Conflict Free Tantalum and Unintended Effects

By Michelle Smith–Exclusive to Tantalum Investing News

The issue that minerals, such as tantalum, from the Democratic Republic of Congo (DRC) are being used to support violent acts and violent groups is clear. The problem, which is being largely addressed by barring these conflict minerals from the supply chain, thereby eliminating the flow of revenue to malicious recipients, is now a major focus in the industry. But, it is an initiative that has had unintended effects, some of which may remain to be seen. Addressing armed conflict in the marketplace, as it turns out, is not as clear-cut as first believed.

The US’ Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to address the issue of conflict minerals. The SEC is still trying to comply but is under pressure since the outcome is expected to have global effects.

The SEC has already proposed rules requiring companies to disclose whether they use tantalum from the DRC or surrounding countries, and if so, to outline the measures taken to ensure proceeds do not support conflict.

In February, the US Chamber of Commerce wrote to the SEC expressing concerns about the impact its proposed rules would have on the economic and living standards in Africa. Private investment, which was highlighted as an economic driver in the region, are at risk of facing a “chilling effect” the Chamber warned.

Despite the absence of the final rules, this chilling effect has already materialized, from what some may consider an industry imposed embargo.

Tantalum consumers are now largely shunning materials from the DRC. Focused on preventing tarnish on their company brands and supporting what appears to be a noble cause, few seemed to consider that turning their backs on the DRC not only closed the pipeline of revenue to militias, but also to artisinal miners who rely on the mineral trade for survival. As a result, massive numbers of people have suddenly found themselves unemployed.

The Congolese government has reached out the SEC urging them to follow guidance developed by the UN and the Organization for Economic Cooperation and Development, which would involve defining “due diligence as a continuous process, proactive and reactive, by which companies take reasonable measures in good faith.”

The Chamber of Commerce’s also reminded the SEC that it is legally obligated to consider the impact any rule may have have on competition.

According to the Chamber, the cost-benefit analysis of the proposed measures fails to show any benefit to investors, increased efficiencies for the marketplace, or capital formulation. The agency points to the SEC’s estimate that compliance costs could total over $71,000,000 and impact over 5,000 companies. A measure the Chamber therefore describes as “economically significant.”

The SEC rules could also prove disadvantageous in other ways.

China has a reputation for playing by its own rules and the industry took notice when it appeared that the Chinese too seemed to support the sourcing of conflict-free tantalum. However, reports continue to surface that China, unlike its western counterparts, is still getting tantalum from the DRC and at deeply discounted prices.

Further, it must be remembered that China has some domestic supply and the Chinese have secured a contract for the bulk of the conflict-free tantalum from Fluminense in Brazil. In addition, Chinese consumers can continue to compete in the open market with ther consumers who have far less, if any, guaranteed supply.

The competitive advantage the Chinese could gain if western consumers hold steadfast to austere sourcing practices should not be ignored. China has already announced plans to develop strategic stockpiles of metals including tantalum, thereby making themselves less susceptible to international pricing. With adequate supply, the nation could become a powerful force in the tantalum industry.

Complicating matters more is that this metal is believed to be subject to severe shortfalls. There is only a limited amount of tantalum available and the portion which is clearly conflict-free is even smaller.

While consumers are largely acting on their social responsibility now, it is inconceivable that in a market struck by deficits, all will have the ability to turn their noses up at supplies that cannot be deemed beyond a shadow of a doubt as conflict free.

The issue of conflict-free tantalum as it has been approached thus far comes dangerously close to pitting business interests against ethical concerns. The Chamber of Commerce warned that there is a possibility that among other things it will lead to false reporting. The agency outlined several “bold steps” the SEC could take to get a better grasp on the situation.

Acting on at least one of them, the SEC announced that on October 18 it will host a roundtable on conflict minerals. This forum will provide the various stakeholders an opportunity to exchange views and provide input. After which, the SEC hopes to be in a better position to write effective rules.