[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 111-86]
PROPOSED RECONFIGURATION OF THE NATIONAL DEFENSE STOCKPILE
__________
HEARING
BEFORE THE
READINESS SUBCOMMITTEE
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 23, 2009
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READINESS SUBCOMMITTEE
SOLOMON P. ORTIZ, Texas, Chairman
GENE TAYLOR, Mississippi J. RANDY FORBES, Virginia
NEIL ABERCROMBIE, Hawaii ROB BISHOP, Utah
SILVESTRE REYES, Texas MIKE ROGERS, Alabama
JIM MARSHALL, Georgia TRENT FRANKS, Arizona
MADELEINE Z. BORDALLO, Guam BILL SHUSTER, Pennsylvania
HANK JOHNSON, Georgia K. MICHAEL CONAWAY, Texas
CAROL SHEA-PORTER, New Hampshire DOUG LAMBORN, Colorado
JOE COURTNEY, Connecticut ROB WITTMAN, Virginia
DAVID LOEBSACK, Iowa MARY FALLIN, Oklahoma
GABRIELLE GIFFORDS, Arizona JOHN C. FLEMING, Louisiana
GLENN NYE, Virginia FRANK A. LoBIONDO, New Jersey
LARRY KISSELL, North Carolina MICHAEL TURNER, Ohio
MARTIN HEINRICH, New Mexico
FRANK M. KRATOVIL, Jr., Maryland
BOBBY BRIGHT, Alabama
DAN BOREN, Oklahoma
Vickie Plunkett, Professional Staff Member
Jack Schuler, Professional Staff Member
Lynn Williams, Professional Staff Member
Megan Putnam, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2009
Page
Hearing:
Thursday, July 23, 2009, Proposed Reconfiguration of the National
Defense Stockpile.............................................. 1
Appendix:
Thursday, July 23, 2009.......................................... 29
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THURSDAY, JULY 23, 2009
PROPOSED RECONFIGURATION OF THE NATIONAL DEFENSE STOCKPILE
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Forbes, Hon. J. Randy, a Representative from Virginia, Ranking
Member, Readiness Subcommittee................................. 2
Ortiz, Hon. Solomon P., a Representative from Texas, Chairman,
Readiness Subcommittee......................................... 1
WITNESSES
Holder, Cornel A., Administrator, National Defense Stockpile
Center, Defense Logistics Agency, U.S. Department of Defense... 7
Lowden, Richard A., Senior Materials Analyst, Office of the
Deputy Under Secretary of Defense (Industrial Policy), U.S.
Department of Defense.......................................... 4
Thomason, James S., Senior Analyst and Projects Director,
Strategy, Forces, and Resources Division, Institute for Defense
Analyses....................................................... 8
APPENDIX
Prepared Statements:
Forbes, Hon. J. Randy........................................ 36
Holder, Cornel A............................................. 44
Lowden, Richard A............................................ 38
Ortiz, Hon. Solomon P........................................ 33
Thomason, James S............................................ 53
Documents Submitted for the Record:
[There were no Documents submitted.]
Witness Responses to Questions Asked During the Hearing:
Mr. Forbes................................................... 61
Mr. Taylor................................................... 61
Questions Submitted by Members Post Hearing:
Mr. Lamborn.................................................. 71
Mr. Ortiz.................................................... 65
PROPOSED RECONFIGURATION OF THE NATIONAL DEFENSE STOCKPILE
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House of Representatives,
Committee on Armed Services,
Readiness Subcommittee,
Washington, DC, Thursday, July 23, 2009.
The subcommittee met, pursuant to call, at 9:30 a.m., in
room 2118, Rayburn House Office Building, Hon. Solomon P. Ortiz
(chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. SOLOMON P. ORTIZ, A REPRESENTATIVE
FROM TEXAS, CHAIRMAN, READINESS SUBCOMMITTEE
Mr. Ortiz. The subcommittee will come to order.
Today the Readiness Subcommittee meets to receive testimony
on the proposed reconfiguration of the National Defense
Stockpile (NDS). I thank our distinguished witnesses from the
Department of Defense (DOD) and the Institute of Defense
Analyses (IDA) for appearing before the subcommittee today to
discuss management of the Nation's stockpile of critical
materials.
So thank you so much for joining us this morning.
As we will discuss today, the concept of a Federal
Government's stockpile has been in existence for nearly a
century. The size and intent of the National Defense Stockpile
has fluctuated based on both geopolitical and security
pressures.
Based on this pressure, stockpile requirements have ranged
from as low as $24 million to as high as $17 billion.
In recent years, a sharp decline in requirements resulted
in a significant disposal program begun in fiscal year 1982-
1992 and continued through the fiscal year 2006, during which
more than $6 billion worth of materials were sold.
Stockpile management and policy at various times in the
past 70 years have fallen into the domain of a number of
different Federal agencies, from the Treasury Department to the
General Services Administration and the Federal Emergency
Management Agency, known as FEMA. In 1988, Congress transferred
both stockpile policy and operations to DOD.
Although current policy oversight for the stockpile remains
with Under Secretary of Defense for Acquisitions, Technology
and Logistics (AT&L), the authority for management of the
operational aspects of the stockpile has been delegated to the
Defense Logistics Agency (DLA). All of this background is
relevant because today we find ourselves in a world where China
has emerged as a significant economic entity.
Increased requirements in developing nations have led to
sharp price hikes for many strategic and critical materials. At
the same time, both commercial and military manufacturing firms
in the United States are reporting shortages of materials
needed for defense production.
In this environment, the current stockpile statutory
management structure may not be sufficiently flexible to
respond to critical defense industrial needs. In 2006 and 2007,
Congress asked the Department of Defense to review its current
stockpiling strategy.
This review included the possibility of reconfiguring the
stockpile and proposing changes in the Stockpiling Act to allow
for stockpile requirements based on economic purposes in this
time, none where related stockpiling is prohibited under
current law, the Strategic and Critical Materials Stockpiling
Act of 1979. A preliminary report to Congress found a lack of
information detailing which materials were forecasted to be
required for future weapons systems, domestic production
capacity, and alternatives for addressing shortfalls.
The April 2009 report on the proposed reconfiguration of
the National Defense Stockpile, which we are addressing in this
hearing, is the result of the Department's work in response to
congressional inquiry. The Department's goal for a restructured
stockpile would be to create the ability to leverage the buying
power of the Department of Defense and other cooperating
Federal agencies by combining materials requirements,
negotiating long-term strategic sourcing arrangements and
enabling planners to capitalize on favorable market, world
market conditions.
To accomplish this, the Strategic and Critical Materials
Stockpiling Act would have to be modified by Congress to
enhance program flexibility. The subcommittee recognizes the
need for managing strategic and critical materials to sustain
major weapons systems. But the question is, where should the
management of a strategic material program reside?
While the Department may have the necessary internal
competency to determine material requirements, the core mission
of the Department does not include market management. Nor does
the Department function as a holder of significant national
stockpiles for other Federal departments and agencies. The
United States Government may have sufficient knowledge and
mission capabilities outside of DOD to support a strategic
material program. These are the issues that we will be
exploring today.
But before I introduce the witnesses, let me yield to my
good friend, the ranking member, Mr. Forbes, for any statement
that he would like to make.
Mr. Forbes.
[The prepared statement of Mr. Ortiz can be found in the
Appendix on page 33.]
STATEMENT OF HON. J. RANDY FORBES, A REPRESENTATIVE FROM
VIRGINIA, RANKING MEMBER, READINESS SUBCOMMITTEE
Mr. Forbes. Thank you, Mr. Chairman.
And once again, I want to thank you for your leadership and
applaud you for having the vision to bring issues before this
subcommittee that are absolutely critical to the readiness of
our military forces and our national security, even though they
may not be the most glamorous or sexiest issues of the day.
Today's hearing is one such topic.
It is one of those things that no one really talks about or
worries about until something goes wrong. It is at that point,
the point we don't have the steel to build Mine Resistant
Ambush Protected (MRAPs) vehicles, or the rhenium we need to
build a Joint Strike Fighter (JSF) engine, that the stockpile
becomes critically important. So, although a discussion on the
stockpiling of manganese, tungsten or rhenium may seem
esoteric, the underlying need is basic, and this hearing is
very important.
As you noted, the Department's April 2009 report to
Congress concluded that reconfiguration of the National Defense
Stockpile is necessary to respond fully to evolving conditions
in the world markets and to rapidly changing requirements for
both traditional and new materials.
The report lists several potential changes, and we are here
today to discuss these potential changes and get further
understanding of what the Department sees as a desired end
state for the stockpile. Since it was established by the
Strategic Materials Act of 1939, the stockpile has experienced
a roller coaster ride of reductions and buildups. Stockpile
requirements are driven by a large number of factors that range
from the health of global financial markets to potential for
localized civil war in a country that is the sole source of a
crucial material.
The complexity of setting stockpile requirements is, in
itself, extraordinary. The proposed changes would modify and
create programmatic flexibility and allow stockpile
acquisitions and disposals on the basis of current market
conditions. This alone would increase this complexity by an
order of magnitude. Furthermore, moving toward an integrated
interagency approach to strategic materials management would
likely broaden stockpile requirements and further complicate
stockpile management.
I am very concerned that we do not have personnel in the
Department of Defense or elsewhere in the Federal Government
with the expertise necessary to manage and integrate its
stockpile with latitude to enter and exit as market conditions
allow.
DOD's proposed reconfigured stockpile would, ``be founded
on an interagency collaborative approach and bolstered by use
of experts in timely market research and intelligence.''
While I applaud efforts to improve management of this asset
that is absolutely critical to national security, I do have
concerns that, in reality, this vision may not be wholly
achievable through one sweeping reform initiative.
I would like to thank our witnesses for being with us today
to share some of their expertise with all of us. As I alluded
to earlier, this is an area where we cannot afford to go wrong.
It is vital that we understand what it takes to achieve the
goal set forth, while we also strive to identify the unintended
consequences of our actions, and your testimony today is a
crucial part of that.
It is my understanding that, in order for this proposed
reconfiguration to take place, this body will have to take
legislative action. I hope our witnesses will be able to also
share their thoughts and views on potential legislative actions
required to improve stockpile management.
With that, Mr. Chairman, I once again thank all of our
witnesses. Thank you for having this hearing, and I yield back
the balance of my time.
[The prepared statement of Mr. Forbes can be found in the
Appendix on page 36.]
Mr. Ortiz. Thank you.
Our distinguished witnesses today are Mr. Rick A. Lowden,
Senior Materials Analyst for the Office of the Deputy Under
Secretary of Defense for Industrial Policy; Mr. Cornel Holder,
Administrator, National Defense Stockpile Center, Defense
Logistics Agency; and Dr. James S. Thomason, Senior Analyst and
Projects Director, Strategy, Forces and Resources Division,
Institute for Defense Analyses.
Mr. Ortiz. Mr. Lowden, whenever you are ready, you can
begin your testimony.
STATEMENT OF RICHARD A. LOWDEN, SENIOR MATERIALS ANALYST,
OFFICE OF THE DEPUTY UNDER SECRETARY OF DEFENSE (INDUSTRIAL
POLICY), U.S. DEPARTMENT OF DEFENSE
Mr. Lowden. Thank you, sir.
Good morning, Chairman Ortiz, Ranking Member Forbes, and
distinguished members of the subcommittee.
I am Rick Lowden, the senior materials analyst from the
Office of the Deputy Under Secretary of Defense for Industrial
Policy.
Prior to arriving in my current position, I served as a
materials engineer at the Oak Ridge National Laboratory. I
appreciate the opportunity to appear today to describe
Industrial Policy's role in the reconfiguration of the National
Defense Stockpile and in the development of a plan for managing
strategic materials for the Department of Defense.
Industrial Policy's mission is to make certain the
industrial base on which the Department of Defense depends is
reliable, cost-effective and sufficient. More specifically,
Industrial Policy is responsible for ensuring DOD policies,
procedures and actions both stimulate and support vigorous
competition and innovation in the defense industrial base and
that these policies help establish and sustain cost-effective
industrial and technological capabilities that assure military
readiness and superiority.
Currently, strategic and critical materials are the subject
of intense discussion within and outside the Department. Since
2003 and until the recent economic downturn, metal prices had
risen sharply. The prices of both titanium and molybdenum,
metals required for many important defense systems, increased
from around $5 per pound to over $30 a pound. The price of
rhenium, a metal needed for high-temperature alloys used in jet
engines, had at one point increased by over 1,000 percent. The
availability of certain materials, such as the rare earths used
in high-performance, high-strength magnets has been the subject
of many recent inquiries.
Because of its importance to this discussion, I would like
to take some time to talk about the definition of strategic
material. The concept of materials being of importance to
national security is not new. The scarcity of crucial materials
during World War I prompted the Assistant Secretary of War to
prepare a list of strategic materials described as the ``raw
materials essential for the prosecution of war, which cannot be
procured in sufficient quantities from domestic sources and for
which no domestic substitution has been found.''
In the legislation governing the stockpile, strategic
materials are defined as, ``materials that would be needed to
supply the military, industrial and essential civilian needs of
the United States during a national emergency and are not found
or produced in the United States in sufficient quantities to
meet such need.''
There are additional definitions of strategic material.
However, all share two common elements: criticality of
application, we need the material; and, second, vulnerability
of supply, the material may not be available.
It would appear that the definition of strategic material
is clear and the implication is obvious. However, many factors
can complicate interpretation of this terminology. Recently
certain metals were given special consideration in Section
2533b of Title 10 of the United States Code, enacted under
Section 842 of the John Warner National Defense Authorization
Act for Fiscal Year 2007.
The amendment provided a list of specialty metals that are
strategic materials critical to national security. This
association appears to have caused some confusion regarding the
definition of strategic material. The specialty metals
presented in the provision are clearly strategic materials.
However, the list of strategic materials is not limited to
these specialty metals. There are many additional metals and
non-metallic materials that could also be considered strategic.
The John Warner National Defense Authorization Act for
Fiscal Year 2007 also directed the Secretary of Defense to
establish a Strategic Materials Protection Board to analyze the
needs and risks associated with materials designated as
critical to national security and to recommend strategies to
ensure the availability of these materials. The Secretary of
Defense delegated responsibility to the Under Secretary of
Defense for Acquisition, Technology and Logistics to chair the
board, who then delegated to the Deputy Under Secretary of
Defense for Industrial Policy responsibility to act as the
board's executive secretary. The delegation of this
responsibility explains Industrial Policy's connection to the
reconfiguration of the stockpile and involvement in other
matters concerning strategic and critical materials.
The statute that established the board does not define
materials critical to national security. Therefore, in order to
distinguish between terms, the board developed definitions to
be used for its purposes.
The board determined that for a material to be designated
as strategic, that material should meet certain technical
criteria. First, the material should be essential for important
defense systems; and, secondly, it must be unique in the
function it performs. In other words, there are no viable
alternatives.
This definition is consistent with respect to the earlier
definitions that include the aspect of criticality of
application. But unlike earlier variants, it does not include a
vulnerability of supply factor. The board's definition of
strategic materials is thus less restrictive and expands the
list of materials that would be considered strategic. It must
be noted that additional criteria, such as vulnerability of
supply, would have to be considered in order to elevate a
strategic material to a higher level of concern.
To ensure consistency for the various Department activities
and complete the congressional reporting requirements related
to strategic materials in the stockpile, the Strategic
Materials Protection Board's executive secretary established
the Strategic and Critical Materials Working Group. The working
group, chaired by the Deputy Under Secretary of Defense for
Industrial Policy, conducted the requested analyses and
prepared the report that was submitted to Congress in April.
The working group was dissolved upon completion of that report.
The working group, the working group developed a new
process by which the strategic and critical materials required
for national defense can be identified, supply chain risks
analyzed, and mitigation strategies selected and applied. The
working group employed a lengthy, deliberative process to
collect material information from a wide variety of sources and
construct an initial list of strategic materials using the
board's technical definition as a guide.
