EUDR a 'gargantuan task' for a complex supply chain

Big changes are coming to the rubber supply chain.

Because by year-end, natural rubber, along with six other commodities and their derived products, will be prohibited from entering the European Union market if they fail to meet certain requirements, according to a new regulation passed by the European Commission.

The EU Regulation on Deforestation-Free Products, or EUDR, entered into force in June 2023. It will go into effect for large businesses on Dec. 30, 2024, and for small and medium enterprises (SMEs) on June 30, 2025.

EUDR, according to the EC, is intended to reduce the EU's impact on global deforestation and forest degradation as well as reduce greenhouse gas emissions and biodiversity loss. It's part of the EU's broader plan of actions outlined in its European Green Deal and Biodiversity Strategy for 2030.

Included in the scope of this regulation, in addition to rubber, is cattle, wood, cocoa, soy, palm oil and coffee. Derived products would include things like furniture, leather, beef, tires and chocolate, among many others.

"As a major economy and consumer of these commodities linked to deforestation and forest degradation, the EU is partly responsible for this problem and it wants to lead the way to solving it," the EC states.

"Under the regulation, any operator or trader who places these commodities on the EU market, or exports from it, must be able to prove that the products do not originate from recently deforested land or have contributed to forest degradation."

Specifically, commodities must come from land that wasn't deforested after Dec. 31, 2020.

So, what does this mean for the rubber industry?

To understand EUDR's impact on rubber, we must first understand the complexity of the natural rubber supply chain.

The NR supply chain is one of the few industries that has most production coming from independent smallholders, Stefano Savi, director of the Global Platform for Sustainable Natural Rubber, told Rubber News.

"You have 6 (million) to 7 million farms that are independently owned, mostly 1- to 2-hectare farms," he said, "that sell to a plethora of sub-dealers and dealers into about 500 factories worldwide that then sell to (manufacturers), of which 70 percent goes into tires and 30 percent into other streams."

About 85 percent of the world's natural rubber is produced by smallholders, according to GPSNR.

"The supply chain is super complex. And when it comes to EUDR, what you're looking at is really a supply chain mapping and traceability exercise," Savi said.

Before EUDR, he said, the rubber industry was starting to make strides toward a more traceable and transparent supply chain, but the preparedness "was not really there."

"It's a gargantuan task," he said. "And EUDR has really accelerated very steeply the amount of resources and investments and time that the companies are now having to put into ensuring their suppliers are traceable and, of course, also compliant."

And when it comes to compliance with EUDR, the regulation is asking that commodities are produced in compliance with local laws and regulations.

"Rubber is produced in many countries that are developing countries, where enforcement of local regulation is not always at its best," Savi said. "It's progressing, it's developing, but there are some areas where there's still many gaps."

Whitney Luckett, president of supply chain solutions firm Simko North America L.L.C., expressed a similar concern.

"One of the unique things about EUDR, and the way that the European Union has structured it, is you aren't going to have this checklist in front of you," Luckett told Rubber News. "There is no industry-wide certification for EUDR. … Both consumers and producers, everybody's kind of setting up their own framework as they understand it."

Another "tricky part" to EUDR, Luckett said, is the person responsible for ensuring a particular cargo is compliant. And that is the importer of record.

"For instance, that's me," she said. Not the company whose products Simko sells.

This could also be freight forwarders, she added, noting that some large companies use these types of services.

"A freight forwarder who knows nothing about natural rubber, are they going to be the person that is on the hook for that?" she asked in the event an imported good is non-compliant.

Another major challenge, particularly for smallholders, Luckett said, is providing proof of provenance. Even smallholders with only 1-2 hectares must provide a deed stamped by the local authority, which can be especially difficult for farms on tribal lands owned by native residents.

This is required for companies' due diligence statements, which are compilations of data on the commodity or product they intend to place on the EU market. This includes quantity, supplier, country of production and evidence of legal harvest.

And a key requirement in this, according to the EC, is obtaining the geographic coordinates of the plots of land where a relevant commodity was produced.

And when it comes to mapping this, Luckett said, this can become a huge expense for companies.

Meanwhile, independent smallholders in certain geographies simply don't have the tools or resources to invest in being mapped.

"Most of these smallholder farmers are not necessarily digitally equipped with the knowledge and tools to comply with traceability requirements and due diligence required by EUDR and the likes," the Association of Natural Rubber Producing Countries told Rubber News in an emailed statement.

Smallholding is a fragmented industry, ANRPC added, noting that some farms are even operated in remote areas, making them hard to reach with traceability initiatives.

"We understand that most of the bigger players are getting prepared as of now, and some major NR producing countries like Thailand, Malaysia, and Indonesia (TMI) are already in conversation with EC in relation to getting support from EU to help them comply with EUDR," ANRPC said.

