Environmental and social governance (ESG) has long been a key issue along global metals and mining supply chains. From carbon emissions and water use in metal processing to conflict minerals, human rights abuses and child labour in mining areas, the extractive industries and their end consumers – as well as the financiers who support the underlying trade – need to track myriad threats in order to remain compliant with increasingly stringent regulations. New blockchain-based initiatives look set to facilitate this, but does the technology have all the answers? Eleanor Wragg reports.
Modern mining firms are sophisticated, tech-driven organisations. In the office, artificial intelligence crunches through reams of geological data and drone images to predict where to find better resources. On site, GPS, radar and laser sensors guide enormous self-driving dump trucks as they rumble across hostile, bumpy terrain. But, with a few exceptions, once the mineral leaves the mine site, that’s where the sophistication ends.
Selling and delivering a cargo of minerals means couriering or emailing paper documents that are subject to interception, fraud and cyber threats. Complying with a rising number of industry and regulatory standards means yet more laborious manual and paper-based due diligence processes – a challenging task given many mines are located in countries that remain stubbornly in the red on Transparency International’s annual Corruption Perception Index.
And all this, of course, is against a backdrop of volatile commodity prices and industry market valuations, which are forcing mine operators to cut costs, limit capital expenditures, and boost productivity.
“Everybody has found workarounds; we are doing letters of indemnity, cutting bills of lading in the port of destination and taking printouts or pieces of paper, scanning it, attaching it to an email and then it is suddenly digital,” Arnoud Star Busmann tells GTR. Formerly innovation lead for commodities at ING, he is now CEO of MineHub, a company involved in the digital transformation of mining and metals supply chains. “These workarounds have made the process bearable but they are still quite expensive and introduce new risks and liabilities.”
Digitisation to the rescue?
As has become customary for what seems like almost every problem nowadays, blockchain is being touted as the answer. Its ability to provide secure and permissioned sharing of information of the end-to-end supply chain in real-time holds the promise of both massive cost savings and the greater ability to both comply with – and unequivocally prove that compliance with – standards.
“We need to work on providing solutions to parties that will make their lives much easier,” says Star Busmann. “To be able to get there, everybody needs to work on the same standards, they should really be sharing information, and you need to have similar ways of working and nomenclatures to make that possible. That requires effectively a digital industry platform with shared information, shared workflows and everybody on it.”
However, the metals and mining space has been something of a laggard when it comes to climbing aboard the digitisation train, in part due to privacy, confidentiality and commercial sensitivities. “Miners are conservative as an industry because of the nature of the work, the risk and the regulatory scrutiny that is there. But we do find that some miners are definitely keen on exploring what digitisation and digital transformation is going to mean,” says Star Busmann.
But these aren’t the only barriers to technology adoption in the space. “A lot of people have spent a lot of time in this industry and have seen lots of attempts coming out to change and digitalise, so there is that healthy dose of cynicism,” he adds.
New solutions abound
Nonetheless, reticence in some corners around injecting technology into the supply chain appears to be turning into something close to enthusiasm, with a raft of new initiatives over the past year beginning to gain acceptance as a means to chip away at some of the many issues plaguing the industry.
MineHub has developed one such solution. Built on the IBM blockchain platform using the open-source Hyperledger Fabric standards, it involves miners capturing mineral production and digital contracts with buyers, to help streamline post-trade operations, financing and logistics. The company says its platform can be used by a wide variety of company types and sizes including SME and large corporate miners, trading houses, financial institutions, alternative financiers, streamers, logistics companies and assayers. Currently involved in the platform are Goldcorp, Kutcho Copper, Capstone Mining, Wheaton Precious Metals and Ocean Partners, as well as Dutch bank ING.
“We construct a chain of custody around minerals from the mine to the market through recording transactions between buyers and sellers,” explains Star Busmann. By providing a single platform where participants can share information electronically, MineHub aims to speed up trade finance processes by eliminating data entry errors and delays. While the financing aspect is the primary focus of the initiative, the data available can also be leveraged for traceability and compliance. “Provenance will be a logical part of that overall dataset. I think it’s also an example of how, if you start doing things digitally, then there is a lot that you can suddenly achieve with the same information, and verifying the provenance of minerals is just one of them,” adds Star Busmann.
Addressing the issue of mineral provenance has come into sharper focus for the industry of late. In October, the London Metal Exchange unveiled a new policy on responsible sourcing, setting out mandatory due diligence requirements to prevent conflict minerals from being sold on the exchange. Meanwhile, from 2021, EU-based companies will have to abide by specific supply chain due diligence requirements if they are importing tin, tantalum, tungsten or gold – the so-called 3TG minerals – that come from conflict-affected and high-risk areas.