The initial list included a total of 128 materials, which
was a more comprehensive list than had previously been
assembled. Vulnerability or security of supply criteria were
then applied to this list to assess risks and vulnerabilities
associated with the supply of these materials and also
determine which materials were of concern and may require
application of risk mitigation strategies.
The Strategic Materials Protection Board played an
important role in the development of this new process and will
continue to participate in the implementation of a strategic
materials management system. The board will support a new
process by requiring military services participate in the
maintenance of the list of material needs and requirements and
identification of possible risks and vulnerabilities associated
with those materials. It will continue to review and validate
material requirements with the process linked to the
Quadrennial Defense Review cycle.
Any new system for managing strategic materials must be
dynamic and proactive. As the Department's requirements change,
the list of materials essential to the strategic defense
interests of the United States will also change, and, thus, the
methods by which the supply chain risks are monitored, measured
and mitigated must also change.
In addition to traditional stockpiling, new and unique
acquisition strategies, such as buffer stocks, vendor-managed
inventories and strategic purchases, will be needed to ensure
reliable, cost-effective and sufficient supply of strategic
materials.
We must look beyond traditional stockpiling methods and
select and apply the most effective and efficient methods to
manage the materials essential to national defense. This is our
challenge, and we look forward to working with Congress and
this subcommittee on this endeavor.
I thank you for the opportunity to testify to the
subcommittee. I sincerely appreciate your time and your
interest, and I will be happy to address any questions you may
have for me.
[The prepared statement of Mr. Lowden can be found in the
Appendix on page 38.]
Mr. Ortiz. Mr. Holder.
STATEMENT OF CORNEL A. HOLDER, ADMINISTRATOR, NATIONAL DEFENSE
STOCKPILE CENTER, DEFENSE LOGISTICS AGENCY, U.S. DEPARTMENT OF
DEFENSE
Mr. Holder. Good morning, Mr. Chairman and distinguished
subcommittee members.
I am Cornel Holder, Administrator for Defense National
Stockpile Center, a field activity of the Defense Logistics
Agency.
The Defense National Stockpile Center administers the
storage and disposal of strategic and critical materials to
support national defense. The stockpile operates under the
Strategic and Critical Materials Stockpiling Act. I welcome the
opportunity to discuss the stockpile to specifically discuss
the proposed reconfiguration.
The stockpile dates back to World War I, when shortages
caused an imbalance in production schedules and program delays.
Over the years, the stockpile has been administered by
different agencies. In 1988, the responsibility for the
National Defense Stockpile was delegated to the Secretary of
Defense with the Under Secretary for Acquisition, Technology
and Logistics designated as stockpile manager. Program
operations were assigned to Defense Logistics Agency, and the
Defense National Stockpile Center was established to manage the
program.
Stockpile material requirements were based on military and
national security scenarios, which resulted in the stockpile
having periodic buildups and reduction phases. In 1992, the
requirement determination process concluded most of the
materials held in the stockpile was excess to defense,
industrial, and essential civilian needs.
Since then, the sale of the materials in the stockpile have
totaled in excess of $6.4 billion. In 1994, there were 90
commodities stored in 85 locations; today, there are 24
commodities stored in 11 locations, and the current inventory
value is about $1.4 billion.
Concerns regarding the low availability of strategic and
critical materials prompted the Department to commission the
National Academy of Science to conduct an independent analysis.
Results of the study indicated a new stockpile strategy was
needed.
Following this study, the DOD established a Strategic
Materials Working Group. The working group was chaired by the
Deputy Under Secretary for Industrial Policy and included
representatives from each of the military services, the Joint
Staff and other Department representatives. The United States
Geological Survey, the Department of Commerce, and the
Institute for Defense Analyses performed research and analysis
on behalf of the group.
The resulting report submitted to Congress in April 2009
concluded the National Defense Stockpile policy required
change. The working group assessment indicated that material
management is a complex and rapidly changing field. Increasing
global competition for raw materials had added new complexity.
The global demand for scarce raw materials and the industrial
surge in developing countries required the United States to use
a new integrated and responsive strategy for identifying and
ensuring advocate supply of strategic and critical materials
for national defense.
The proposed change being considered included an expanded
interface with other Federal agencies, greater latitude in
entering and exiting the market, and a flexibility to develop
risk-mitigation strategies. The Department has developed a
comprehensive Strategic Materials Security Management System
that would identify, on an ongoing basis, those materials
required for national security.
This system would be founded on interagency collaborative
approach and bolstered by the use of experts and timely market
research and intelligence. The system would employ an
integrated risk-assessment construct, compare demand to supply,
analyze supply chain vulnerabilities. This would allow
identification of defense mitigation strategies to ensure an
adequate and timely supply of those materials.
Challenges to the implementing of the Strategic Materials
Security Program includes ensuring the Department has
programmatic flexibility to acquire the right materials
efficiently and effectively, and to ensure that essential
strategic materials are available to respond to current future
needs and threats.
In closing, I would like to thank you for the opportunity
to discuss the Department's strategy to reconfigure the
National Defense Stockpile, and I look forward to working with
Congress as we implement this vital program.
I stand ready to answer any questions you may have.
[The prepared statement of Mr. Holder can be found in the
Appendix on page 44.]
Mr. Ortiz. Thank you.
Dr. Thomason.
STATEMENT OF JAMES S. THOMASON, SENIOR ANALYST AND PROJECTS
DIRECTOR, STRATEGY, FORCES, AND RESOURCES DIVISION, INSTITUTE
FOR DEFENSE ANALYSES
Dr. Thomason. Good morning, Chairman Ortiz and Ranking
Member Forbes, and other distinguished members.
My name is Dr. Jim Thomason of the Institute for Defense
Analyses (IDA) in Alexandria, Virginia. I am honored to testify
before you today to summarize key findings from IDA's research
on the National Defense Stockpile.
IDA did research for DOD last year on three specific things
in this area, assessing DOD's ongoing needs for a range of key
materials; building and testing an initial risk framework
forevaluating the risks DOD and the U.S. government would face
in obtaining enough of such materials in war and in less-than-
full-war conditions; and offering recommendations for
reconfiguring the stockpile based on these assessments.
I led an IDA team to do this work drawing on the best
available evidence. We have provided DOD with our independent
analysis and recommendations, and I am pleased to provide
highlights of them for you today. Portions of our research were
included by DOD as appendices B and C in the NDS
reconfiguration report that you are considering today.
Our research suggests two major points relevant to this
subcommittee's purpose today. First, the magnitude of DOD's
purchases of strategic and critical materials warrants an
ongoing program of analysis to promote purchasing efficiencies.
DOD buys numerous materials that are broadly known as strategic
and critical. Some of IDA's initial assessments of these
ongoing purchases are provided in appendix D--B of the
reconfiguration report, and that appendix shows that DOD
annually buys three-quarters of a million tons of strategic and
critical materials every year.
A second major point is that, while the current basis for
estimating NDS requirements, in the 2005 requirements report,
for example, centers on potential shortages in a full-scale
national security emergency, such a focus may be too narrow.
The future challenge space, as I call it, for assessing such
material needs, both essential defense and civilian, and
associated risks, also ought to encompass a range of less than
full-scale emergency conditions. These additional situations
could plausibly include potential material supply disruptions
due to natural disasters, political instability in key foreign
countries, and selective terrorist attacks.
IDA has made several recommendations to DOD regarding
potential scenarios and has provided initial results of risk
assessments using some of them.
Based on its analyses, IDA recommended that DOD consider
establishing a materials security program, including a
component focused on leveraging DOD's significant buying power
in various materials markets to reap potential economies of
scale and savings for taxpayers; a component that would
regularly assess risks to material supplies across possible
disruption scenarios ranging from near peace to full-scale war.
This component would also assess risk-mitigation strategies
such as stockpiling, as in the NDS, but these strategies could
also include making special contingency supply arrangements
with trusted producers; working out expedited supply
procedures, such as under a defense priorities and allocation
system; exploring material substitution possibilities; and,
when warranted, investing in domestic production capacity.
Failure to use practical risk-mitigation strategies such as
these could degrade our force's materiel readiness, which in
turn could inhibit operational performance of the U.S. military
at key times.
A final component of such a materials security program
would work closely with major DOD materials users, chiefly the
services and defense agencies, but also the combatant
commanders, to monitor DOD's regular and emergency demands for
and supply chains of both traditional materials and leading-
edge advanced materials. With a strong collaborative
partnership of this kind, the fragility of material and vital
parts supply chains for essential military and civilian needs
will be better understood than they are today, and the risks to
materiel readiness and national security should be better
mitigated as well.
This concludes my opening statement, Mr. Chairman, Mr.
Forbes, distinguished members. Thank you very much for inviting
me to summarize our research on this important proposal this
morning. I would be pleased to respond to any questions that
you may have about these assessments and recommendations.
[The prepared statement of Dr. Thomason can be found in the
Appendix on page 53.]
Mr. Ortiz. Thank you, Doctor.
It might not be a very glamorous hearing, but you guys play
a very important role. Just like when you are driving, you
don't want to run out of gasoline. You have got to have the
material that you need.
But, Dr. Thomason, based on your research into the risks
associated with the continuous supply of strategic materials,
is a proposed reconfiguration a good idea which DOD should
exercise? If you could elaborate a little bit on that.
Dr. Thomason. Mr. Chairman, IDA has done assessments and
made recommendations for a reconfigured program with three
major components, those that I outlined in my testimony just
now.
I believe that the reconfiguration proposal that DOD has
submitted incorporates all of those major elements and, in that
sense, from my standpoint, from IDA standpoint, is a very
strong proposal.
I cannot speak to the other elements because we weren't
asked to assess them, but I would say that, overall, IDA's
position is that this reconfiguration proposal is a very
worthwhile and overdue reconfiguration.
Mr. Ortiz. How would this plan overcome the risk that your
research has identified?
Dr. Thomason. The risk framework that IDA offered in the
context of the research that we did last year is an initial
step in the sense that it works to identify shortages under
both national security emergency conditions pursuant to Section
14, as well as addresses potential shortages under conditions
of less-than-full-scale emergency conditions. It is a first
step, because beyond addressing the shortages that could arise,
there is the very important question of the connection between
those shortages, those delays, for example, potential delays,
and materiel readiness shortages for the Department of Defense
and the impact on operational performance.
That is an area which I believe DOD is very, very
interested in extending and developing in the context of this
proposal. And I believe that is a well warranted extension, and
close collaboration with the components and with the combatant
commanders will serve that purpose and that connection very
well.
Mr. Ortiz. Do you know, in the past, there were different
agencies, like the Treasury Department, the General Services
Administration and FEMA involved in the past? I know that that
we are trying to see how we can do it better now. Do we only
have one budget now to look at all the stockpile and the buying
and the selling. Can you elaborate how that works?
Dr. Thomason. Mr. Chairman, I would defer to the DOD
representatives for that question.
Mr. Ortiz. Mr. Holder.
Mr. Holder. The current construct of the stockpile right
now does not meet today's global environment.
One of the things that we feel is that the stockpile base
itself is based on war scenarios and which we must respond to.
We feel that today's military must meet national defense
threats whenever they would occur. And, therefore, we feel that
is important that we basically must transform the National
Defense Stockpile to this new program, strategic materials
program, in order to basically be able to secure the materials
that it is going to need for current and also for the future.
Let me just give you an example of why we think it is
important this program is basically transformed. For instance,
military services came in and was looking for tungsten in order
to service the MRAP program. Tungsten is one of those
commodities that is used basically in shielding a material. And
one of the things is that we could not base a supply of
tungsten to them because of the current construct of the
stockpile, whereas because of the fact that material had to be
considered in excess or that material had to be a Presidential
release from the stockpile to be able to get to the military
services or it had to be legislated to be able to get to
services. So the services basically had to buy that material in
open market.
And in addition to that, one of the things that is one of
the restrictions is also the amp ceiling level, whereas the
material that--the quantities they wanted, basically we could
not supply because the ceiling level basically had a cap on it.
So regardless of the quantity that they wanted it and the
restrictions of release, the services were not able to,
basically, obtain material from the National Defense Stockpile,
and they basically had to go on the open market and basically
pay a higher cost for that material.
Mr. Ortiz. And the reason I ask is because most of us, when
we go grocery shopping, you know, we just want to be sure that
you can take advantage of the material that you might need. You
might be able to get a bargain sometimes.
So, in my statement, I mentioned that, based on the
pressures that you have, these stockpile requirements that
range from as low as $24 million to $17 billion, so we just
want to be sure, maybe those bargains don't come often, but if
they do come, that you have enough money to buy and then, of
course, you sell.
Mr. Holder. Well, we have been selling off materials from
the stockpile since 1993, and that is because, based on the
scenarios that were given and the report that was given
indicated that a majority of those materials in the stockpile
were considered in excess to the Department of Defense needs.
Because it was considered in excess to the Department of
Defense needs, we began an aggressive sales program. And from
the aggressive sales program, we basically have sold off,
again, from 90 commodities to 25 commodities. One of the things
we are now doing in the Department is that we have assessed the
materials within the Department.
We basically have looked at materials, the current
inventory within the Department, and we have basically used an
assessment of looking at, is it 100 percent import dependent?
Is there a vital substitute to those commodities? Are there
geopolitical issues that may affect the supply chain?
The Department basically suspended 13 commodities and also
funded a reconfiguration study. We identified another 39
commodities that needed to be more further studied. So we are
taking initial steps in order to address some of the issues,
but there is more work needed to be done.
Mr. Ortiz. We will probably come back with more questions,
but I don't want to take all the time. Mr. Forbes, go ahead.
Do you have any questions?
Mr. Forbes. Thank you, Mr. Chairman.
And as all of our witnesses have heard several times over,
this might not be a glamorous hearing, but if something goes
wrong down the road, somebody is going to be digging up this
hearing and saying, what did everybody say and why did we have
that problem? So we appreciate you being here and appreciate
your expertise.
But the other reason we are excited to have you here is
because this is the one chance that we get to ask you to take
off your agency coats, and we get to look at you and say, tell
us what you think with your years of experience and expertise
in this.
And so that is the framework or the premise of the two
questions that I would like to pose to you. And one of my
questions has a number of components to it. So if you don't
feel comfortable answering it today, you can just get back to
us in writing with it, or if you do, that is fine. But I think
we can all agree that the current approach to stockpiling
critical and strategic materials can be improved.
And as we have mentioned and you have heard from all of us,
we really appreciate all the work you have done to bring forth
these recommendations on what a reconfigured stockpile should
look like. However, the piece that I am missing is the path of
how we get there. You know, the devil is always in the details.
So I would ask you this, what steps need to be taken and in
what order to ensure that we get it right? Is it best to take a
measured approach, or do you recommend we leap in kind of with
both feet and make those changes with one action? And what are
the global economic impacts to this transition? How does
Congress maintain oversight both during the transition and
after the reconfiguration takes place? That is one question
with this component.
The second one is I had an expert in my office just
yesterday or the day before yesterday who had just come from
testifying before the Federal Reserve, I think for about 2.5
hours, but he was, very, very concerned about our mining
policies now across the United States and the direction he saw
them moving and the difficulty that that was going to place us
in for strategic materials down the road.
Could you elaborate as to whether or not you see that as a
problem that could pose difficulties for us in our stockpile
capabilities down the road? And any of you, any order is great.
Mr. Holder. The implementation process, again, we have
started already. The implementation meaning that we have
identified materials within the stockpile, and we have made an
assessment of those materials, and, again, the Department
basically has suspended 13 commodities for right now in order
to do the assessment on those commodities. In addition, the
study reflected that we need to do more studies on 39
materials.
Also the next step would be to look at our current
requirement determination process, which we need to align that
to the Quadrennial Defense Review (QDR). Align it to the QDR to
be able to determine what are the defense planning priorities
for the future.
