The time to tackle the tantalum supply chain is now

Tantalum is a critical raw material for the electronics, aerospace and power generation industries.  Computer logic chips, portable devices and turbine blades all rely on the metal.  However, there is a looming and profound supply problem stemming from potential increases of supplies of conflict tantalum from tantalum.  The article provides context, a timefame, and recomendations to OEMs and leading ore processors for actions to be taken now.

 

In July 2009, Global Witness (www.globalwitness.org) published a report on the role of mineral extraction as a source of funds to sustain conflict in the eastern part of the Democratic Republic of Congo (DRC). The report, “Faced With a Gun, What Can You Do?” focused mainly on the exploitation of a tin-bearing mineral, cassiterite. Tin is widely used in a range of industries and is increasingly critical in electronics as lead based solders are phased out.

 

Numerous firms have been named in the report, most prominently Amalgamated Metal (AMC) of London. AMC operates the Thaisarco tin smelter in Thailand and obtains tin ores for smelting from a range of countries around the world including the DRC.  The company has defended its procurement practices and has stated that it follows UN guidelines for the region. Many of the other firms named in the report are smaller trading firms that are not themselves ore processors, but instead buy ores in Africa and sell them to processors around the world. This note is not intended as a comment on the accuracy of the Global Witness allegations.

 

 

In 1986, the price of tin collapsed after the failure of the tin price support mechanism of the International Tin Council. Caught between the pressure of falling tin prices, growing domestic incomes, and the rise of tourism and associated demands for better environmental stewardship in Malaysia and Thailand, the tin mining industry in those two countries largely disappeared. However, the smelting infrastructure used to process tin ores remained active and in place, operating now on imported rather than domestically mined ores.

 

Over time, other countries shifted from producing ores to smelting their own tin. This shift in producer countries to higher value-added exports has compelled the major Malaysian and Thai smelters (the Thaisarco smelter on Phuket(BAK:PIC-F)(BAK:PIC-F), and the Malaysian Smelter in Penang) to import ores from a wider range of countries including African ores. The Great Lakes region of Africa has long been a centre of tin production, including the Eastern parts of the DRC, and it is therefore no surprise that ores from this part of Africa have been exported to Thailand for smelting.

 

The excoriation of AMC underscores the challenge of sourcing minerals from what, for the past 15 years, has been a zone of conflict of varying intensity. The supply chains are long and include many entities, from small scale producers, to local consolidators, to trading firms, before reaching firms like AMC. Ensuring that no ore purchases are fueling conflict is at best a hugely difficult problem to manage.

 

Thus the Global Witness report is likely correct in claiming that some of the cassiterite ores (tin ores) produced in the DRC are done so by or for the benefit of warring parties. The report’s title is graphic, but also consistent with reports over the years of forced mining in this part of the DRC.

 

 

Tin is by no means the only mineral for which the DRC has become an important supply source. Two other examples, both of which are important in consumer electronics and infrastructure markets, are tungsten and tantalum.

 

Tungsten, mined as wolframite, is mainly associated with infrastructural applications such as cutting tools and steel alloying. However, many specialty applications exist in electronics, from displays to cellphone vibrators.

 

Tantalum, found in the DRC commonly as coltan ore (a term used to describe ores containing commercially attractive amounts of both tantalum and niobium), is used primarily in electronics (in capacitors for portable devices and in the manufacture of computer chips) and is also widely used in turbine blades for jet aircraft and power plants, where it contributes to greater energy efficiency.

 

Demand for both of these metals is currently depressed, due to the global financial crisis. However, with economies showing signs of recovery, we should expect demand to bounce back, and for ore prices to begin to rise. Rising prices will inevitably stimulate increased efforts in the DRC to produce these materials, and to some degree are likely to lead to greater efforts by militias to control and exploit the increasing revenues from these minerals.

 

 

The situation is worse for tantalum than for tungsten, for several reasons. First, tantalum demand has been much harder hit than tungsten, because its main end markets are in consumer electronics products such as high performance computer chips and portable high performance devices. Second, three of the world’s more significant tantalum mines, including the largest in the world (Wodgina in Western Australia), have stopped production in the past year, creating a severe imbalance between current supply and normal (pre-crisis) levels of demand. And third, the major tantalum processors all possess excess inventories or raw materials, which they are consuming to generate cash but which means the ore market is even more depressed than end-use consumption would suggest.

 

To put this into context, the loss of capacity from the shutdowns at the Wodgina, Marropino and Tanco mines is as much as 750 tons per year of tantalum oxide (the form in which tantalum is found in nature). This is around 50% of the 2008 supply from discrete mine sources of tantalum. While none of these three mines is irrevocably closed, the task of starting up and reaching normal operating performance is not a simple one, and can be expected to take in the range of a year. Therefore, the ability of the formal tantalum mining sector to respond rapidly to changes in demand is limited.

 

Moreover, miners are unlikely to commit to opening shuttered facilities without multi-year agreements in place. Negotiating these agreements will likely further delay start-up efforts at key mines.

 

 

The keys to understanding the outlook for the tantalum industry are the demand outlook, as demand recovers from today’s dramatically depressed levels, and processor inventories. Inventories are a closely guarded secret in the industry and have in recent years been high. Weak demand has further cushioned processor inventories even in the face of much-reduced purchases of ore.

 

At some point, of course, inventories will reach levels that begin to stress processor operations. Once this point is reached, the affected processor must act both to increase ore supply, and perhaps to ration demand. The upshot will be pressure on ore prices and a greater emphasis in the DRC on tantalum mining.