A new initiative, launched at the beginning of 2019 by Ford, Huayou Cobalt, IBM, LG Chem and supply chain audit and advisory group RCS Global, and later joined by Volkswagen Group, Volvo, Fiat Chrysler (FCA) and Glencore, brings this due diligence onto the blockchain. The Responsible Sourcing Blockchain Network (RSBN) aims to trace and validate a range of minerals used in consumer products. Participants in the network are validated against responsible sourcing standards developed by the Organisation for Economic Cooperation and Development (OECD). A recent pilot saw this put into practice, when an immutable audit trail was created to track the five-month journey of a 1.5 tonne batch of cobalt, from Huayou’s mine in the Democratic Republic of Congo to a refinement facility in China, then to LG Chem’s cathode plant in Korea, before arriving in the US at a vehicle manufacturing plant as a battery for an electric car.
“Our commitment to the responsible procurement of raw materials is vital to the integrity and sustainability of our supply chain, especially as our electrification strategy ramps up,” says Carl Smiley, chief purchasing and supply chain officer at FCA. “Embarking on this journey will propel our ability to have visibility into artisanal and small-scale mines, allowing us to better manage the social and environmental impacts of our business.”
Not everyone, though, is convinced. Yigal Chazan, head of content at Alaco, a London-based business intelligence consultancy, cautions that while distributed ledger technology is “a potentially useful addition to the due diligence toolkit” it is, however, vulnerable to misuse by bad actors in the first mile stage of the supply chain. “Consignments documented as originating from a validated source may have in fact been extracted in an environment where human rights abuses are occurring or contaminated with minerals of dubious provenance,” he says. He points to a 2016 report by Washington-based NGO, The Enough Project, which revealed “a common practice of moving minerals from non-validated mines to validated ‘green’ mines for tagging, and a black market for tags, which are smuggled and attached to noncertified minerals”.
“These first mile problems highlight the vulnerabilities of certification and traceability schemes which distributed ledger technology can do little to mitigate,” says Chazan.
However, the companies behind the RSBN initiative say that while their initial focus is on large-scale miners, an important objective for them is to help increase transparency around whole mining regions, with talks being held on the use of incentives or financial benefits for local communities impacted by mining. In addition, the network says that it wants to help artisanal and small-scale mining operators to partner with due diligence data providers and ultimately join the blockchain-based platform, giving them a legal, compliant way to sell their raw materials on the global market.
With greater comfort comes greater investment
While transparent minerals supply chains could give more comfort to trade financiers, who, because of high due diligence requirements and scrutiny, are increasingly risk-averse when it comes to financing minerals from countries such as the Democratic Republic of Congo, investors in metal as an asset also stand to benefit, as Michael Albanese, CEO at Tradewind Markets, explains. “The mining community is looking to differentiate its production and ESG funds are not only talking the talk but they are starting to walk the walk when it comes to applying ESG principles to alternative assets like precious metals.”
His company launched its initial product about a year ago. A digital platform built on R3’s Corda, it allows gold and silver to be traded, financed and settled, with ownership records held on the blockchain. “If you own that metal, it is clear that you have got title to that metal, it is clear that it is located in a sovereign storage location at the Royal Canadian Mint, and it is clear that you have got title to it, which is not something that everyone can say out there,” he says.
Tradewind Markets has since expanded its offering with Origins, a distributed ledger-based solution that, again, tracks the supply chain for precious metals from the moment they are mined from the earth until they are delivered to the final customer. “For years, the mining community, even if they had been producing the gold and silver responsibly, have never really been able to brand themselves as producing responsibly, because they typically sell to a big bullion bank and then that metal loses its identity, because that bullion bank then resells it,” adds Albanese. “We wanted to help these responsible miners tag their metal with information-rich detail that will help them appeal to downstream buyers like corporations that are purchasing metal for industrial purposes, or asset managers that are willing to invest in the metal.”
A crowded space
Although the recent influx of blockchain-based solutions into the industry augurs well for a future state of end-to-end digitised metals and mining supply chains, the familiar problem of digital siloes risks raising its head. “The challenge today is that there are multiple platforms across multiple markets offering multiple products that cater to different types of users,” says MineHub’s Star Busmann. “Naturally there is also a lot of overlap as a consequence.” However, he believes that, given the difficulties in promoting digital transformation across such a tightly-regulated industry, the more parties that are experimenting with value propositions and finding out what works in terms of governance and business model, the better.
“If you look at how other industries develop over time, it is not a surprise at all that you are seeing different flavours beginning to emerge. We are still very early in the cycle. If you were to get a group of people in the room and they started to talk theory, would it be nice to have a single solution? My best answer is maybe, but it depends,” adds Tradewind Markets’ Albanese. “Different segments of the market are looking for different things.”
For now, proponents of digitisation in the extractive industries supply chain are more focused on just getting their initiatives out there, preferring to move quickly rather than risk stifling innovation by imposing consolidation too soon. And, while blockchain may very well not be the remedy for all of the industry’s woes, hopes are high for what it can do to alleviate some of the very real pain points faced by miners, manufacturers and banks in financing, tracking, and selling everything from the cobalt in electric vehicle batteries to the gold traded on international markets.