Then we can basically do another requirements report to
determine what are the potential material shortfalls. Once we
know what our potential shortfalls are and we can do
assessments of those materials to determine what should be the
risk-mitigation strategies for those materials for the future.
This would, again, be a very collaborative approach with
the industry experts and also with the government experts to be
able to look at the requirements and look at the military
services requirements and be able to look at industry
requirements to get a better handle, a better assessment of
those and apply those strategies, risk-mitigation strategies,
such as office stocks, such as long-term contracts such as
better management type stocks and versus traditional
stockpiling, as we currently do right now. So that is one of
the paths we are looking at moving forward.
As far as for congressional oversight, we believe the
Congress will still have congressional oversight because of the
fact we will--we will send up the annual--annual material
operation report. In that report, it basically gives you an
idea of what the stockpile has done within a given fiscal year.
In addition to that, we will send a requirements report and
the requirements basically tells you what materials we are
looking at for potential shortfalls, and we will be looking at
designating supply and risk mitigation strategies to those
materials that have been identified. Any release from the
stockpile also will--we will basically tell Congress, we will
give Congress notification of the release of the material from
the stockpiles. So Congress will continue to have oversight
over the program.
Mr. Forbes. Do any of you see any problems with our current
mining policies and the directions they may be going as far as
it would impact stockpiles?
Mr. Lowden. I would like to defer that and get back to you
with that.
[The information referred to can be found in the Appendix
on page 65.]
Mr. Forbes. Sure. We would be happy to do that.
With that, Mr. Chairman, I yield back, and thank you,
gentlemen.
Mr. Lowden. Sure.
Dr. Thomason. May I make one comment?
Mr. Forbes. Sure, Mr. Thomason.
Dr. Thomason. The process for determining requirements that
has been designed for use by the government and reviewed by the
Government Accountability Office (GAO) is a flexible process,
one that can incorporate the best available evidence and that
can utilize scenarios of the sort that I was describing beyond
the national security emergency scenarios.
I believe that an adapted version of that process will
continue to be a very useful analytic tool. But I would like to
say that that is particularly with respect to assessing
shortages and risks and vulnerabilities.
The work that IDA did last year with regard to
reconfiguration--and this harks back actually to Chairman
Ortiz's question earlier about a single budget--what we
envision now is a potential strong role for the development of
essentially purchasing efficiencies for the Department of
Defense and beyond the Department of Defense to include the
rest of the United States Government in a way that is not
directly tied to the issue of risk, not directly tied to the
issue of shortages, but tied more directly to the possibility
of serving as a wholesale supplier to the government as a
whole.
And so, therefore, in terms of steps for reconfiguring the
stockpile, I would urge, as I have in my prepared statement,
consideration of the twofold potential purpose of a
reconfigured stockpile, one, to serve potentially as a smart
buyer for the Department of Defense as a whole; and, two, to
have a separate track, complementary track, that would look at
risk-mitigation strategies for a wider range of materials than
has traditionally been the case. So that is point, number one,
in response to your question.
And then, point number two, Mr. Chairman and Mr. Forbes,
with regard to mining policies, I would simply say that it is
very important to have as strong evidence as possible about the
capabilities both under normal circumstances and contingency
emergency circumstances of the U.S. mining base and that, in
order to do that, in order to get that information and be able
to use it in a coherent way, really calls for a strong
capability from either the U.S. Geological Survey or a
combination of the U.S. Geological Survey and the industry.
Mr. Forbes. Thank you, Dr. Thomason.
Mr. Ortiz. Before I go to Mr. Kissell, let me ask you, Mr.
Lowden and Mr. Holder, can reconfiguration as proposed in the
April report be implemented without changes in the Federal law,
or do you think you might need our help to come up with
legislation that would make it easier for you, make it better
for you?
Mr. Holder. Yes, the final report reflects a full range of
authorities that we may need. Some of those authorities we are
looking at, indicating that we may need help in acquisition,
developing acquisition, also help in the area of release
authority, such as I indicated before, of having more
flexibility in the area of release.
So those are some of the things that we are proposing or
that have been proposed in the report that we will probably be
needing that flexibility to be able to implement this program.
Mr. Lowden. I agree. Flexibility is the word, and if you
look at the current way that the stockpile operates, it is good
for long-term storage, and it is good for things that we see as
problems down the road. But as something comes up quickly, we
can't respond to the stockpile because of the legislation that
is involved.
And so that we really need to have a program or methods,
different methods by which we react to different scenarios, as
Dr. Thomason said, that something maybe, may come up like,
tomorrow, say for example two-inch-thick aluminum plate can't
be bought because they are closing the last rolling mill.
Well, if we know how much we are going to need for the next
three years, we are okay; we get that. We move on. That is one
scenario. That might be a buffer.
Or you might have something as long term as we have with
manganese, as we talked about, things like that. I think there
are different scenarios, there are different materials risks
that are going to be coming up, and we need different methods
to address those, so that may require different sources of
funding and different tracks.
So I think it is not just as simple as saying we are just
going to have this block and everything is going to be fine. I
think it is going to be, as Mr. Forbes asked, I think it is,
from my opinion, is that it is much more complicated than just
saying this is what we are going to do, and it is going to take
different steps and small steps in some cases to get used to
what we are doing to know how to do what we are doing. Baby
steps, I think you call them.
I think the DLA folks are doing some things already that
are fantastic in that respect. But it is in that idea of
reacting and having a stable source of funds for those
different activities is where we really would like to work with
you guys.
Mr. Ortiz. Well, we just wanted to be sure that we offer
you our services and especially if there is anything we can do,
don't hesitate to let us know how we can help you maybe
streamline and make it better.
Mr. Kissell.
Mr. Kissell. Thank you, Mr. Chairman.
Thank you, gentlemen, for being here today.
And I want to kind of follow the same lines as the chairman
and Mr. Forbes has followed.
There was a saying or story I remember from my past, for
want of a nail, the war was lost. And the story goes about the
rider that didn't have a nail for the horseshoe and took off
riding, and the horse went lame, and he was not able to deliver
the news to the general in time. The battle was lost; the war
was lost.
Do we have any nails in our system now, and does the system
we have now allow us to see the potential nails in time to
avert a crisis? And the new system you are talking about, is
that what we need to get to in order to be able to have a
system that allows us to avoid the nails and, therefore,
something very small that could cost us in terms of the big
picture?
Mr. Holder. The current construct, again, for the stockpile
is based on war scenarios for war mobilization. So the
materials that basically go into a stockpile is a hold model.
It is holding it for basically national emergencies in order
for materials to be released. That right now does not fit the
global environment, currently, right now, as far as to be able
to serve the military services.
What we are talking about, as far as the implementation of
a new program, is to be able to have more flexibility, to be
able to have collaboration with the services to identify what
are the services' problems when it comes to materials or
requirements that they may need for the current and also for
the future.
In the static program of the current stockpile, we did not
have that interface with the services, and what we are talking
about now is having more interface with the services to be able
to discuss their requirements, discuss their emerging needs and
being able to apply risk-mitigation strategies for the future
to assure that they will have supply availability in times of
our need.
Mr. Kissell. Thank you, sir.
I yield my time, Mr. Chairman.
Mr. Ortiz. Mr. Rogers.
Mr. Rogers. Thank you, Mr. Chairman.
Mr. Lowden, in your opening statement, you briefly
described the mission of the Office of Deputy Under Secretary
of Defense for Industrial Policy and in greater detail the
responsibilities that have been delegated to the deputy under
secretary for protecting the United States' access to strategic
materials.
These are significant responsibilities, particularly as the
worldwide demand for these materials continues to grow,
potentially driving the cost of these materials up and
availability for them down. However, in recent press accounts,
and specifically I am referring to the Defense News and Army
Times published article, these accounts indicate that the
Department plans to demote this office from deputy under
secretary to the director level.
In response, the Senate's version of the National Defense
Authorization Act would codify and elevate the position to
Assistant Secretary.
In your opinion, what would the effect of downgrading the
Office of Industrial Policy be in terms of the ability of the
office to accomplish its stated mission, particularly as
shrinking budgets, defense budgets, may lead to further
consolidation of the industrial base as the world competition
for scarce materials such as rare Earth magnets becomes more
intense?
Mr. Lowden. Mr. Rogers, let me refer to the statement of
administration policy (SAP) from July 15 in which the
administration expressed its concerns regarding this provision.
And the SAP states, The elimination of non-statutory deputy
under secretary of defense positions would be detrimental to
the continuity and operation of the Department and severely
hamper the Secretary of Defense's ability to effectively
organize, structure and manage the department. That would be
true with us also.
Mr. Rogers. Okay.
What about you, Doctor?
Dr. Thomason. I have not studied the issue, and I am not
really prepared to comment on it, except to say that I do
believe that in the reconfigured process, as we recommended in
our, through our research, that it would be very useful to have
an Office of the Secretary of Defense (OSD) review and decision
panel that could draw upon the best assets from OSD (AT&L), and
OSD policy and from program analysis and evaluation in making
key decisions on such things as scenarios and other vital
planning assumptions.
Mr. Rogers. Thank you.
That is all I have, Mr. Chairman.
Mr. Ortiz. Mr. Courtney.
Mr. Courtney. Thank you, Mr. Chairman.
I had one question I was sort of intrigued by looking at
the chart, which was submitted to the committee, showing the
fluctuation of commodity prices for different materials, which
I don't think anybody needs to be reminded of that in terms of
just the price of oil and what has happened in just the last 12
months, but, clearly, that volatility has extended to other
materials which are part of today's discussion.
And in terms of coming up with a system that can really
respond to market changes that are out there, I am struck by
whether or not this is something that really belongs completely
or at all in the Department of Defense because it is really not
sort of the mission of the Pentagon is necessarily to be sort
of out there, you know, following trading patterns.
The Department of Commerce, obviously, is an agency of
government which is much more focused and linked to dealing
with international economics. And, as a result, I think they
may--I am just sort of curious whether you think that their
resources would be more appropriate in terms of trying to help
design a system that can buy when the buying is good and sort
of see out into the horizon when the buying is bad.
As an example, I mean, the Department of State used to run
our export assistance programs for U.S. businesses looking for
markets in different parts of the world. Back in the late
1980s, Congress moved that function out of State and over to
the Department of Commerce so that now, if you go to an embassy
in different parts of the world and you are a U.S. company that
is out there looking for customers, it is the Department of
Commerce that runs the export assistance system, not the
Department of State.
And, frankly, it has been a great shift because Commerce is
just much more connected to, you know, the world of commerce.
And, again, looking at the challenge that this country has in
terms of, again, trying to get ahead of the curve in terms of
these very complex markets, you know, should we be tapping into
Commerce as the agency of government to help us design a good
system?
Mr. Holder. One of the things right now is that the
Department of Commerce does collaboration with the Department
of Defense. It serves as co-chair of part of the Market Impact
Committee with the State Department. The Market Impact
Committee basically is an interagency of material experts, and
basically they provide the stockpile manager with analysis on
supply disruptions and supply availability issues.
We will continue to collaborate with the Department of
Commerce. They have been working with the stockpile for 15
years. They have participated with us in our sales program. And
basically, we will continue that collaboration with State and
also with all the other individuals that serve on that
committee, such as the Department of Treasury, Agriculture and
Homeland Security, to be able to make sure that we have the
most intelligence that is going to be needed as we implement
this new program.
Mr. Courtney. So, I mean, does that collaboration have
structure to it?
Mr. Holder. Yes, it does.
Mr. Courtney. Or is it kind of ad hoc?
Mr. Holder. It is a statute within the Stockpiling Act that
provides this interagency collaboration in order to support the
mission of the stockpile program.
Mr. Courtney. Okay, and I know the committee is curious
about an issue about the definition of strategic materials
where, again, our 2010 Authorization Act issued a report which
talked about the definition of strategic materials which points
out that the Materials Protection Board's definition of
strategic materials is sort of, in the committee's point of
view, not as broadly--is not as broad in terms of covering what
I think the concern is of Congress in terms of materials that
need to be picked up under this type of program.
For example, Congress has determined that the reliance on
foreign sources of supply for materials such as titanium,
specialty steel and high-performance magnets poses a heightened
risk. The board's narrowing of the definition of materials
critical to national security renders the board unable to
provide perspective on the adequacy, suitability or
effectiveness of those policies. I was wondering if you would
comment about that sort of disparity.
Mr. Lowden. I will take that, Mr. Courtney.
The definition of strategic and critical by the board
created for its purposes was multifold. One is that, in my
testimony, it talked about strategic materials; are those
materials that we have to have? And that is what the board took
on, was those are the things we have to have; they are
essential.
And there is a big list of strategic materials, and as I
said, there was 128 that we looked at that could possibly be
strategic materials. It could be aluminum, an aluminum alloy.
It could be almost anything, even the most mundane materials we
see as standard materials still are strategic to us. The
Department of Defense has to have them.
So the definition of ``strategic'' is a technical one. It
is one that says it is something we have got to have and there
is a possibility or there is no substitute that is available
for it. And that can be, like I said, even a plastic screw in a
electronic component can be a strategic material if that is the
only thing that works.
Then taking it to the next level, is there--I will call it
a gray area, there is an area in which that material becomes
more important. That is the area in which there is a risk of
supply-chain disruption, and it can be almost anything that
does. It can be global disruptions. It can be China cutting us
off on that supply of that material. That raw material, as you
talked about, the nail. The little thing you don't expect, say
terbium for light bulbs, whatever it may be.
There is a bunch of risks that can occur, and those risks
can have many forms and have different severities. So you don't
want to go to critical because critical becomes a state of
crisis, and that is the definition of the word. And so you
don't want to take everything that suddenly has a small risk of
supply disruption and crank it up to crisis level.
So there is this area in between, in between strategic and
critical, that things happen, and there is a supply chain
disruption, a vulnerability that occurs. Now, the board decided
that critical meant it was--there was a significant chance of
supply chain disruption from U.S. and U.S.-friendly suppliers,
and the Department of Defense is the last user, and also not
just the last user, we are the ones who drive the market.
There are very few materials that fall into that category,
as you notice there is one, it is beryllium, we have all seen
that. As you look behind this a little bit and what it is
coming up the pike, there are other materials that probably
make it to that level in near term, four specific applications.
And I won't mention any of those right this moment, but
there are a number of different risks that occurred. So the
reason the board took that approach is, we know there are a lot
of strategic materials, and we know that many of those
materials do have risks associated with the supply chain.
And that is going to get worse with time. We have Brazil,
Russia and China, and other things coming up. So we want to
take it, and as we move along, we don't want to go into that
crisis mode unless we have to. And that is things like we are
doing with beryllium, and we are building a plant so that we
have the beryllium that we need for our applications. And we
are the last big user.
So that is the definition. So, what I said in my testimony,
I was trying to deflect it a little bit, was that we created a
big list of strategic materials, and that is something that I
find to be very interesting and very useful, because we didn't
know what we need. When we came into this process, we really
didn't know all the materials we used. And of course, we looked
at those things that were big first. You look at the
Acquisition Category I programs, you know, the ones that are
being spent a lot of money. But then you realize it is that
little thing that might get you.
It might be the germanium you need for all of our night-
vision goggles we might not be able to get. It is not the big
programs; it is those things we have to have and then all of a
sudden we can't get. So that is the list of materials we want.
We want to know everything we need. And since, by definition,
it is things we have to have, it is a strategic material. We
just don't want to elevate it to critical until we really have
to. Thank you.
Mr. Ortiz. Mr. Taylor.
Mr. Taylor. Thank you, gentlemen, for being here, and I
thank you for what you do.
What I am curious is, is I am reading what your job is and
what you are empowered to do. What I have failed to see is
that, is your organization empowered to try to get a better
deal for the Nation?
For example, you mentioned in your testimony, the price of
metals went way up during the 1980s. You didn't mention that
the price of steel and aluminum fell to about half of what it
was just two years ago over the course of the last year. And
the only reason I found out is my local scrap dealer told me.
