Conflict-free tantalum initiative gathers pace

AVX launched its ‘Solutions for Hope’ project in July 2011 with Motorola Solutions, signing a supply agreement with DRC concession holder MMR and the CDMC mining co-operative in Katanga.

Under the scheme the ore is mined from a designated MMR mine, bagged and tagged and then tracked along its journey via South Africa to F&X Electro Materials, China”s only EICC/GeSI-certified conflict-free smelter and from there, through AVX”s production chain, to finished tantalum components. Customers who have signed up to the scheme include: Hewlett Packard, Intel and Foxconn.

A ‘Solutions for Hope’ review team have spent time in Katanga assessing the operations on the ground and have concluded that AVX”s closed pipe model for responsibly sourcing tantalite ore from the region is both reliable and sustainable.

The third in a series of ten-tonne shipments to AVX from MMR has now been carried out, and customers have started to receive finished components made from conflict-free DRC ore.

“We did three shipments to exercise the pipeline,” said Bill Millman ,Technical and Quality Director at AVX’s Tantalum Division. “We visited the smelter, F&X in China as part of the evaluation of the closed pipeline and also looked at AVX facilities including the Kalinga secure depot and the factory in the Czech Republic where the capacitor grade power and wire manufactured by F&X will be made into tantalum capacitors. We are currently delivering the first tantalum products manufactured from ethically sourced ore from the region to end users.”

Following the coming into force of the US Dodd Frank “conflict minerals” Act last year, the US Securities and Exchange Commission (SEC) has struggled to set out regulations for companies to report their supply chain tracing for products made using 3T (tin, tantalum and tungsten) metals and gold bought from central Africa. The SEC ruling, when it comes, is expected to include a two-three year phase-in to allow companies to get to grips with the process.

“The good news is that it is not going to just apply to the electronics industry, it will apply to automotive, aerospace and other industries,” Millman comments. These account for the other 50% of the market for tantalum not taken up by electronics.

Unlike the electronics industry, which was quick to self-regulate through EICC and GeSi initiatives, the aerospace and other industries have taken advantage of the delay in regulations to continue to buy raw material originating from central Africa that cannot be reliably traced.

Now the pressure is not only on the aerospace and automotive companies to catch up, but also on Chinese and other Asian processors – this is coming from the UN which recently extended its inspections from mines in the DRC to smelters in the Far East. Notably Malaysian Smelting Corporation, a backer of the iTSCi mineral tracing scheme, is now building a tin smelter in the DRC in order to build its own closed raw material supply pipeline.

AVX”s partner smelter F&X is the only EICC and GeSi certified “conflict-free smelter” (CFS) in China, but other major processors, notably Ningxia, are also undergoing certification. “These involve very detailed audits. Their willingness to go through the audit shows that Chinese smelters are taking CFR certification seriously,” explains Millman.

Uncertified Chinese smelters buying untraceable ore from central Africa have been blamed recently for pushing down tantalite prices in the spot market. The UN clampdown and the shrinking pool of overseas customers willing to buy metal from unverifiable sources means Chinese smelters would need to join traceability schemes if they want to maintain a viable business.

Ten-year cycle

The main reason for the drop in tantalite prices, however, is the slump in the electronics sector, which takes around half of the estimated 1,700 tpy tantalum market.

“We are now coming out of the classic tantalum bell-shaped curve that the market goes through every ten years. The price of tantalum goes up, then the price comes down – this cycle typically takes 18-24 months,” Millman says. “Electronics demand has fallen off a cliff, inventories have built up all the way through the tantalum chain and people are now destocking.”

“Demand for tantalum capacitors has halved in the past two quarters, and this demand downturn is influencing the prices in the market. People are trying to talk the market up, understandably as they are holding a lot of high priced inventory, but the supply and demand situation is not going to improve in the short term.”

There is growth in demand in the superalloys sector which serves the aerospace industry and in new applications such as tantalum sputtering targets, which act as insulators for copper circuit boards and are winning market share from aluminium. However, this is not enough to offset the fall in demand for capacitors.

“People always expect tantalum to be this big growing market, but over the past ten years tantalum demand has gone down – it has still not recovered to the level seen in the year 2000,” Millman points out. Tantalum”s historic price volatility and controversy over “conflict minerals” have led to substitution by materials such as ceramics and aluminium, he notes. “The market for tantalum capacitors is less than 1% of the total market for capacitors – so it is a real niche.”

The drop in end-user demand has filtered through to the raw material market and prices and the market in 2012 has tipped into an oversupply of around 500,000lb, he estimates.