Other member states, however, are still lacking access to this support.

"And we are not 100-percent sure if the smallholders from TMI can get the necessary access to support as larger players did given that the rubber sector is a very fragmented sector and smallholder farmers from remote regions are even harder to reach," the association said.

Several associations have expressed concerns over the timeline of EUDR's implementation and the functionality of its information system, through which companies must submit their due diligence declarations.

Both the German Rubber Industry Association (WDK) and European Tyre and Rubber Manufacturers Association have specifically expressed grievances about the EC's rejection of a second test phase for the EU-wide information system.

"According to the current schedule, registrations by companies will be possible from November and the due diligence declarations will only be able to be submitted in December, with its many public holidays — immediately before the deadline of (Dec.) 30, 2024," WDK President Michael Klein said in a July 10 press release.

"If something goes wrong here, supply chains for important products are at risk of breaking down," the WDK said.

ETRMA, along with several other associations, issued a joint letter in May to the EC calling for a second round of testing for the information system, making API specifications ready for businesses to prepare, a lift on the 25MB limitation for uploading files as part of the due diligence statement, the acceptance of other geographical data formats than just GeoJSON files and opening up the information system for all users as soon as possible.

As of late-August, ETRMA told Rubber News that an API has been implemented and the industry has responded to the EC's proposal to test API conformity and GeoJSON files.

But there's more to be done, ETRMA said.

"These developments do not compensate for the need for a complete second test of the system or its early opening to full use in preparation for implementation," the association said. "Currently, there are concerns about the size of the files we can upload to the system, which apparently can only handle files smaller than 25 MB."

Due to the complexity of NR plots of land, multiple geolocation coordinates are often required to determine the land's perimeter, "generating hundreds or thousands of geolocation coordinates for a single plot and, as a result, heavy files," ETRMA said.

ETRMA also remains concerned that the information system will be unable to handle the high number of transactions that will have to be recorded and reported.

It also has been urging the EC to publish a new set of FAQs and guidelines, which the industry has been waiting for since March and June, respectively.

"Until these answers are received, stakeholders in the sector will continue to face uncertainty, particularly regarding the issues we have already raised and for which we have proposed several pragmatic solutions," the association said.

WDK's Klein warned that delays in EUDR's proper implementation could "pose an acute threat to the natural rubber value chain" and called the regulation a "prime negative example" of EU regulation that lacks impact assessment and industry expertise.

GPSNR's Savi also expressed that the NR industry has had much less time to prepare for EUDR because it was added later in the game.

The EU began talks for establishing a deforestation regulation as early as 2019 as part of its 2019 Commission Communication on Stepping up EU Action to Protect and Restore the World's Forests. In 2020, the commission began soliciting feedback from its citizens on how it should tackle deforestation, and by October 2021, the EC had its first draft of the then-proposed anti-deforestation legislation.

This first draft included the six aforementioned commodities and their derived products, but natural rubber wouldn't be added until December 2022.

"The time for preparedness for the industry has been very, very tight," Savi said.

Vice President Maros Sefcovic said in an Aug. 1 statement on behalf of the EC, that the Commission is focusing its efforts on preparing the information system for "smooth implementation."

"An application programming interface will be available before the EUDR becomes applicable to ensure smooth and automated data exchange and reduce manual data input for stakeholders concerned," he said, noting particular emphasis on cybersecurity and data protection. "The Commission is mindful of some challenges for certain partner countries and will take the necessary time to engage in dialogue with those identified as potentially high risk."

While EUDR comes with many risks to the rubber industry, the regulation is not without opportunities.

"I don't want to be cynical," Savi said. "I do think there's a lot of business opportunity with the EUDR."

EUDR can bring business opportunities to Western-based consultancies, he said. But more importantly, the regulation could result in the creation of jobs at the local level for NR suppliers in areas such as mapping, compliance audits and verifications.

And so long as the regulation does not exclude vulnerable stakeholders, it ultimately can improve the sustainability of the NR industry.

"If everybody collaborates with the intent of fulfilling the EUDR requirements in an inclusive manner," Savi said, "it can be a great opportunity to improve how things are done."

Traceability, he said, gives consumers and manufacturers the chance to better understand the source of critical commodities, "understand who you're sourcing from, and understand how you can help and have relationships with those suppliers in order to help improve those practices on the ground and improve the environment around it."

ANRPC believes EUDR may bring premium pricing to NR, which it says has dealt with persistently low prices for decades.

With improved pricing, the association said, this could incentivize smallholders to continue in the NR industry and better support their livelihoods, which in turn would "advance the rubber sector sustainably."