And so as someone who has, very fortunately, significant
amount of responsibility for shipbuilding, I found it very
strange that no one in the Navy came to me and said, hey, the
price of steel is down, the price of aluminum is down, let's go
buy a bunch of it while we can and save the taxpayers some
money.
In fact, when I pointed it out to the Navy, they said,
well, it is only five percent of the ship. Well, if you can
save 2.5 percent on a $7 billion ship, that is a heck of a lot
of money in Bay St. Louis, Mississippi.
So my question to you gentlemen is, to what extent do you
get involved, and since you know what things cost and their
availability, and that sometimes things are way above cost and
sometimes there are bargains, to what extent are you empowered
to try to get a better deal for the Nation? And to notify
Congress, hey, the price of aluminum down, now is the time to
buy? The price of steel is down; now is the time to buy. Or I
am told titanium is down by a third from a couple of years ago;
now is the time to buy. Are you empowered to do that, and do
you ever do that? Guys, it is a fair question.
Mr. Holder. That is one of the things that we are looking
at in order to transform the current construct of the National
Defense Stockpile into a Strategic Materials Security Program,
to be able to have those flexibilities and to be able to help
the services when it comes to an acquisition buy of materials.
Currently, right now, the materials that we have in the
stockpile are considered to be in excess the Department of
Defense needs; so, therefore, we are selling off a majority of
materials from the stockpile.
Mr. Taylor. May I interrupt?
Mr. Holder. Yes, sir.
Mr. Taylor. To that point, let's say that material happens
to be aluminum. Are you empowered to say, guys, this is a bad
time to sell aluminum; the price is down from two years ago? It
has got to go up at some point. It would be a smart thing for
our Nation to hold off on that. And I will give you a perfect
for instance.
I was here when we sold off the naval shale reserves, and
the price of oil was $13 a barrel. Everybody, including myself,
who voted for that should have been shot. If we had just waited
a few years, we could have gotten a heck--if we would have
waited until last summer, we could have gotten over $100 a
barrel for the same oil. So, again, I made a mistake when I
voted for that. We happened to have balanced the budget that
year; that is the only good thing that came out of it. But is
anybody saying, this isn't a good time to sell? Because we all
have a civic responsibility to try to get the best deal for the
taxpayers.
Mr. Holder. Within our sales program, we have that
responsibility to determine when is the best time to be able to
sell material.
For instance, let me give you an example. We have cobalt
within the inventory. The price of cobalt fell down to about $6
a pound. We suspended the sales of cobalt because we knew that
over an extended period of time that the price of cobalt was
going to rise again, and which it did. We backed out of the
market for a year, and basically the price of cobalt began to
rise, and we began----
Mr. Taylor. So you are empowered right now, under existing
law, to make that decision?
Mr. Holder. Yes. With the materials we have considered
excess within the stockpile.
Mr. Taylor. And just as a matter of curiosity, when you see
a directive come down to get rid of something and you know it
is a bad time to sell it, what is your procedure to notify
someone that we really shouldn't be doing this? What do you do?
Are you the man that makes that decision?
Mr. Holder. I have that authority to make that decision not
to sell those materials at that moment in time.
Mr. Taylor. But everyone answers to someone.
Mr. Holder. Yes, sir.
Mr. Taylor. So who do you notify that you have made the
decision to hold on to that product until the price gets
better?
Mr. Holder. We go through the chain of command, which is
through, basically, from Industrial Policy and all the way to
the stockpile manager; which we have done this time, where we
said that we wanted to suspend the sale of 13 commodities
within the stockpile because of the fact that we felt that
those commodities may have geopolitical issues; we didn't have
viable substitutes and were 100 percent import-dependent. Until
we made sure that the services--that there was no need for
those materials for the services. Right now, those materials
are still suspended or curtailed until that analysis is done.
Mr. Taylor. And as a matter of curiosity, when you saw that
it was a bad time to buy something or sell something, and
particularly sell something, has anyone above you ever told
you, go ahead and sell it anyway?
Mr. Holder. No, sir.
Mr. Taylor. I am glad to hear that.
Thank you, Mr. Chairman.
Mr. Ortiz. Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chairman.
And I am just now arriving at this hearing, unfortunately,
and so I missed a lot that has taken place prior to my arrival.
So I will have no questions or comments today, but next time, I
would like to get my five minutes from today added on to.
Mr. Ortiz. Well, my question is this now. The material that
you buy, is there an expiration period where you stockpile it
and you say, well, it is only good for five years, six years?
And then, you know, most of the stuff we buy today, you look at
the bottom of the can or the bottle, expires by such and such a
date. Is that the same animal that you face with the stuff that
you buy?
Mr. Holder. We haven't purchased material in the stockpile
probably since the early 1990s. But one of the things that the
current Stockpiling Act does allow us to rotate materials. Such
as, for instance, years ago, when we had smoked sheet rubber
within the inventory, we were able to rotate the stock on a
yearly basis to make sure that we had the current available or
current specifications of rubber within the stockpile. So that
the Stockpiling Act does give us that authority to rotate the
stocks to assure that we have the best availability and
material.
Mr. Ortiz. Mike.
Mr. Rogers. The only question I have in follow-up with
Gene's questioning is, is it a problem as far as space? What
would be the reason why you couldn't go ahead and take
advantage of market pricing volatilities if you saw, as Gene
said, steel down 50 percent from what it had been 2 years ago?
What would inhibit you from being able to penetrate that market
and take advantage of that? Or, would storage costs outweigh
the savings you would make on it? I don't know. I am asking.
Mr. Holder. Again, with the current construct right now, we
have to go through what is considered to be a process of
Department determination to determine, what are the
requirements that the services will actually need? That is
identifying the material. And, right now, the only things we
have identified of potential materials right now with the
current construct is that materials that we have are considered
to be excess. So there is right now no determination for
material for us to actually buy at this moment in time.
One of the things that Dr. Thomason testified is that, as
we looked at our study, we looked at maybe the top 10 materials
that there is the possibility for the Department to do leverage
buys because those are the materials that we are saying that
there are three quarter of a million tons of materials that
possibly that the Department can apply leverage buys to be able
to use their buying strength to be able to attain the best
overall price for these commodities.
Mr. Rogers. So then the cost of storing those materials is
not going to be a factor that you are concerned about
outweighing the price benefit that you may get from a cheaper
buy?
Mr. Holder. Sir, that would depend on the quantity that we
are talking about buying, and also depends on where actually
the storage of these locations will be. Currently, right now,
Defense National Stockpile has three staff locations where we
store material at. Some of those locations basically could
possibly maybe handle the storage of those commodities. But
then, again, we need to be looking at, should we be storing
those commodities? Or basically, should we be looking at vendor
management with those materials actually being kept at the
facility, and they could basically be holding it as buffer
stocks, versus releasing that material to the government and
where it can be used or can be released directly to the vendor
in times of need?
Mr. Rogers. Thank you, Mr. Chairman.
Mr. Forbes. Mr. Chairman.
Mr. Ortiz. Mr. Forbes.
Mr. Forbes. Can I offer one follow-up question?
Mr. Lowden, returning to your definition of strategic
material critical to national security. By determining that DOD
has to be, in your words, the, quote, last big user of the
material for it to be critical to national security, doesn't it
create the difficult situation that a material could be
critical to every element of the industrial base upon which the
Department depends but not considered critical to the
Department itself if the material is also used significantly in
commercial items and vulnerable to disruption?
Mr. Lowden. Well, I think that the health of the commercial
market and the commercial industrial base is essential for
ours. If you look at materials, we are a relatively small user
of materials, although we talk about so many millions of tons
of materials. In steel, we are less than one percent in
defense. And if you look at aluminum, we are less than six
percent. If you look at titanium, we used to be the key in
titanium, but with the global aerospace market and the growth
in other areas, we are less than five percent of the market now
globally.
So when you look at that health of the industrial base----
Mr. Forbes. How about something like fuel that you would be
using?
Mr. Lowden. I don't know about fuel, sir.
But I can tell you about materials, is that we do look at
it from, again, from the bottom up; is that we are only a small
player. And when I call it critical to national security
through the Strategic Materials Protection Board, as I noted,
that was for its purposes, and that was Defense Department
purposes.
Mr. Forbes. What does that term the ``last big user''
really mean?
Mr. Lowden. Well, let's look at beryllium. I can use
another example. Say it is a corrosion protection material that
is hazardous to the health of the users and the people who have
it out there, and we are no longer going to use it, and there
are a couple out there right now. As we look at our legacy
equipment and we find and we look at our current and existing
programs to build aircraft or ships, whatever it may be, a
ground vehicle, and we see that this material is no longer to
be used in the commercial market; we see that coming, but we
have to have it. And we are the last user.
Mr. Forbes. Let me stop you there, and I will wrap up here
very quickly. Suppose I have material A, which has to go in
some product that you need, and you are concerned about that
not being available. But let's say there is a product B that is
vitally important for the commercial industry that is producing
the product you need. Does that product A ever come in and be
counted as a critical to national security?
Mr. Lowden. Yes.
Mr. Forbes. Okay.
Mr. Ortiz. Trying to follow up on Mr. Rogers' question. Do
you envision the necessity for Military Construction (MILCON)
funding requirements under the storage, under the plan that we
are talking about?
Mr. Holder. Right now, we are looking at different funding
sources. The Department right now has not made a decision on
what is the appropriate funding source. As of right now, we
operate under the transaction fund, which basically pays for
operating in the National Defense Stockpile. Of course, as you
know, there is the appropriated fund that is a direct line from
the Defense budget, and also there has a revolving fund. These
are things that we are exploring, but no decision has been made
within the Department what would be the most appropriate fund
as we move forward with the new program.
Mr. Ortiz. Any other questions?
Mr. Taylor.
Dr. Thomason. Mr. Chairman, may I make one comment on that
point?
Speaking to Mr. Rogers' question about the storage
requirements, I think Mr. Holder indicated, very much in line
with our suggestions and our research, that the model for
storage has yet to be determined because there is the question
of whether it is more efficient, more efficient for the
taxpayer, more efficient for the government to serve as a
manager and yet store, for example, at the contractors that are
actually doing the production.
But--so it is premature, I would say, from our standpoint,
because the issue of the relative merits of one versus the
other storage model have not been worked out yet, which bears,
I believe, on the chairman's question as well about MILCON
requirements.
Mr. Ortiz. Thank you, sir.
Mr. Taylor.
Mr. Taylor. Thank you, Mr. Chairman.
Gentlemen, have all of you been at this job for at least
five years? Okay. A real-life scenario that occurred with this
committee was a group frustration at the delays it took for our
Nation to produce up-armored Humvees. One of the causes of
those delays was the shortage of certain types of steel to use
in the up-armored portions of the Humvees. I am just curious,
and I remember it being a very significant factor, was that
type of steel in your inventory? And was any effort made to get
that type of steel out of your inventory to the manufacturers
that we were calling upon to make the doors and the bodies of
the up-armored Humvees? That is the first question; did you
have that type of steel in your inventory?
Mr. Holder. Sir, the Defense National Stockpile basically
has raw materials.
Mr. Taylor. I understand.
Mr. Holder. These are materials that are basically used in
the applying and making of steel.
Mr. Taylor. I understand that, too.
Mr. Holder. So the answer is, as far as did I have steel
within the inventory, the answer is, no.
Mr. Taylor. Based on that delay, has anyone within the DOD
come to you and said, we got burnt once, maybe we should
stockpile this stuff this time?
Mr. Holder. No, sir.
Mr. Taylor. Just for my information. Who within the DOD
ought to be looking at scenarios like that and saying, okay, we
made a mistake once, let's not make it again? Whose job is it
to analyze that real-life scenario that happened just in the
past five years?
Mr. Lowden. It is our job. And we did respond, and we did
work with the steel community to get the material that was
needed.
Mr. Taylor. But I think you will agree, Mr. Lowden, it took
a very long time.
Mr. Lowden. Yes. The hindrance was the availability of
ingot steel to be rolled and tempered and quenched in the
appropriate manner to make the steel we required, the thin-
gauged armor plate. The problem was no one could melt enough
steel of the type we needed in this country. And, therefore, we
had the capability at Oregon Steel to roll and quench and
temper that ingot, but they could not get steel to roll.
And, therefore, the delay and the hindrance was the rule
that we could not bring steel that was melted or produced into
this country to make armor; from either Canada or the United
States was not available. So that, by working with the various
organizations, we looked at changing the definition of produced
and allowing us to bring in ingot from Mexico from Mittal
Steel--that also produces here; it is our number one producer--
to be rolled and quenched and tempered at Oregon Steel, and it
increased our capacity by 40 percent. So it was that move that
in that special situation we had to work through that scenario
of getting it because it was not allowed by law to be brought
in. And so that is what the hindrance was, was that ability to
get ingot steel of the type we needed. We had the capacity to
roll, but not the capacity to produce.
Mr. Taylor. Given that very real scenario happened not that
long ago, that we have also had again group frustration in how
long it took to produce the 18,000 MRAPs that we now have in
Iraq, that I am sure we are going to continue to feel that
frustration in trying to fill the 5,000 all-terrain MRAPs for
Afghanistan, to what extent--it is my understanding General
Brogan is in charge of that program. To what extent do you work
with General Brogan, who is responsible for the acquisition of
those 5,000 new MRAPs, to see to it that this type of delay
doesn't happen?
And, Mr. Lowden, I am not trying to bust your chops.
Mr. Lowden. I understand, sir.
Mr. Taylor. But we know for a fact that MRAPs are saving
lives. We know for a fact that kids who died in Humvees would
probably have been alive if we had gotten the MRAPs built
sooner. Right? We don't want to keep making the same mistakes.
So to what extent does your organization get involved in
saying, General, you have got some delays here, I have got some
expertise within my shop, let me help you find these things?
Mr. Lowden. The purpose of industrial policy is to look at
the industrial base and make sure we have what we need to do
the job. And I would like to----
Mr. Taylor. But we also get caught in our own lanes and
fail to help the guy in the next lane with some expertise that
you might have.
Mr. Lowden. I would like to take that for the record,
Because I am a materials engineer, and it is not my area of
expertise, and I would like to get back to you and provide a
more appropriate and informed answer to that.
[The information referred to can be found in the Appendix
on page 65.]
Mr. Taylor. I would very much appreciate that, because it
is going to be a challenge. We have just funded those vehicles.
We want to get them fielded right away.
Mr. Lowden. Now that I said that, I would like to say
something a little bit additional to that.
Mr. Taylor. All right.
Mr. Lowden. This idea of a Strategic Materials Management
Program broadens what we would be doing with respect to
materials that we may need or we see problems with. If we are
using the military services to help derive the list of
materials we need--and it was real interesting. I used two-
inch-thick aluminum plate as an example because, in our
inquiries out to the services, that came back as a material
they were concerned about. If they are concerned about it and
they know about it, they can tell us, and then we, as a
Strategic Materials Management Program, can plan ahead for
that, and we can see what is coming down the pike. And that
requires input from the services and the programs. They are
crucial to making this work. And so as I look at this program
and as we talk about it, this is the idea, is that when we
think about stockpiling--and I am going to try not to smile too
much.
When I came here when I thought about stockpiling, I said
it is a pile of rocks. You know, that is what it is. It is this
big pile of rocks that we have kept around for long times, and
we are not using it. And now we are looking at having materials
in the form we need it when we need it. It doesn't just have to
be the pile of rocks anymore. This gives us the opportunity to
put things in there in the form we can best use it, whether it
be an ingot of steel, an ingot of titanium, or a two-inch-thick
aluminum plate, store it at the vendor so that the programs can
get it when they need it. That is what we want to look at.
So whether it be titanium or even something as simple as a
powder that they use to make magnets, we want to be able to
have the material in the form and in the quantities we need to
plan for those problems in the future. And that is really what
we are talking about here, is taking and making this more
flexible and allowing us to do things like that.
Mr. Taylor. If I may, Mr. Chairman, one last thing.
