t do business with in the future.  I’ve done this myself and while it’s not hard to do with any one supplier, it’s a lot of time to follow up with all your suppliers.  

Bottom line, even if you are a small private company you can’t ignore this law.  If you don’t act you might find that your largest customer suddenly can’t do business with you.