Uncovering Slavery in Steel

How far up a supply chain should a company be held accountable?

In Carajas in Brazil’s eastern Amazon region, work is scarce and poverty and lawlessness are widespread. Opportunistic hacienda owners lure the desperate and unemployed to distant charcoal camps with promises of work, wages and shelter. Once at the camp, the owners levy illegal charges on the workers for transportation, equipment, lodging and food. Mario Osava, reporting for Inter Press Service last July described the debt as “pretext to keep laborers on the camp under threat and often under armed guard.” Deep in debt, workers succumb to involuntary servitude, a form of modern day slavery.

Charcoal is the cheapest fuel around to feed pig iron plants. Pig iron is gold to steel manufactures, as it gives mills using scrap higher iron content and durability. Over 1,400 charcoal camps dot the Amazon. Laborers collect hardwood and pile it into kilns. They shovel cured charcoal, through smoke and heat, and load it for travel to pig iron plants. The Carajas region alone exports six million tons of pig iron every year, sending nearly all to the thirsty U.S. iron and steel industry.

Over the past decade, government inspectors have worked to eradicate slave labor with moderate success. Local NGOs complain resources are scarce, inspections are sporadic, and fines and orders to pay back wages are minimally effective penalties. Last year, Bloomberg News investigated reports of slave labor and with the help of government inspectors mapped the life cycle of slave made coal (The Secret World of Modern Slavery December 2006). Bloomberg found unpaid laborers at a work camp making charcoal for Cosipar, a major pig iron exporter. Cosipar exports to Nucor, the second largest U.S. steel company, and to National Material Trading (‘NMTC’) and Intermet, two U.S. brokers who contract with Ford, GM, Toyota, Nissan, and Whirlpool. “Brazilian pig iron is part of almost any product in the U.S. that uses steel,” says a NMTC spokesperson.

As Nucor shareholders, we and investor partners contacted the company to learn how it would prevent future incidents of slave and forced labor in their supply chain. The discovery of slave labor was not new to Nucor. The issue came up a few years ago and CEO Daniel DiMicco told Bloomberg “we were hopeful the government would have remedied this situation.” Nucor told me this summer they were talking with Brazilian officials again, using ‘certified’ suppliers, and asking the Brazil government to keep an accurate list of tainted and untainted charcoal camps. When we and investor partners pressed Nucor on specifics of their certification process and policies the company surprised us by declining to talk further.

If a company has the means to prevent egregious violations in its supply chain, we believe that it has the obligation to do so. Companies should build policies, investigate their supply chains, and use their influence to effect government reforms. Those that source from low cost countries often find themselves operating in environments with weakly enforced local laws. If policies are not adequately set and enforced in their supply chains, companies are ultimately exposed to reputational, financial, and legal risks that can erode shareholder value. Supply chain policies should be transparent and available to investors.

Trillium Asset Management Corporation is co-filing a shareholder resolution with a coalition of investors at Nucor led by Domini Social Investments. We are asking the company to review its human rights policy as it relates to supply chain standards. We are requesting a report on the current system and assurances that the company and its suppliers are implementing human rights policies, monitoring them effectively, and engaging local authorities. With the quest for human dignity at stake, Nucor must set and meet higher standards.

Nucor – Report on Modern Slavery

WHEREAS

• Bloomberg Markets Magazine reported in a cover story that “Nucor Corp., the second-largest U.S. steel company, buys pig iron made with charcoal produced by slaves.” The article reported that these suppliers were identified by Brazilian labor officials as using slaves and also discussed the use of illegal logging in charcoal camps. (The Secret World of Modern Slavery, by Michael Smith and David Voreacos, Bloomberg Markets, December 2006)

• The US State Department reports: Brazil “is a source and destination country for men, women, and children trafficked for the purposes of … forced labor” and the government’s efforts to address this “widespread” issue were “insufficient.” (U.S. State Department Trafficking in Persons Report (June 2005))

• The State Department reports: “Internal trafficking of rural workers into forced labor schemes was a serious problem” and “[t]his typically occurred when employers recruited laborers from poor, rural towns and transported them to remote areas where escape was difficult. Workers then were obliged to toil in brutal conditions until they were able to repay inflated debts.” (US State Department Country Reports on Human Rights Practices (Released March 6, 2007))

• Nucor’s General Counsel stated: “Any amount [of pig iron] that is sold with the use of slave labor is too much.” (Secret World of Modern Slavery)

• Slavery is an international crime, actionable in the United States under the Alien Tort Claims Act (ATCA). The ATCA has increasingly been used against corporate defendants, including Drummond, Unocal, Coca-Cola and Talisman.

• Amazon deforestation is a significant problem, with implications for indigenous peoples, biodiversity and climate change. Nucor’s pig iron purchases may be exacerbating this problem.

• In our view, Nucor faces significant reputational and legal risk from its Brazilian supply chain, but has published no information about its efforts to mitigate these risks. Nucor refuses to engage in dialogue with proponents about these issues.

RESOLVED

Shareholders request the Board of Directors to review the company’s policies and practices related to its global operations and supply chain to assess areas where the company needs to adopt and implement additional policies to ensure the protection of fundamental human rights and to report its findings to shareholders, omitting proprietary information and at reasonable expense, by October 2008.

SUPPORTING STATEMENT

We recommend the review include:

1. A risk assessment to determine the potential for human rights abuses at the company’s operations or at the operations of the company’s direct and indirect suppliers, in each country where the company operates or purchases raw materials, with a particular focus on the use of child labor, or forced or trafficked labor, whether in the form of prison labor, indentured labor, bonded labor or labor persuaded by false incentives.
2. A report on the current system in place to ensure that the company and its suppliers are implementing human rights policies in their operations, including monitoring, training and addressing issues of non-compliance.
3. The company’s strategy of engagement with internal and external stakeholders relating to human rights issues.