Mr. Lowden, and really all of you, and again, we learn from
our mistakes. In conversations I had with the acquisitions
people in the Navy and the fact that they weren't aware that
the price of steel had been cut in half, the price of aluminum
had been cut in half, and even that flip remark of, well, you
know, it is only five percent. I just put a pencil to it. Okay,
so half of 5 percent is 2.5; 2.5 percent of $7 billion is $170
million towards these $7 billion aircraft carriers. That is a
heck of a lot of money that somebody was just dismissing as
inconsequential.
I would really hope that one of the things that your
organization would do, since you track this, is reach out to
the other acquisition--other branches, like the Under Secretary
of the Navy, and say, you know what? Now is a good time to be
doing, whatever. Because I really do--I think many of us have
the sense of frustration that the right hand often isn't
telling the left hand what they are up to, and that we as a
Nation, we as taxpayers end up paying too much for things we
shouldn't be, and we miss the opportunities that we ought to be
taking advantage of. And I am asking you guys to be an integral
part of that because you are tracking the price of materials,
and I would hope that you would make that part of your job
description.
Mr. Holder. One of the things I would like to say, sir, is
that one of the things we have done is we have established a
pilot program with the Army and the Navy. And with that pilot
program, one of the things that we are doing is to do an
aggregate buy. For instance, for titanium for the Army and Navy
for lightweight armory and also for the Navy submarine program,
by them coming in together with their requirements, we are able
to enter into a long-term agreement with titanium producers to
be able to provide a lower overall cost versus market price
where they would buy that material on the spot market. By doing
such, we are basically saving the Army possibly avoiding $7
million just for this little small pilot program.
So we are taking small steps to be able to see how we can
basically best serve the military services and looking at ways
to be able to create new acquisition strategies for the future.
Mr. Taylor. Thank you, sir.
Thank you, Mr. Chairman.
Mr. Ortiz. Mr. Rogers.
Mr. Rogers. Thank you, Mr. Chairman.
I would just like to point out to the panel but also to the
committee members, the person that makes the decision that Mr.
Taylor was asking about a little while ago, about looking and
making sure we don't make these mistakes again and we start
getting the materials that we need, is the Deputy Under
Secretary of Defense for Industrial Policy, the position that I
questioned Mr. Lowden about, and the published articles that
they are talking about demoting that person to a director
level. I think, if anything, we need to be looking at investing
more power into that person and expecting more of the kind of
foresight that Mr. Taylor just referenced. Thank you.
Mr. Ortiz. It has been a wonderful hearing this morning. It
has been very informative, and I think that me personally, I
have learned a lot by having this hearing, having you as
witnesses today. But let me ask you a question. Should we
expect a legislative proposal for the fiscal year 2011
authorization bill?
Mr. Holder. One of the things right now the Department is
basically, or, from us, we are planning on submitting a
proposal to the Department, and then basically the Department
would basically have to review that proposal of our legislation
authorities that we are seeking relief for. And so that is
where we are currently right now.
Mr. Lowden. I would like to add one thing, is that we have
a new AT&L, Under Secretary of Defense for Acquisition
Technology and Logistics, and we have a number of key
leadership positions that are empty right now. So moving that
through the system, we will have to wait and see what we have a
little bit.
Mr. Ortiz. Thank you. And like I stated before, we want to
work with you, because we are all in the same boat, the same
team. And whatever we can do to make what we build better and
to save taxpayers money, we should look at it so that we can do
better.
You guys have done a great job this morning. And if we
don't have any further questions, thank you so much again for
your testimony, and we look forward to continuing to work with
you. Not hearing any questions, the hearing is adjourned.
[Whereupon, at 11:01 a.m., the subcommittee was adjourned.]
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A P P E N D I X
July 23, 2009
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
July 23, 2009
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
July 23, 2009
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RESPONSE TO QUESTION SUBMITTED BY MR. FORBES
Mr. Lowden. The purpose of the National Defense Stockpile is to
protect the nation against a dangerous and costly dependence upon
foreign sources of supply of strategic and critical materials in time
of national emergency. The NDS is a reserve of strategic and critical
materials which are unavailable in the U.S. in sufficient quantities to
meet anticipated national security emergency requirements. Mining
regulations that result in the closure of existing mines and/or hinder
the development of additional domestic resources have the potential to
expand dependence upon foreign supplies and thus could theoretically
increase the number of materials which would require stockpiling. [See
page 13.]
______
RESPONSE TO QUESTION SUBMITTED BY MR. TAYLOR
Mr. Lowden. The Department relies on its prime contractors (as an
integral part of their program management responsibilities) to
identify, manage, and solve program/supplier issues and risks. The DOD
program office is responsible for maintaining frequent and open
communications with the prime and key suppliers to keep appraised of
any issues that could potentially affect the program's cost, schedule,
or performance. The Military Services are encouraged to resolve
identified industrial capability issues at the lowest level possible.
However, there are cases when issues may impact more than a single
program or Service.
The Defense Acquisition Guidebook directs program offices to
elevate an industrial capabilities matter via their Program Executive
Officer to the Office of the Deputy Under Secretary of Defense
(Industrial Policy) when an item produced by a single or sole source
supplier meets one or more of the following criteria (even if the
program office has ensured that its program requirements can and/or
will be met):
it is used by three or more programs
it represents an obsolete, enabling, or emerging
technology
it requires 12 months or more to manufacture
it has limited surge production capability
The Mine Resistant Ambush Protected (MRAP) is a good example of the
process. There was a shortfall in thin gauge MIL-A grade steel armor
production capacity necessary to support rapid production of the MRAP
vehicle and other operationally-important ground vehicles requiring
protective armor. The MRAP managers elicited the assistance of
Industrial Policy in uncovering the details associated with the
shortage and resolving the problem. The availability of steel,
generally, was not a production constraint; but the availability of the
specialized thin gauge, quenched and tempered steel (a ``specialty
metal'') needed for DOD armor applications was a constraint. The
Department was required to waive various statutory domestic source
restrictions to meet operational requirements.
The primary ``beneficiary'' of the waivers was U.S.-located Evraz-
Oregon Steel. Although Oregon Steel quenches and tempers its steel in
the United States, it does not have a blast furnace and buys its ingot
from Mittal in Mexico. The addition of Oregon Steel increased relevant
domestic production capacity by about 40 percent.
For MRAP, the Department waived restrictions concerning armor plate
in the Defense Federal Acquisition Regulation. When the Department
faces shortcomings in the industrial base (such as shortages of
strategic or critical materials), it has authorities, responsibilities,
and resources to address these deficiencies and promote innovation and
competition. For example, the Department can:
Directly fund innovation in its science and technology
accounts, and encourage industry to do the same via their independent
research and development accounts;
Induce innovation by employing acquisition strategies
that encourage competition at all levels of contract performance;
Use contract provisions to preclude the ability of
contractors to favor in-house capabilities or long-term teammate
products over more innovative solutions available elsewhere;
Block exclusive contractor teaming arrangements that
effectively reduce the number of suppliers in a given market,
especially if the teammates are dominant in a particular market sector;
and/or
Utilize other authorities such as Title III of the
Defense Production Act to maintain or expand capacity for needed items
or materials.
The Department also can, and does, formally establish restrictions
within the Defense Federal Acquisition Regulation Supplement on the use
of foreign products for certain defense applications, when necessary,
to ensure the survival of domestic suppliers required to sustain
military readiness.
Additional details regarding policies, procedures, and
circumstances under which the Department will take action when there
are problems with a supply chain or to preserve endangered industrial
capabilities can be found in DOD Directive 5000.60, ``Defense
Industrial Capabilities Assessments,'' and the accompanying DOD
Handbook 5000.60-H, ``Assessing Defense Industrial Capabilities.'' [See
page 25.]
?
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING
July 23, 2009
=======================================================================
QUESTIONS SUBMITTED BY MR. ORTIZ
Mr. Ortiz. You stated that your office interprets ``critical
materials'' as those for which a crisis in availability already exists.
Is there some other defined term or way in which a strategic material
for which availability to the Department is an issue of concern (but
not at the crisis level) is or could be designated for review for
policy action?
Mr. Lowden. The Department's analysis of and resulting definitions
for ``strategic'' and ``critical'' materials were validated by the
Strategic Materials Protection Board (SMPB) and published as the
``Analysis of National Security Issues Associated With Specialty
Metals,'' in the Federal Register (Volume 74, Number 34, Monday,
February 23, 2009, in Notices).
From the publication:
`` . . . the SMPB agreed that the term ``Strategic Material'' shall
mean--
A material:
(1) which is essential for important defense systems,
(2) which is unique in the function it performs, and
(3) for which there are no viable alternatives. Strategic Materials
include those specialty metals listed in 10 U.S.C. 2533b, and any other
materials the Board may designate.
The SMPB also agreed that the term ``Material Critical to National
Security'' (or ``Critical Material'') shall mean--
A ``Strategic Material'' for which:
(1) the Department of Defense dominates the market for the
material,
(2) the Department's full and active involvement and support are
necessary to sustain and shape the strategic direction of the market,
and
(3) there is significant and unacceptable risk of supply disruption
due to vulnerable U.S. or qualified non-U.S. suppliers.''
It is evident that there are many materials that meet the
definition of ``strategic.'' It is also apparent that some of the
``strategic'' materials have risks and vulnerabilities associated with
their supply, but do not meet all of the given criteria to be elevated
to ``critical.'' Even though these materials are not ``critical,''
these ``at risk'' materials must still be monitored, and when
appropriate, action taken to ensure their availability. The
Department's proposed strategic materials management program includes a
reproducible and dynamic process for identifying materials that are
essential to national security and defense; and for identifying,
analyzing, and watching strategic materials that are ``at risk.'' When
necessary, the process will also guide the selection and application of
risk mitigation strategies to ensure a reliable supply of the
materials.
Mr. Ortiz. As part of the Strategic Materials Security Management
System as described in your report, you note representation and
analysis will be provided by such agencies as the Department of
Commerce and the United States Geological Service. Do you anticipate
cooperation and representation with the Department of Homeland Security
as well?
Mr. Lowden. Currently, DNSC relies on the cooperation and support
of other federal agencies that serve on the Interagency Market Impact
Committee (MIC). The Department of Homeland Security is a member of the
MIC. The co-chairs of the MIC are Department of Commerce and Department
of State. Both the Department of Commerce and the United States
Geological Service have been instrumental in providing analytical and
technical support to DNSC in formulating the requirements report on
material needs. This collaborative effort will continue to support the
Strategic Materials Security Program.
Mr. Ortiz. A number of references within the reconfiguration report
make the statement that the new program would ``require a stable
funding source to make strategic acquisitions, undertake other risk
mitigation strategies and operate the stockpile program''. The report
did not stipulate whether these funds should be appropriated or
revolving in nature, only a ``stable source of funding.'' Would a
revolving fund be more appropriate for this type of program?
Mr. Lowden. The operation of the National Defense Stockpile is
currently funded by the Transaction Fund which was established under
the Strategic and Critical Materials Stock Piling Act. The
implementation process for the Strategic Materials Security Program is
an evolutionary one. There would be no need for additional funding to
get the process started. As we begin the implementation we know there
will be challenges, at that time the Department will work with the
Administration and Congress to identify the available options for
stable funding sources and the implications of each option.
Mr. Ortiz. IDA's risk assessment recommended that the Department
convene senior panels to review the most current assessments and make
policy recommendations as to which supply scenarios the DOD should use
as benchmarks to determine how much risk it is prepared to accept with
respect to material sources in the years ahead. What has the Department
done in this regard?
Mr. Lowden. ODUSD-Industrial Policy (IP) has tentatively identified
mid-September 2009 for conducting an IP-Chaired Working Group for
assessing supply side assumptions and making appropriate
recommendations to ODUSD (L&MR) regarding supply side risk. Proposed
representation at this time includes such offices as L&MR, PAE, OUSD
(Policy), OUSD (P&R) and J-5. Another panel is planned to address
demand-side assumptions after issuance and analysis of the Quadrennial
Defense Review (QDR). DNSC's role in this process would be to provide
input to the Working Group and implement policy decisions emanating
from OSD.
Mr. Ortiz. IDA also recommended that the Department should consider
continuing to compile data from the military services on materials used
to produce key weapon systems. What has the Department done in this
regard?
Mr. Lowden. The Strategic and Critical Materials Working Group
assembled the initial Integrated Materials List employing a robust
process that included de-consolidation of weapons platforms down to
basic materials, discussions with program offices, and interviews of
experts to determine required materials. The Military Departments also
provided input regarding materials with which they had encountered
problems or believed would cause difficulties in the near future. The
Military Departments and program officers are a necessary and valuable
source of information and their participation is crucial to maintaining
a dynamic and complete list of strategic materials and in identifying
risks, vulnerabilities, or other problems associated with essential
materials.
The Department, through the Strategic Materials Protection Board,
is considering a new process of requiring the respective Military
Departments to participate in the maintenance of the list of material
requirements and in the identification of possible risks and
vulnerabilities associated with these materials.
Mr. Ortiz. What is the risk if we don't make the proposed changes
to configuration and management of the National Defense Stockpile?
Mr. Lowden. Without the proposed changes to the configuration and
management of the NDS, the primary risk is a shortage of the strategic
and critical materials required for current and future defense and
essential civilian needs. Reconfiguration is necessary to fully respond
to evolving conditions in the world market and to the nation's rapidly
changing requirements for both traditional and new materials,
particularly during this era of increased dependence on foreign sources
of supply. Reconfiguration will address non-conflict as well as
conflict scenarios, and the nation's key users of strategic and
critical materials, both essential civilian and defense.
The program will take into consideration fluctuating domestic and
foreign industrial consumption and production capacities; technological
advances; geopolitical issues; and supply chain vulnerabilities. Risk
mitigation strategies and contingency plans will be developed and put
in place. The reconfigured Stockpile will maintain close relationships
with material users, and will readjust and assist as necessary to
further reduce the risk of material unavailability. Establishing
partnerships with friendly nations will enhance the nation's ability to
ensure current and future availability of key materials; and the
procuring and stockpiling selected materials deemed truly critical to
the nation's security will provide the insurance policy for the
Nation's needs.
Mr. Ortiz. What are the economic implications involved in stockpile
management? How would the proposed reconfiguration affect those
implications?
Mr. Lowden. There will be some economic implications. First to
clarify, with current funding, we can meet service and operational
requirements. In the reconfigured organization, we would not build the
Stockpile to previous levels. However, we may need additional
investments, e.g., additional infrastructure and strategic sources. The
amount of investment will depend upon input from the military services
and commodities they identify as critical to their needs. When
investment needs are determined, we will work within the Department to
determine the most appropriate sources of funding.
Under the current configuration acquisition of strategic and
critical materials is made in accordance with established Federal
procurement practices. Both acquisition and disposal of strategic and
critical materials from the stockpile are made under the following
parameters:
(1) Competitive procedures are used.
(2) Efforts are made to avoid undue disruption of the usual
markets of producers, processors, and consumers of such materials and
to protect the United States against avoidable loss.
The Market Impact Committee as described in Question 3 plays an
integral role in this process. Under the reconfiguration these
practices would continue.
Mr. Ortiz. Marketplace action and reaction would be another
critical piece of the reconfiguration plan. Where would DOD get the
workforce competencies and market research and intelligence expertise
that would be required to manage the stockpile in this environment?
Would this be a more appropriate function for the Department of
Commerce? If so, what impediments could that cause?
Mr. Lowden. Over the past 15 years, the National Defense Stockpile/
Defense National Stockpile Center (DNSC), on DOD's behalf, has managed
a very robust marketing and sales program. DNSC's aggressive efforts to
dispose of (sell) materials determined to be excess to defense needs
have generated over $6 billion worth of revenue, and have afforded DNSC
the opportunity to develop and strengthen the precise core competencies
required to successfully manage the reconfigured stockpile.
