How Conflict Minerals Rules Affect Steel Scrap and Gold Supply Chains

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Continued from Part One.

The Scrap Metal Sticking Point

Though companies like tantalum producer Global Advanced Metals may appear an obvious “winner” with the conflict minerals rule, many may not know that the rules could have placed severe limits on all domestic metal recycling, had Nucor not taken a proactive stand in explaining to the SEC how the rule would impact EAF producers.

EAF production methods, used by Nucor, represent approximately 62 percent of all US steelmaking capacity as of 2011.

“We fought for a recycling exemption,” said Jennifer Diggins, director of public affairs for Nucor. “We believed the final rule should recognize the impossibility of tracing the elements in our scrap back to their original source. A piece of scrap may be recycled dozens of times and over the course of the past hundred-plus years.”

The SEC conceded that point and amended the rule, which a created far less burdensome final rule.

Under the final rule, the SEC will require a reasonably designed, good faith inquiry only to determine whether its minerals are from recycled or scrap sources. Additional due diligence and furnishing a Conflict Minerals Report will not be required unless a company has reason to believe that its conflict minerals may not have been from recycled or scrap sources.

As a result, the SEC stated that they believe that “the magnitude of the cost savings for issuers with conflict minerals from recycled or scrap sources will be greatest for companies that use exclusively scrap and recycled materials.”

“Certainly the SEC likely didn’t intend to shut down all recycling,” Diggins said. “We applaud them for recognizing the importance of recycling metal, which will hopefully increase the extent to which these materials are recycled.”

“The more you recycle, the less you have to mine,” she concluded.

What About Gold Supply Chains?

Gold and its supply chains represent, to some extent, greater complexities for one key reason. One of the main end-uses of gold – jewelry – has a supply chain dominated by retailers, but “manufactured” by smaller mom-and-pop-type operations.

“Based on how the rules are set up, if you are a re-seller – and you have no control over the specification – you don’t have to report and those products should not be captured by the rule,” said Michael Littenberg, partner at Schulte Roth & Zabel LLP.

When asked what had changed from the proposed rules to the final rule, Littenberg said, “to the extent that something is branded but the public company didn’t have any influence over the manufacturing process, the company does not have to report.”

He predicts the rules won’t apply to a large chunk of the industry. However, he suggested, “It will be an interpretive question – for example, what does it mean to have control over the design? That remains unanswered.”

The Silver Lining

Though some would argue that no silver lining exists when new regulations impose compliance burdens on a manufacturing base, others are not so sure. “There is a school of thought that says at the end of the day, [manufacturers] will learn more about their supply chains as well as how to make this pay for itself… supply chains will become more efficient,” argues Littenberg.

Another silver lining could be that the goal of the legislation — having a positive effect on the ground in the DRC and surrounding region — could actually be met (unlike similar legislative attempts).

We’d concur with Littenberg’s stance — though we wouldn’t want to argue that point to the electronics or aerospace industries right now.

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