The next largest source of tantalum ore, after Australia is undoubtedly DR Congo – hence the pressure to bring it back into the supply chain, but in a transparent and responsible way.

Transparency vs trade

AVX is currently holding two years” worth of tantalum inventory, including finished products and raw material, the three ten-tonne shipments from MMR make little difference to the company”s stock levels. Bearing the cost of the bag and tag scheme in mind, they also bring with them neither additional costs nor cost benefits to the company.

However AVX”s vision is long-term i.e. to establish a responsible, sustainable, transparent and cost-effective supply base in the DRC. In December last year it became the first capacitor manufacturer to guarantee that all its tantalum comes from conflict-free sources. Until ‘Solutions for Hope’ is fully integrated into its supply chain every capacitor made from DRC ore will be marked with its own traceable ID. Potentially, scaled up to full rate production MMR”s Mai Baridi concession could provide AVX with 100,000lb per year of tantalite, covering 30-40% of its demand.

AVX decision to deal directly with MMR, cutting out the middleman as it has done through “Solutions for Hope”, means traders now have a grudge against the scheme.

AVX had reached out to traders to participate in its scheme, but on condition that they must participate traceably and transparently –but this has met with little enthusiasm. In Katanga dealers find themselves in direct competition with ‘Solutions for Hope’ and other traceable sourcing schemes, so traders are trying to tempt miners to sell to them instead by offering a higher price than “bag and tag” customers, according to Millman. The iTSCi “bag and tag” scheme carries an additional levy for the supplier and the buyer, and MMR also shoulders an extra burden of social costs such as building infrastructure and facilities for the mining co-operative.

“It is important that the community also buys into this. For example, education is very highly prized there: some of the miners are subsistence farmers and the fact that mining allows them to send their children to school is very important to them,” Millman says.

To ensure that its mine is free from any armed groups and that there are no irregularities, “AVX is working with the local government in Katanga to put together a multifaceted team that will include local police, the church, civil society, regional government, local government, the mining police and the army which will meet once a month. It will ensure that any issues are noted and response is minuted and actioned,” Millman says. “If there is not enough bandwidth to action it, it is kicked up to the local government and then the regional government. The pressure has to come from the ground up, not just from the customers.”

If any presence of armed groups is detected in the area there will be mitigation activities, involving the mine police and the army, and there will be local pressure to ensure due diligence succeeds. If there is a deep problem and bagging and tagging fails, the ultimate sanction is that there will be no sales. “That puts pressure locally at the mine site,” Millman adds. “That is a model that we have developed in Katanga, which is a conflict free zone.”

The ‘Solutions for Hope’ review team has been in Kivu province in the eastern DRC: the country”s largest tin and tantalum producing area which has been at the heart of recent armed conflicts. The question now is whether the model built in Katanga could be applied to eastern Congo.

The links between sales of Kivu ores and funding for armed groups prompted a customer revolt which culminated in the US Dodd Frank Act and similar political initiatives in Europe. Last year this created a de-facto market embargo on ore from the Great Lakes region.

“The recent UN experts report published near the end of last year stated that when they visited the Kivus last year they found it was devastated by the “embargo” created by the Dodd Frank Act,” Millman says. “According to the UN, there was a 70% to 80% reduction in mining activities in the Kivus, and social dislocation was widespread.”

The regional government wants to see mining regulated, and efforts are underway by a range of agencies. The ‘Solutions for Hope’ review team will work with provincial governments and these agencies to determine if its ethical sourcing model can be applied in the Kivus.

One option, said Millman, could be to start in the currently conflict free neighbouring province of Maniema, and gradually allow sourcing to resume selectively at “green flag” sites in the Kivus by collective agreement. As in Katanga, the artisanal miners would have to be represented by an officially recognised mining co-operative.

Another approach might be to use Centres de Negoce – set up by ICGLR and protected by UN”s MONUC peacekeepers – currently two or three physical centres where material purchased from artisanal miners is technically evaluated and traced.

Whether the experience in Katanga can be used in the Kivus will be the next test for ‘Solutions for Hope’. Its partners, together with USAID and ICGLR have also joined the Public Private Alliance (PPA) to expand the mineral tracing scheme.

The closed supply pipeline is evaluated in three tests, according to Millman. Two of which it has now passed: reliability and sustainability – whether the scheme can be financially self-sustaining through levies paid for bagging and tagging. It now needs to pass the third test: expandability – to determine whether the business model developed in Katanga can be extended to the troubled regions of eastern DRC.

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