With its extensive experience in the domestic and international
marketplace, DNSC possesses the necessary expertise in all facets of
commodity marketing and sales, as well as commodity procurement.
Integral to each process is DNSC's demonstrated ability to effectively
evaluate global market conditions; e.g., determine supply and
contractor reliability, pricing, etc., and to analyze supply chain
risks. For example, after conducting extensive market research and
intelligence, an internal DNSC economist has prepared and issued a
comprehensive ``Alert'' of pertinent issues regarding alumina/aluminum,
a commodity included in the list of 11 materials used in the largest
quantities by DOD.
DNSC's extensive communication network, customer outreach, and
strong, established relationships with commodity traders, producers,
processors, individual consumers, and foreign and local governments
further point to DNSC as the best manager for the reconfigured
stockpile.
In the reconfigured stockpile, DNSC's efforts would be augmented
through interagency, collaborative efforts involving the use of experts
from such organizations as the Departments of Commerce and State, DCMA,
and the U.S. Geological Survey, as well as from the formally
established Stockpile Market Impact Committee (MIC). The Department of
Commerce and the State Department are co-chairs for the Stockpile's
MIC, and DHS, Agriculture, Energy, Interior and Treasury are
representatives. DNSC has standing Memoranda of Agreement with DOC,
USGS and Census for data collection and analysis, and collaborates with
DCMA on a regular basis.
Within DOD, the effect of the Strategic and Critical Materials
Working Group has been to establish closer relationships among DNSC,
the Military Services, Research Laboratories, and OSD, and the revised
requirements determination process will build upon that relationship.
Mr. Ortiz. Please explain what is meant in the report by ``the
reconfigured program requires a broader internal DOD profile.''
Mr. Lowden. Building on the relationships established during the
DOD Strategic and Critical Materials Working Group, the Stockpile will
adopt a more proactive, preventive approach to material management by
increasing the collaboration and communication flow among OSD, the
Military Services, Joint Chiefs of Staff J-8, and research labs.
Stockpile-issued material alerts will keep OSD and key stakeholders
abreast of important developments in the global marketplace. Aggressive
outreach and consultation to the Military Services will provide
expertise in strategic sourcing and other risk mitigation strategies.
Senior OSD panels will consider and provide policy decisions for issues
such as supply and demand-side assumptions/scenarios, and the DOD
Strategic Materials Protection Board (SMPB) will provide guidance and
validation of materials determined to be at risk.
Mr. Ortiz. In the hearing, you mentioned a Pilot Program with the
Army and Navy. Could you provide additional details on what the pilot
is, and what the program hopes to achieve in the future? What would be
the next steps if the pilot is successful?
Mr. Holder. Under the pilot program, DNSC awarded a strategic
sourcing contract to procure titanium to support select Army and Navy
programs. The contract vehicle enabled DNSC to aggregate the quantity
of material needed by the two services in order to leverage a more
favorable unit price. This material was previously purchased by the
defense contractors often as a spot market transaction where prices are
traditionally high.
The commitment under the pilot program was for approximately
368,800 lbs of titanium over four years. Army provided 10,000 lbs of
offal (scrap) material as feedstock to reduce the out of pocket cost
for the material. This scrap material was purchased by the contractor
at prevailing scrap market value. The contract included a provision for
a scrap management program under which DOD would receive value for any
scrap material resulting from the manufacturing processes either as a
credit against future deliveries or priced at prevailing scrap market
value.
The pilot program realized a cost avoidance of approximately $1.0M
for the Army. The Navy program (the Virginia Submarine Program) is
still drawing against the contract. Other Navy programs have also
purchased titanium against this contract as the unit cost for the
material was lower than what they previously were charged when the
material was purchased by the defense contractor.
DNSC is currently partnering with Army Armament Research,
Development and Engineering Center (ARDEC) to expand the footprint of
the pilot program. ARDEC is capturing information on program needs to
facilitate a more comprehensive procurement strategy for not only
titanium but other strategic materials. Army plans to assist DNSC in
working with the other services in identifying material requirements in
order to maximize the benefit to DOD in material leverage procurements.
Mr. Ortiz. When can we expect to see Legislative Proposals to
implement this proposal?
Mr. Holder. DLA has prepared a legislative proposal to implement
the recommendations contained in the DNSC Reconfiguration Report and
this proposal is being considered by the Department for submission in
the Department of Defense legislative package for Fiscal Year 2011. The
legislative proposal includes a requirements determination process that
consists of a wide variety of conflict and non-conflict planning
scenarios, expands the ability to release strategic and critical
materials from the stockpile, and overall allows greater flexibility in
meeting needs of the military services for strategic and critical
materials.
Mr. Ortiz. As part of the Strategic Materials Security Management
System as described in your report, you note representation and
analysis will be provided by such agencies as the Department of
Commerce and the United States Geological Service. Do you anticipate
cooperation and representation with the Department of Homeland Security
as well?
Mr. Holder. Currently, DNSC relies on the cooperation and support
of other federal agencies that serve on the Interagency Market Impact
Committee (MIC). The Department of Homeland Security is a member of the
MIC. The co-chairs of the MIC are Department of Commerce and Department
of State. Both the Department of Commerce and the United States
Geological Service have been instrumental in providing analytical and
technical support to DNSC in formulating the requirements report on
material needs. This collaborative effort will continue to support the
Strategic Materials Security Program.
Mr. Ortiz. A number of references within the reconfiguration report
make the statement that the new program would ``require a stable
funding source to make strategic acquisitions, undertake other risk
mitigation strategies and operate the stockpile program''. The report
did not stipulate whether these funds should be appropriated or
revolving in nature, only a ``stable source of funding.'' Would a
revolving fund be more appropriate for this type of program?
Mr. Holder. The Department has not determined which funding source
would be the most appropriate to support the National Defense Stockpile
reconfigurations. Currently Defense National Stockpile Center operating
costs and payments to entities mandated by Congress are paid out of the
Transaction Fund.
Mr. Ortiz. IDA's risk assessment recommended that the Department
convene senior panels to review the most current assessments and make
policy recommendations as to which supply scenarios the DOD should use
as benchmarks to determine how much risk it is prepared to accept with
respect to material sources in the years ahead. What has the Department
done in this regard?
Mr. Holder. The Office of the Deputy Under Secretary of Defense for
Industrial Policy (IP) in cooperation with the Office of the Deputy
Under Secretary of Defense for Logistics and Materiel Readiness (L&MR)
is convening the senior panel for this purpose. IP has tentatively
identified mid-September 2009 for conducting this IP-Chaired Panel.
Proposed panel members include representatives from L&MR, Program
Analysis and Evaluation, OUSD (Policy), OUSD (Personnel & Readiness)
and J-5.
DNSC's role in this process would be to provide input to the Panel
and implement policy decisions emanating from OSD.
Mr. Ortiz. IDA also recommended that the Department should consider
continuing to compile data from the military services on materials used
to produce key weapon systems. What has the Department done in this
regard?
Mr. Holder. Recognizing the need to develop a more comprehensive
listing of materials needed by the services to support their weapon
systems, DNSC will be awarding a contract to develop a process to
compile ``live'' data on the quantity and character of strategic
materials purchased and consumed in support of DOD vehicles, weapons
and related systems. For the purpose of demonstrating the effectiveness
and efficiency of the process, the contractor will be required to
compile information on the titantium procured to support eleven cross-
service systems. Data collected will include: form and quantity of the
material purchased; specific end item part or sub-system to which the
material was applied; supplier of the material; unit price; lead time;
amount of material consumed; and amount of scrap material with the
possibility of reclamation at each step of the manufacturing phases.
Mr. Ortiz. What is the risk if we don't make the proposed changes
to configuration and management of the National Defense Stockpile?
Mr. Holder. The primary risk is a shortage of the strategic and
critical materials required for current and future defense and
essential civilian needs. Reconfiguration is necessary to fully respond
to evolving conditions in the world market and to the Nation's rapidly
changing requirements for both traditional and new materials,
particularly during this era of increased dependence on foreign sources
of supply. Reconfiguration will address non-conflict as well as
conflict scenarios, and the Nation's key users of strategic and
critical materials, both essential civilian and defense.
Mr. Ortiz. What are the economic implications involved in stockpile
management? How would the proposed reconfiguration affect those
implications?
Mr. Holder. There will be some economic implications. The current
authorization allows us to operate the National Defense Stockpile.
During the initial implementation of the Strategic Materials Security
Program no additional funding would be required. In the reconfigured
organization, we would not build the Stockpile to previous levels.
However, additional funding may be needed for the limited additions to
the stockpile and the implementation of the risk mitigation strategies.
The amount of investment will depend upon input from the military
services and commodities they identify as critical to their needs. When
investment needs are determined, we will work within the Department to
determine the most appropriate sources of funding. The efficiencies and
flexibility of the reconfigured program will allow the Department to
realize cost avoidances and savings by aggregating material
acquisitions and entering into long term contracts.
Under the current configuration acquisition of strategic and
critical materials are made in accordance with established Federal
procurement practices. Both acquisition and disposal of strategic and
critical materials from the stockpile are made under the following
parameters:
(1) Competitive procedures are used.
(2) Efforts are made to avoid undue disruption of the usual
markets of producers, processors, and consumers of such materials and
to protect the United States against avoidable loss.
The Market Impact Committee as described in Question 3 plays an
integral role in this process. Under the reconfiguration these
practices would continue.
Mr. Ortiz. Marketplace action and reaction would be another
critical piece of the reconfiguration plan. Where would DOD get the
workforce competencies and market research and intelligence expertise
that would be required to manage the stockpile in this environment?
Would this be a more appropriate function for the Department of
Commerce? If so, what impediments could that cause?
Mr. Holder. Over the past 15 years, the National Defense Stockpile/
Defense National Stockpile Center (DNSC), on DOD's behalf, has managed
a very robust marketing and sales program. DNSC's aggressive efforts to
dispose of (sell) materials determined to be excess to defense needs
has generated over $6 billion worth of revenue, and has afforded DNSC
the opportunity to develop and strengthen the precise core competencies
required to successfully manage the reconfigured stockpile. With its
extensive experience in the domestic and international marketplace,
DNSC possesses the necessary expertise in all facets of commodity
marketing and sales, as well as commodity procurement. Integral to each
process is DNSC's demonstrated ability to effectively evaluate global
market conditions, i.g., determine supply and contractor reliability,
pricing, etc., and to analyze supply chain risks.
In the reconfigured stockpile, DNSC's efforts would be augmented
through interagency, collaborative efforts involving the use of experts
from such organizations as the Departments of Commerce and State, DCMA,
and the U.S. Geological Survey, as well as from the formally
established Stockpile Market Impact Committee (MIC). The Departments of
Commerce and the State Department are co-chairs for the Stockpile's
MIC, and DHS, Agriculture, Energy, Interior and Treasury are
representatives. DNSC has standing Memoranda of Agreement with DOC,
USGS and Census for data collection and analysis, and collaborates with
DCMA on a regular basis. Within DOD, the effect of the Strategic and
Critical Materials Working Group has been to establish closer
relationships among DNSC, the Military Services, Research Laboratories,
and OSD, and the revised requirements determination process will build
upon that relationship.
Mr. Ortiz. Please explain what is meant in the report by ``the
reconfigured program requires a broader internal DOD profile.''
Mr. Holder. Building on the relationships established during the
DOD Strategic and Critical Materials Working Group, the Stockpile will
adopt a more proactive, preventative approach to material management by
increasing the collaboration and communication flow among OSD, the
Military Services, Joint Chiefs of Staff J-8, and research labs.
Stockpile-issued material alerts will keep OSD and key stake holders
abreast of important developments in the global marketplace. Aggressive
outreach and consultation to the Military Services will provide
expertise in strategic sourcing and other risk mitigation strategies.
Senior OSD panels will consider and provide policy decisions for issues
such as supply and demand-side assumptions/scenarios, and the DOD
Strategic Materials Protection Board (SMSP) will provide guidance and
validation of materials determined to be at risk.
Mr. Ortiz. IDA's risk assessment recommended that the Department
convene senior panels to review the most current assessments and make
policy recommendations as to which supply scenarios the DOD should use
as benchmarks to determine how much risk it is prepared to accept with
respect to material sources in the years ahead. What was the analysis
behind this recommendation?
Dr. Thomason. The risk analysis process that IDA has designed for
DOD in this area has several key steps. One important step involves DOD
selecting the specific scenarios (including assumptions about essential
material demands and material supply conditions) for which the United
States should be prepared. Such planning scenarios normally have both
material demand-side and material supply-side assumptions. Scenario-
related decisions such as what defense and civilian equipment (and
derived material) demands it is essential to meet, and what supplies of
material production will be available from the US (and potentially
elsewhere) on what schedules to meet those demands, are crucial. Such
scenario-related decisions are important in this process because IDA's
analysis has shown repeatedly that these decisions can have major
effects on estimated shortages of materials such as titanium, tungsten,
cobalt, tantalum and many others.* Based on a variety of such analyses,
IDA has recommended to DOD that such scenario decisions should be made
explicitly in the risk assessment process--in a structured and
transparent way. DOD has had key elements of such an explicit decision
process in place for the NDS requirements report for a number of years.
For a reconfigured stockpile (materials security) program, IDA again
recommends that DOD have an explicit process for such decisions, and in
particular that DOD convene an official advisory group to set key
assumptions for each major material security assessment. IDA does not
have a specific recommendation as to which offices should be members of
this advisory group.
---------------------------------------------------------------------------
* The last DOD NDS Requirements Report to Congress (2005) provides
considerable analysis and evidence of such major effects. (See table 2
and figure 1, pp 11-12 of that report.) Appendix B of the April 2009
DOD NDS Reconfiguration Report to Congress references a similar set of
IDA analyses for DOD showing the major effects that selecting one or
another Peacetime Supply Disruption Scenario may have upon estimated
material shortages.
---------------------------------------------------------------------------
Mr. Ortiz. IDA also recommended that the Department should consider
continuing to compile data from the military services on materials used
to produce key weapon systems. Why do you believe this is necessary?
Dr. Thomason. OSD-led research in 2008 identified some materials of
concern to one or more of the Services. These materials were summarized
in Appendix C of the April 2009 NDS Reconfiguration Report to Congress.
IDA believes, based on its research, that obtaining ongoing and even
more specific information of this kind from the Services--about the
scope, nature and persistence of any problems they have had or
anticipate with those materials--could be useful to DOD for at least
three reasons. First, detailed, timely evidence from the Services can
help DOD diagnose the problems more clearly and thus promote the most
cost-effective risk-mitigation approaches. Second, obtaining high-
quality evidence of material demands of each individual DOD component
for key systems can help DOD identify and leverage opportunities to
achieve purchasing efficiencies department-wide. Third, new types of
materials are being introduced into high-priority weapon systems
regularly and DOD would manage material risks best with clear, timely
visibility into the DOD-wide demands for such materials and into the
specific suppliers of those materials, both in the US and abroad.
Mr. Ortiz. What is the risk if we don't make the proposed changes
to configuration and management of the National Defense Stockpile.
Dr. Thomason. There are at least two types of risk. One risk is
that more serious material shortages will occur for DOD, with extra
shortages in turn degrading the materiel readiness and operational
performance of DOD forces more than otherwise. A second type of risk of
not reconfiguring is that DOD will be unable to implement an integrated
program to achieve purchasing efficiencies for strategic materials as
readily as it could with reconfiguration. Savings achieved through
these purchasing efficiencies can be applied to other critical needs in
DOD, thus further mitigating operational risk.
Mr. Ortiz. What are the economic implications involved in stockpile
management? How would the proposed reconfiguration affect those
implications?
Dr. Thomason. Our research suggests that if DOD can achieve
purchasing efficiencies in its buys of selected materials through such
a reconfiguration, this result could regularly free up DOD funds,
potentially millions of dollars per year, for other high-priority
defense budget items.
