Pending regulations by the US Securities and Exchange Commission (SEC) to restrict trade in "conflict minerals", specifically strategic rare minerals from the Democratic Republic of the Congo, could affect Israeli electronics components manufacturers, which use these mineral in their products.
The SEC defines conflict minerals as " columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives; or any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the DRC countries." In many ways, the regulations are an extension of regulations on blood or conflict diamonds.
The SEC measures parallel similar measures by the OECD, which is running a pilot with several countries and major multinationals, including Siemens AG (NYSE: SI; DAX: SIE), Oracle Corporation (Nasdaq: ORCL), and Nokia Corporation (NYSE; LSE; HEX: NOK) to examine how to carry out effective and credible due diligence on the source of minerals that are critical for various industries. Israel is not participating in the pilot.
According to the US Geological Survey, the war-torn eastern provinces of the Democratic Republic of the Congo are the source of 6-8% of the world's tin, 2-4% of its tungsten, 1% of its gold, and 15-20% of the world's tantalum.
Lana Zeiger, director of OECD relations at the Ministry of Industry, Trade and Labor's Foreign Trade Administration told "Globes", "These are raw materials mainly used for the production of electronics, medical devices, and communications and mobile devices. Companies using these minerals will be required to conduct a very long chain of thorough due diligence to verify their origin. Every Israeli manufacturer of components that use these minerals will have to prove to its foreign customers that the Congo is not the source of these minerals, or at least not mines controlled by warlords, and that trade in the minerals is not financing wars."
The Foreign Trade Administration is worried that the complexity of this pending due diligence is liable to affect Israeli companies' delivery of components to multinational customers. Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX), which exports its Inifiband products to US customers, has already encountered such a demand.
"One of our big customers, a US electronics giant, has already asked us to conduct due diligence on the source of raw materials, and made it clear to us: if there is no due diligence, it will terminate its contract with us," Mellanox VP regulations Yossi Adi told "Globes".
"Now every company is looking back to its suppliers and their suppliers back to the mine where the mineral was produced, in order to verify that the source of the mineral complies with the new regulations. In this chain, we have to reach suppliers we do not know, and who owe us nothing, certainly not accounts of their operations. This is the basic problem."
Electronics and telecommunications manufacturers are worried about a lack of cooperation by foreign suppliers, on commercial confidentiality grounds. "It is not clear at the moment what would happen if I conduct due diligence, as the regulations require, but the suppliers do not cooperate, on the grounds that I am asking for confidential commercial information. Under these circumstances, the examination chain is broken. There is no question that is worrying: if we supply cable with gold-plated contact points to a large US public company, we must state which mine supplied the gold," warns Adi.
Foreign Trade Administration director Ohad Cohen has asked the Israel Securities Authority to implement the regulations gradually over a long period to allow the development of suitable mechanisms for the carrying out of reasonable and reliable due diligence on the source of raw materials.
Zeiger says, "Similar requests have been made to the US authorities by other countries. This is not just an Israeli problem. We have the impression that Washington understands the problem, but that all the signs nonetheless point to the new regulations being published by the end of the month."
Published by Globes [online], Israel business news - www.globes-online.com - on August 9, 2012
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