 

While the outlook is of course heavily dependent on demand recovery, 2011 is likely to be the year in which ore prices begin to respond to declining processor inventories and recovering end-market tantalum demand.

 

Numerous new tantalum mines have been promoted in recent years, some more heavily than others.  None of these new mines can be expected to commence operations in the next two years. The supply side response must therefore come from existing sources, if processor inventories reach problem levels in 2011. Given the lengthy re-start requirements for mothballed mines, increased exploitation of DRC tantalum is probable.

 

 

The Eastern DRC is the main swing production location for tantalum. Although mining techniques are very simple, typically involving little more than picks and shovels, the region has rich resources of tantalum and has shown an ability to gear up rapidly as prices rise, notably in 2000-2001 when annualised production rates approached 500 tons per year of tantalum oxide, as compared to a normal level of below 200 tons.

 

Unfortunately, many of the same militias involved in exploiting tin today also possess the experience of exploiting tantalum in the 2000-01 period, an episode that engendered much press attention especially in the EU. Theft and “taxing” of mineral production by militias are both likely, as is forced mining (compelling communities at gunpoint to mine minerals for militia profit). The human rights abuses that will flow from such activities are as appalling as they are obvious.

 

Furthermore, many high quality tantalum deposits lie in the national parks that span the borders of the DRC and are home to the world's remaining few hundred mountain gorillas. Much of the public outrage in 2000 derived from the killing of gorillas as miners sought access to deposits in the parks. The same can be expected if indeed the tantalum price rises substantially in 2011.

 

 

The Kimberley process has been hailed as a successful step to reducing conflict diamond trading. Similar efforts are under way for tantalum, based on typing ores chemically using their trace element composition. Unfortunately, these efforts are unlikely to succeed and should not be relied upon until they are robustly proven, a process that may take years.

 

The reason is that tantalum ores are frequently partially processed at or near the production site. Processing the ore changes its chemical characteristics by altering the mix of trace elements potentially useful in tracing the ore to its site. Typing ore is therefore intrinsically hard in the most optimistic circumstances.

 

Furthermore, unscrupulous producers and traders can blend ores from multiple sites, rendering them anonymous. Material can be smuggled across borders, and certificates of origin can be forged or bought. All in all, a prudent consumer of tantalum should be wary of purchasing any material suspected of being mined in the Great Lakes region of Africa, as there is no way at present to be certain the ore is not a conflict mineral.

 

 

The global market for tantalum ore in 2009 will be worth less than about $200 million. As a metal, it is nevertheless critical in many large markets. Tantalum is an essential component in most microprocessor and high performance logic chips (the brains of personal computers, smart cellphones, and gaming devices) and also in turbine blades for jet engines and power plants.

 

Companies likely to come under consumer scrutiny therefore include the leading chip makers (Intel, AMD, Texas Instruments, IBM), major gaming device marketers (Sony, Microsoft, Nintendo), cellphone manufacturers (Nokia, Sony Ericsson, Motorola, Samsung etc) and large jet engine and turbine makers such as GE, Rolls Royce and Pratt and Whitney.

 

In the 2000-01 period, the greatest consumer attention was paid in the EU to cellphone makers. However, the Brownback-Durbin US Senate bill of 2008, reintroduced in April of 2009 as S-891 and co-sponsored by Senator Feingold, is evidence of hightened awareness in the US of the importance of conflict minerals to the instability in the DRC, and companies should expect this or similar legislation to gain further support if the situation in the DRC worsens. US legislation in consumer electronics markets is de facto global legislation, given the relative importance of the US market.

 

 

There are a number of concrete steps consumers of tantalum can take:

 

1. Supply chain auditing: OEMs should start now to map their tantalum supply chain at least back to their ore processors. Compliance with good procurement practice is most effectively enforced at the processor level in this industry.

 

2. Engage with the industry: OEMs, especially large consumers of tantalum and high-profile corporations, need to start now to engage the tantalum industry, both to understand quantitatively their options and to work with their suppliers to head off the bad outcomes of business as usual.

 

3. Processor disclosure: Processors of tantalum need to disclose not where they avoid purchasing from, but instead where they do purchase from, at least at the level of a list of countries of origin, and make this list subject to independent third party audit. At present amongst the major processors, only Cabot provides this level of disclosure.

 

4. Corollary compliance: tantalum ores, like many mineral ores, are somewhat radioactive, and shipment of radioactive ores is more difficult than is the case for non-radioactive ores. Processors and OEMs should require that their suppliers provide assays including radioactivity measurements for all their ore supplies, and processors should be able to withstand audit of this requirement. The principle here is that a supplier willing to ignore shipping rules is more likely to be willing to trade in suspect materials.

 

5. Certficates of origin: Processors and OEMs should require certificates of origin for all their ore supplies, since although these are imperfect they do create the scope to audit supplies and to cross reference against production data.

 

Firms should not take the path chosen by AMC and continue to source from the DRC, until such time as the violence has been brought to an end. There are legitimate miners in the conflict zones of the DRC, and there are many poor communities who make a living from mining. Stopping purchases in the DRC will inevitably hurt these communities. However, this legitimate production cannot realistically be separated from the conflict-driven exploitation of natural resources (and to some degree provides an umbrella for such activities). As AMC has learned to its reputational cost, no firm consuming DRC tantalum will be given the benefit of the doubt, least of all high profile, multi-national consumer brand name firms, in the event tantalum again becomes a significant contributor to militia group incomes in the DRC.

 

This author consults with leading institutions through GLG