Mr. Ortiz. Marketplace action and reaction would be another
critical piece of the reconfiguration plan. Where would DOD get the
workforce competencies and market research and intelligence expertise
that would be required to manage the stockpile in this environment?
Would this be a more appropriate function for the Department of
Commerce? If so, what impediments could that cause?
Dr. Thomason. The reconfiguration proposal calls for a team effort
with other departments and agencies, such as through the existing
interagency Market Impact Committee (MIC), which the DOC chairs.
Interagency expertise has proven useful to DOD in the past, including
research by DOC, DOI and DOS, and should continue to be a strong part
of a reconfigured materials security program.
Mr. Ortiz. Should DOC have the lead instead of DOD? If DOC had the
lead, would there be any problems?
Dr. Thomason. IDA was not asked to study this issue. Whichever
organization leads this effort, interagency collaboration is essential.
Mr. Ortiz. Please explain what is meant in the report by ``the
reconfigured program requires a broader internal DOD profile.''
Dr. Thomason. IDA was not involved in developing or supporting
development of this conclusion. I cannot, therefore, explain its
meaning beyond the language contained in the report itself.
______
QUESTIONS SUBMITTED BY MR. LAMBORN
Mr. Lamborn. In your testimony you state that there is ``some
confusion regarding the definition of strategic material.''
Additionally, you state that the designation of ``critical material''
is only given in the instance that the Department of Defense (DOD) is
the ``last big user'' of that material. Is it DOD Industrial Policy's
position that a material will only be deemed ``critical'' if DOD is the
sole consumer of that material in the marketplace? If so, how does DOD
ensure availability of supply of defense articles for materials that
utilize materials with only limited supply in the supply-chain, but
that have some commercial applications? How does refusing to classify
materials, such as rare earth metals (which are predominately available
from Chinese sources), as ``critical'' make sense when these materials
are required in the production of vital DOD components? Is there a
long-term strategy for ensuring a supply of materials, such as defense-
specific components containing rare earth metals, considering there are
some commercial uses of these rare earths or will DOD simply let the
market dictate their availability before taking any action?
Mr. Lowden. The Department's analysis of and resulting definitions
for ``strategic'' and ``critical'' materials were validated by the
Strategic Materials Protection Board (SMPB) and published as the
``Analysis of National Security Issues Associated With Specialty
Metals,'' in the Federal Register (Volume 74, Number 34, Monday,
February 23, 2009, in Notices). A more detailed discussion of these
definitions can be found in the answer to Congressman Ortiz's question
#11.
Additional information and analysis regarding the definitions of
``strategic material'' and ``material critical to national security''
or ``critical material'' will be provided in the report to the House
and Senate Armed Services Committees as described on page 351 of H.R.
2647, National Defense Authorization Act for Fiscal Year 2010.
Mr. Lamborn. This Committee clarified in the FY09 and FY10 National
Defense Authorization Bill via ``Items of Special Interest'' that it
was concerned about DOD's implementation of Section 842 of the National
Defense Authorization Act for Fiscal Year 2007 and Section 804 and 884
of the National Defense Authorization Act for Fiscal Year 2008. In
fact, the committee has contacted DOD on numerous occasions with
concerns over the definition ``production.'' Has DOD noted those
concerns and how were they addressed in the release of the Final Rule
by DOD on July 29, 2009? How does DOD justify a definition of
``production'' that allows late stage finishing processes to qualify as
a major production process that will allow minimal manufacturing of
metal to occur in the United States?
Mr. Lowden. The issues concerning ``produced'' are addressed in
``Defense Federal Acquisition Regulation Supplement; Restriction on
Acquisition of Specialty Metals (DFARS Case 2008-D003),'' published in
the Federal Register, Volume 74, Number 144, Wednesday, July 29, 2009,
under Rules and Regulations. This is the final rule amending the
Defense Federal Acquisition Regulation Supplement (DFARS) to address
statutory restrictions on the acquisition of specialty metals not
melted or produced in the United States. The rule implements Section
842 of the National Defense Authorization Act for Fiscal Year 2007 and
Sections 804 and 884 of the National Defense Authorization Act for
Fiscal Year 2008. All input was considered in the decision making
process. Additional analysis regarding the definition of ``produce''
will be included in the report to the House and Senate Armed Services
Committees as described on page 351 of H.R. 2647, National Defense
Authorization Act for Fiscal Year 2010.
From the Federal Register:
``The law has never provided a definition of ``produce'' with
regard to the requirement to acquire domestic specialty metals. The
1973 DOD Appropriations Act (Pub. L. 92-570) added specialty metals to
the annual Berry Amendment restrictions, requiring that restricted
items be ``grown, reprocessed, reused, or produced in the United
States.'' The Secretary of Defense at that time (Melvin Laird), in a
memorandum setting forth DOD planned implementation of this
restriction, interpreted this requirement to mean ``melted'' when
applied to specialty metals, and the reasonableness of this
interpretation was upheld in the courts. This does not mean that this
is the only possible interpretation. When Congress created the new 10
U.S.C. 2533b, while following the Laird memo traditions in many
respects, it reinstated ``or produced,'' allowing that melting was not
the only acceptable process for creation of domestic specialty metal.
According to DOD technical experts, quenching and tempering is not
an insignificant process. Melting is only one stage in a multi-step
process that is used to produce an item with properties that meet the
requirements of an application, i.e., specifications. Melting for most
metals accounts for about one third of the final price of a wrought
product. Manufacturers have stated that the operations associated with
forming and heat treating account for more than one-half of the price
of a mill product such as plate. (The prices for mill products used by
the military are typically higher than for commercial products due to
more stringent military requirements.) Although alloying elements are
added during ``melting,'' the primary casting (ingot, slab, bloom,
etc.) does not possess the microstructures and/or phases that are
required to produce desired properties. Using steel as an example,
after primary casting, the metal is shaped and then heat treated to
produce the desired properties in the final product. This is true for
plate, wire, sheet, etc. Steel's versatility is primarily due to its
extraordinary response to heat treatment. Heat treatment is used to
control the microstructure and thus the properties of the steel.
Different iron carbon phases form at critical temperatures, and it is
the combination and concentration of these phases that produce the
desired mechanical properties in the steel. DOD experts believe that
heat treatment may be the single most important stage in metals
processing for DOD applications. The final properties of the metal are
determined by the heat treat schedule. This is true for most if not all
metals and their alloys. Heat treatment results in a product with
properties that meet the specified requirements. The specifications for
a material typically include not just chemistry but also the mechanical
and physical properties as well as the condition of the product, i.e.,
surface finish, flatness, waviness. Forming and heat treatment
processes are very important to producing an item that meets the
requirements of an application. It is after heat treatment that the
item possesses all of the attributes that are needed for the required
application.
The concern that magnetization can be considered production under
this rule is unfounded. The definition of ``produce'' has not been left
to open ended interpretation. It has narrowly specified what processes
other than melting are included, and does not include magnetization.
DOD does not see any impact on the high performance magnet industry
from the definition of ``produce,'' because tempering and quenching
processes are specifically restricted to the production of steel plate,
and gas atomization and sputtering are restricted to the production of
titanium.
DOD acknowledges the additional restriction on armor plate in DFARS
252.225-7030, which requires that armor plate be melted and rolled in
the United States. Therefore, any acquisition of armor plate by DOD
must satisfy both statutory restrictions.
DOD performed an industrial capabilities assessment in 2007 to
support rapid production of the MRAP vehicles and other important
defense programs relying on protective armor. The assessment found that
availability of thin gauge MIL-A grade steel armor was the limiting
factor in domestic production. The industrial capabilities assessment
identified a total of four North American steel mills collectively
capable of producing up to 12,000 tons per month of thin gauge armor
steel plate. All four reported that quench and temper operations (not
steel melting capacity or ingot/slab availability) were the limiting
factor in their ability to produce the thin gauge armor needed to meet
U.S. military demand. In contrast to the demonstrated maximum North
American MIL-A grade thin gauge armor steel plate production capacity
of 12,000 tons per month, the American Iron and Steel Institute (via
its Web site) asserts that domestic raw steel melt production per week
is usually in excess of 2 million tons (8 million tons per month). To
meet peak MRAP and other DOD requirements, the four mills made capital
investments and process improvements that enabled a 100 percent
increase (to 24,000 tons per month) in thin gauge armor steel plate
production capacity. However, two of the mills rely on ingot/slab
melted outside the United States. If these mills had been excluded from
participation, the sustained MRAP production rate would have been
limited to about 600 vehicles per month (instead of the actual
sustained rate of 1,100 vehicles per month); and it would have taken
twice as long to deploy MRAP vehicles into Iraq and Afghanistan.
DOD also notes that the specialty steel industry does not object to
the other expansions DOD provided in the definition of ``produce,''
such as gas atomization, sputtering of titanium, or titanium alloy
powder. None of these processes is a melting process. It is
inconsistent to accept some non-melt processes, but not others.
DOD considered processing a domestic non-availability determination
under the non-availability exception or the national security
exception, but both avenues represented significant obstacles, and were
rejected as unsuitable options. A national security exception requires
that the contractor become compliant. The availability exception was
determined to be impracticable, time-consuming, and inefficient.''
Mr. Lamborn. DOD recently released a Final Rule implementing
Section 842 of the National Defense Authorization Act for Fiscal Year
2007 and Section 804 and 884 of the National Defense Authorization Act
for Fiscal Year 2008. In that rule, it defined ``high performance
magnets'' as ``a permanent magnet that obtains a majority of its
magnetic properties from rare earth metals (such as samarium).''
However, Congress explicitly defined ``high performance magnet'' in its
Conference Report (H.R. 110-477), which states that `` `high
performance magnet' means permanent magnets containing 10 or more
percent by weight of materials such as cobalt, samarium, or nickel.''
How can DOD justify a redefinition that ignores congressional intent,
particularly considering its impact on the alnico magnet industry? Was
DOD unaware of the congressional definition?
Mr. Lowden. The issues concerning ``high performance magnets'' were
addressed in ``Defense Federal Acquisition Regulation Supplement;
Restriction on Acquisition of Specialty Metals (DFARS Case 2008-
D003),'' published in the Federal Register, Volume 74, Number 144,
Wednesday, July 29, 2009, under Rules and Regulations. This is the
final rule amending the Defense Federal Acquisition Regulation
Supplement (DFARS) to address statutory restrictions on the acquisition
of specialty metals not melted or produced in the United States. The
rule implements Section 842 of the National Defense Authorization Act
for Fiscal Year 2007 and Sections 804 and 884 of the National Defense
Authorization Act for Fiscal Year 2008. All input was considered in the
decision making process.
To define ``high performance magnets'' as ``permanent magnets
containing 10 percent or more by weight of materials such as cobalt,
samarium, or nickel'' is technically unsound and open-ended. Cobalt and
nickel have been primary alloying elements for permanent magnet
materials since exploration of these materials began over 100 years
ago. By this unbounded definition, almost all magnets would be covered.
The table listing compositions of many magnetic materials containing
specialty metals is provided to highlight this assertion.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
DOD does not consider alnico magnets to be ``high performance
magnets.'' The Department does note that representatives from permanent
magnet suppliers established in discussions with DOD technical experts
that virtually all alnico and samarium cobalt magnets are made to
unique customer specifications and are not COTS items. Accordingly,
direct DOD purchase of such permanent magnets almost certainly would
involve non-COTS magnets, which must comply with specialty metals
provisions, whether or not the magnets are judged to be high
performance magnets. With respect to permanent magnets incorporated
into COTS subsystems or end items, such magnets, whether COTS or non-
COTS, high performance or not high performance, are by statute not
required to utilize specialty metals melted or produced in the United
States. Therefore, the definition of high performance magnet makes a
difference only with regard to the 2 percent minimum content exception
and has no significant impact on the use of alnico magnets for defense
applications.
The text addressing ``high performance magnets'' from the DFARS
rule referenced earlier is provided for easy reference.
``With regard to whether it is meaningful to define ``high
performance magnet'' as a permanent magnet that obtains a majority of
its magnetic properties from rare earth metals: Cobalt, iron, and
nickel are the three primary ferromagnetic metals and, therefore, are
present in most, if not all, permanent magnets. However, it is the very
strong magnetocrystalline anisotropy (the property of being
directionally dependent) of certain rare earth elements that produces
the exceptional magnetic behavior in the materials to which they are
added. The partially filled 4f electron subshells in rare earths lead
to magnetic properties in a manner similar to the partially filled 3d
electron subshells in transition elements such as cobalt, iron, and
nickel. However, the magnetic moment of a rare earth material is
typically an order of magnitude greater than that in a transition
element; and rare earths exhibit a large anisotropy due to dipolar
interactions. In summary, rare earths possess very unique electron
structures that produce extreme anisotropy in their magnetic
properties.
DOD technical experts have concluded that there is no industry
standard definition for high performance magnets. However, magnet
performance is measured using magnetic properties and temperature
capability.
Magnetic properties are summarized using maximum energy
product. DOD technical experts reviewed various references that place
heavy emphasis on the maximum energy product of a magnet as ``the
figure of merit'' by which permanent magnet materials are judged. The
greater the maximum energy product of a permanent magnetic material,
the more powerful the magnet, and the smaller the volume (and typically
the weight) of the magnet required for a given application. The maximum
energy products for rare earth magnets are significantly higher than
those for ferrite and alnico materials, thus supporting their
designation as ``high performance magnets.''
Temperature stability is measured using maximum operating
and Curie temperatures (the temperature below which there is a
spontaneous magnetization in the absence of an externally applied
magnetic field). Although alnico magnetic materials rank well on
maximum use temperature and Curie temperature, this does not overcome
the substantially lower maximum energy product.
The maximum energy product ranking of various magnetic materials
and temperature stability measurements are as follows:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Of today's permanent magnets containing specialty metals, only
samarium cobalt magnet materials possess the combination of properties
necessary to be considered ``high performance magnets.'' The only other
permanent magnets today that obtain a majority of their magnetic
properties from rare earths are neodymium-iron-boron magnets.
Neodymium-iron-boron magnets are high performance magnets, but normally
do not contain specialty metals. Ferrites are not high performance
magnets (as was erroneously stated in the preamble to the proposed
rule), nor do they contain specialty metals.
Representatives from permanent magnet suppliers asserted in
discussions with DOD engineers that alnico magnets possessed superior
toughness and calibration sensitivity qualities, and those qualities
supported designating alnico magnets as high performance magnets. DOD
engineers considered, but ultimately did not accept, that rationale.
Mechanical strength and toughness generally are not
employed as measures of merit for permanent magnets, because all
permanent magnetic materials of interest (ferrites, rare-earths, and
alnico) are hard and brittle. Section I, subsection 6.0, of Magnetic
Materials Producers Association Standard No. 0100-00, Standard
Specifications for Permanent Magnet Materials, states that most
permanent magnet materials lack ductility and are inherently brittle.
Such materials should not be utilized as structural components in a
circuit. Measurement of properties such as hardness and tensile
strength are not feasible on commercial materials with these inherent
characteristics. Therefore, specifications of these properties are not
acceptable.
Finally, calibration sensitivity is an indication of
precision but not of high performance.
DOD technical experts agree that, in addition to maximum energy
product, parameters such as temperature stability, temperature range,
resistance to demagnetization, corrosion resistance, mechanical
toughness, and machinability contribute to the decision as to which
type of magnet to use for a military application. However, just because
a particular magnetic material is most appropriate for a particular
application does not mean that it is a high performance magnet. Not
every application requires the use of a high performance magnet.
Although DOD does not consider alnico magnets to be high
performance magnets, regardless of the impact of this decision on the
industry, DOD notes that representatives from permanent magnet
suppliers further established in discussions with DOD technical experts
that virtually all alnico and samarium cobalt magnets are made to
unique customer specifications and are not COTS items. Accordingly,
direct DOD purchase of such permanent magnets almost certainly would
involve non-COTS magnets, which must comply with specialty metals
provisions, whether or not the magnets are judged to be high
performance magnets. With respect to permanent magnets incorporated
into COTS subsystems or end items, such magnets, whether COTS or non-
COTS, high performance or not high performance, are by statute not
required to utilize specialty metals melted or produced in the United
States. Therefore, the definition of high performance magnet makes a
difference only with regard to the 2 percent minimum content exception
and has no significant impact on the use of alnico magnets for defense
applications. To define ``high performance magnets'' as ``permanent
magnets containing 10 percent or more by weight of materials such as
cobalt, samarium, or nickel'' would be technically unsound and open-
ended. Cobalt and nickel have been primary alloying elements for
permanent magnet materials since exploration of these materials began
over 100 years ago. By this unbounded definition, almost all magnets
would be covered. Therefore, no change has been made to the definition
of ``high performance magnet.''
Mr. Lamborn. Following up on Mr. Kissell's question regarding any
potential vulnerability in our DOD supply chain what does DOD consider
to be viable, reliable alternative sources of supply for the following
materials?
Titanium--Is there a sufficient quality and quantity of aerospace
grade titanium produced in the United States to meet the needs of the
Department of Defense? Would it be acceptable if DOD suppliers were
reliant on VSMPO in Russia for a substantial quantity of aerospace
titanium? Are all potential sources of aerospace grade titanium, i.e.,
U.S., Russia, China, considered equally reliant?
Mr. Lowden. The three domestic titanium producers have been
boosting capacity to support the upcoming growth in the aerospace
market (Airbus A380, Boeing 787 and Joint Strike Fighter). In 2007,
U.S. production of titanium metal products rose to record levels with
production of ingot and mill products increasing by 11% and 6%,
respectively, from the previous year. Despite the current economic
downturn, the domestic titanium producers continue to expand production
capacity and expect much of the new capability to be on-line by 2011.
Domestic sponge capacity will be double that of 2005 levels and mill
product capacity increased by almost as much. A recently released RAND
study predicts there will be excess titanium production capacity by
2010. In addition to these factors, the continued delays in Airbus
A380, Boeing 787 and Lockheed Martin's Joint Strike Fighter have given
extra breathing space for a market that previously anticipated a
shortfall in availability.
Mr. Lamborn. Alnico magnets--Are there alnico magnets produced in
sufficient quality and quantity to meet the needs of the Department of
Defense from other than Chinese sources? Would it be acceptable if DOD
suppliers were reliant on Chinese suppliers for alnico? Are all
potential sources of alnico, i.e., U.S. or China, considered equally
reliant?
Mr. Lowden. There are three primary domestic Anico magnet
producers. Alnico alloys have some of the highest Curie points of any
magnetic material and thus are favored for elevated temperature
applications. In spite of this advantage, they are being superseded by
rare earth magnets, whose stronger fields (Br) and larger energy
products (BHmax) allow smaller size magnets to be used for a given
application. Current production of Alnico magnets is rather low and
continues to decline as the availability of the rare earth materials
improves and engineering approaches are being explored to allow the use
of low cost ferrites in as many applications as possible. The high
temperature stability of Sm-Co magnets now matches or exceeds that of
the Alnico materials. Sm-Co magnets can thus be used in the same
applications as Alnico magnets, but due to their improved magnetic
properties, the Sm-Co magnets would be smaller. Many sources show
growth for every permanent magnetic material market with the exception
of Alnico for which some experts predict the market to shrink by 1/3 in
the next ten years.
Mr. Lamborn. Neodymium Iron Boron magnets--Are there neodymium-
iron-boron magnets produced in sufficient quality and quantity to meet
the needs of the Department of Defense from sources other than Chinese
manufactures? When considering the manufacturing of magnets, is the
base neodymium metal available from other than Chinese sources? Do any
U.S. suppliers produce neodymium iron boron magnets (excluding late
stage finishing process such as magnetization, shaving or finishing)?
Does DOD have a strategy to ensure a long-term supply of neodymium iron
boron magnets?
Mr. Lowden. Presently, there is no domestic NdFeB magnet production
capability. The NdFeB magnets presently contained in certain defense
systems are procured from reliable foreign suppliers. The Department is
aware of the issues regarding the rare earth elements. The Department
plans to commission in FY2010 a study of rare earth resources,
associated supply chains, and defense systems that utilize these
materials. The results of the study will be used to help guide
Department decisions and future actions.
Mr. Lamborn. In your testimony, you cite DOD's review of 128
potential strategic materials. Can you provide that list to Congress?
Mr. Lowden. Please see table entitled, ``Integrated Strategic
Materials List.''
Mr. Lamborn. Of those materials, how many were in the ``gray area''
between strategic and critical? What were those materials?
Mr. Lowden. There are materials that meet the definition of
strategic and have risks associated with their supply, but do not meet
all of the criteria to be elevated to critical. These are the materials
in the ``gray area'' between strategic and critical. These ``at risk''
materials must monitored, and when appropriate, action taken to ensure
a reliable supply.
Initial risk assessment modeling by the Institute for Defense
Analyses indicated the 13 commodities for which the NDS has temporarily
suspended or limited sales are ``at risk'' and thus by the
aforementioned definition would be in the ``gray area.'' The risk
analysis also indicated that 39 other materials should be monitored,
studied and/or considered candidates for future mitigation strategies
to ensure availability. These are the strategic materials included in
the accompanying Integrated Strategic Materials List with
recommendations such as ``Monitor'', ``Hold/Study'' or ``Study/PB.''
These too may be considered to be in the ``gray area.'' Materials with
possible supply chain vulnerabilities are also included in Table 1 of
Appendix C of the Reconfiguration of the National Defense Stockpile
Report to Congress, entitled, ``Supplementary Risk Assessments.'' The
analysis of the risks associated with the materials presented in the
tables is also included in Appendix C.
Mr. Lamborn. What was your methodology for determining if a
material is strategic, critical or neither?
Mr. Lowden. The Working Group employed the definitions for
``strategic'' and ``critical'' materials validated by the Strategic
Materials Protection Board (SMPB) and published as the ``Analysis of
National Security Issues Associated with Specialty Metals,'' in the
Federal Register (Volume 74, Number 34, Monday, February 23, 2009, in
Notices).
Mr. Lamborn. How did you ascertain the original list of 128
materials?
Mr. Lowden. The Strategic and Critical Materials Working Group
employed a lengthy, deliberative process to collect material
information from a wide variety of sources to construct an initial list
of strategic materials. Details regarding the methods and sources are
included in Appendix B of the Reconfiguration of the National Defense
Stockpile Report to Congress, entitled, ``Key Materials for High-
Priority Weapon Systems, and Assessing Risks to their Supply.''
Mr. Lamborn. Will DOD simply let a domestic industry fail before it
crosses over into the ``critical'' category? For example, what are the
plans for ensuring a long-term availability of strategic materials such
as titanium, alnico magnets, samarium cobalt magnets or neodymium iron
boron magnets--items that are found in critical defense applications,
but that may have limited (or no) production in the United States?
Mr. Lowden. The Department of Defense has focused resources (as
well as policies, processes, and structured procedures) that ensure,
when indications of potential industrial concerns arise, they are
identified, analyzed, and effectively integrated into key DOD budget,
acquisition, and logistics processes. DOD Directive 5000.60, ``Defense
Industrial Capabilities Assessments,'' and the accompanying DOD
Handbook 5000.60-H, ``Assessing Defense Industrial Capabilities,''
establish the policies, procedures, and circumstances under which the
Department will take action when there are problems with a supply chain
or to preserve endangered industrial capabilities.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Lamborn. When considering DOD's long-term needs for strategic
materials such as titanium, high performance magnets (i.e. SmCo,
Alnico, NdFeB) and components containing rare earth materials, how does
DOD Industrial Policy ensure availability of these items? Your
testimony repeatedly states that the Office of Industrial Policy
responds to what the services need. ``What systems does the Office of
Industrial Policy use to predict and inform the services of the
materials they will need today and in the future (and vice versa)?'' In
other words, how do you and the services know what materials readiness
and supply-chain availability shortfalls exist in their current and
future weapon systems? How is DOD determining if a supply of strategic
materials is available and how does it ensure it will always be
available? For example studies by the National Academies refused to
list tungsten as a critical material for the military, because there
was no history of its supply interruption. Yet the US today is
approaching 100% import reliance on China for tungsten. Is it likely
that China would ship tungsten for armor plate to the US in the event
of a confrontation or actual conflict with North Korea, or its energy
supplier, Iran? America and Canada have ample deposits of tungsten, but
only Canada is developing new resources of tungsten as well as trying
to maintain production from large existing mines in the face of Chinese
predatory pricing. How will DOD predict future material shortages? Do
you have data and statistics, not only on material usage, but also on
US industrial capacity? Isn't this lack of foresight a contributor to
the recent MRAP steel shortage?
Mr. Lowden. This series of questions addresses the fundamental
aspects of program development and planning, acquisition, and program
management. The Defense Acquisition System exists to manage the
Nation's investments in technologies, programs, and product support
necessary to achieve the National Security Strategy and support the
United States Armed Forces. The objective is to rapidly acquire quality
products that satisfy user needs with measurable improvements to
mission capability at a fair and reasonable price. The fundamental
principles and procedures that the Department follows in achieving
those objectives are described in DOD Directive 5000.01 and DOD
Instruction 5000.02.
The Office of the Deputy Under Secretary of Defense (Industrial
Policy) is a participant in the acquisition decision process whose
primary role is to advise the Under Secretary of Defense for
Acquisition, Technology & Logistics (AT&L) and the Secretary and Deputy
Secretary of Defense on matters concerning defense industrial
capabilities. Industrial Policy's mission is to make certain the
industrial base on which the Department of Defense depends is reliable,
cost-effective, and sufficient. More specifically, Industrial Policy is
responsible for ensuring DOD policies, procedures, and actions both
stimulate and support vigorous competition and innovation in the
defense industrial base and that these policies help establish and
sustain cost-effective industrial and technological capabilities that
assure military readiness and superiority. Industrial Policy does so by
monitoring the health and competitiveness of industry; by leveraging
DOD decisions to promote innovation and competition; and by utilizing
statutory processes.
However, it is important to note that the Department relies on its
prime contractors (as an integral part of their program management
responsibilities) to identify, manage, and solve program/supplier
issues and risks. The DOD program office is responsible for maintaining
frequent and open communications with the prime and key suppliers to
keep appraised of any issues that could potentially affect the
program's cost, schedule, or performance. The Military Services are
encouraged to resolve identified industrial capability issues at the
lowest level possible. However, there are cases when issues may impact
more than a single program or Service. The Defense Acquisition
Guidebook directs program offices to elevate an industrial capabilities
matter via their Program Executive Officer to the Office of the Deputy
Under Secretary of Defense (Industrial Policy) when an item produced by
a single or sole source supplier meets one or more of the following
criteria (even if the program office has ensured that its program
requirements can and/or will be met):
it is used by three or more programs
it represents an obsolete, enabling, or emerging
technology
it requires 12 months or more to manufacture
it has limited surge production capability
The Mine Resistant Ambush Protected (MRAP) is a good example of the
process. There was a shortfall in thin gauge MIL-A grade steel armor
production capacity necessary to support rapid production of the MRAP
vehicle and other operationally-important ground vehicles requiring
protective armor. The MRAP managers elicited the assistance of
Industrial Policy in uncovering the details associated with the
shortage and resolving the problem. The availability of steel,
generally, was not a production constraint; but the availability of the
specialized thin gauge, quenched and tempered steel (a ``specialty
metal'') needed for DOD armor applications was a constraint. The
Department was required to waive various statutory domestic source
restrictions to meet operational requirements. The primary
``beneficiary'' of the waivers was U.S.-located Evraz-Oregon Steel.
Although Oregon Steel quenches and tempers its steel in the United
States, it does not have a blast furnace and buys its ingot from Mittal
in Mexico. The addition of Oregon Steel increased relevant domestic
production capacity by about 40 percent.
Tungsten is specifically mentioned in your inquiry. Tungsten is a
metal that is used in a number of important defense systems, such as
armor penetrating munitions, and in the manufacture of a variety of
components, e.g., in carbide machine tools. A Department of Commerce
analysis of tungsten is included as an appendix to the Reconfiguration
of the National Defense Stockpile Report to Congress. According to the
2009 USGS Mineral Commodity Summaries, the U.S. net import reliance on
imported tungsten has decreased since 2004, due in part to the fact
that a mine in California made limited shipments of tungsten
concentrates in 2008. Tungsten contained in scrap represented
approximately 35% of the materials consumed that same year. Canada and
the United States have noteworthy tungsten resources and a number of
domestic tungsten manufacturers are vertically integrated allowing them
to process ore and scrap to produce precursor material and/or powder.
Tungsten is a strategic material for which there is some concern
regarding supply; however, current indications do not warrant
significant action.
Additional details regarding policies, procedures, and
circumstances under which the Department will take action when there
are problems with a supply chain or to preserve endangered industrial
capabilities can be found in DOD Directive 5000.60, ``Defense
Industrial Capabilities Assessments,'' and the accompanying DOD
Handbook 5000.60-H, ``Assessing Defense Industrial Capabilities.''
The Reconfiguration of the National Defense Stockpile Report to
Congress presents a strategic materials management program that
includes many of the processes and procedures addressed in your
questions. It is a system for managing strategic materials that is
dynamic and proactive so that as the Department's requirements change,
and the list of materials essential to the strategic defense interests
of the U.S. also changes, the methods by which supply chain risks are
monitored, measured, and mitigated also change. The proposed strategic
materials management program includes all of the basic components
essential to managing risk--indentify, study, monitor, and act.
Strategic materials will be identified. These materials will be studied
and risks examined. The materials with supply chain vulnerabilities
will be monitored. When problems arise, action will be taken. Strategic
materials risk management is a crucial part of ensuring a reliable,
cost-effective, and sufficient supply of the materials that are
essential to national security and defense.
Mr. Lamborn. You mentioned potential stockpiling of powders to make
magnets. Are you aware that stockpiling of rare earth magnet powders
would likely result in having the incorrect composition for the
production of customized magnet alloys needed by the Department of
Defense? A form very useful to meet customized DOD needs would be to
stockpile rare earth un-alloyed metals of purity of 99.9% minimum
purity and 99.5% minimum total rare earth purity.
Mr. Lowden. Magnet powder was used as an example of a form of a
material, other than ore or ingot that could be stockpiled or managed
utilizing different approaches in the future. The statement was made to
support the concept of flexibility in the types of materials that could
be included as part of a strategic materials management program. In
some instances, it may be beneficial to acquire and manage materials in
a form more easily processed into finished products.
Mr. Lamborn. Are you aware that even without a conflict, rare earth
metals supply are in jeopardy due to the production of Chinese rare
earths potentially equaling domestic Chinese consumption within a few
years according to expert sources, thereby squeezing out access of rare
earths to the DOD not only for rare earth magnets but also for metal
hydride batteries, and numerous other commercial magnet and non-magnet
uses? What are the Department's plans to ensure availability of rare
earth metals in the event of a supply disruption due to a conflict or
simply being cut off due to China consuming the entire world's
production of these elements?
Mr. Lowden. The Department is aware of the issues regarding the
availability of rare earth elements as Chinese consumption increases.
The Department plans to commission in FY2010 a study of rare earth
resources, associated supply chains, and defense systems that utilize
these materials. The results of the study will be used to help guide
DOD decisions and future actions.
Part of the Department's plan to respond to the issue raised is the
purpose of the National Defense Stockpile--to protect the nation
against a dangerous and costly dependence upon foreign sources of
supply of strategic and critical materials in time of national
emergency. The NDS is a reserve of strategic and critical materials
which are unavailable in the U.S. in sufficient quantities to meet
anticipated national security emergency requirements. It is worth
noting the U.S. and Canada do possess ample rare earth resources.
However, regulations that result in the closure of existing mines and/
or hinder the development of additional domestic resources would
increase dependence upon foreign supplies of these materials.
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