[Federal Register: February 23, 2009 (Volume 74, Number 34)]
[Notices]
[Page 8061-8064]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23fe09-25]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
Office of the Secretary
Analysis of National Security Issues Associated With Specialty
Metals
AGENCY: Office of the Deputy Under Secretary of Defense for Industrial
Policy, Office of the Under Secretary of Defense for Acquisition,
Technology and Logistics, DoD.
ACTION: Analysis of National Security Issues Associated with Specialty
Metals.
-----------------------------------------------------------------------
SUMMARY: Specialty metals are not ``critical materials.'' There is no
national security reason for the Department to take action to ensure a
long term domestic supply of specialty metals.
FOR FURTHER INFORMATION CONTACT: Rick Lowden, (703) 601-5003.
SUPPLEMENTARY INFORMATION:
A. Congressional Direction
Section 843 of Public Law 109-364 required the establishment of a
Strategic Materials Protection Board (SMPB) composed of representatives
of the Secretary of Defense, the Under Secretaries for Intelligence and
Acquisition, Technology, and Logistics, and the Secretaries of the
Military Departments. The SMPB is to determine the need to provide a
long-term domestic supply of strategic materials designated as critical
to national security, and analyze the risk associated with each
material and the effect on national defense that non-availability from
a domestic source would have. 10 U.S.C. 2533b ``Requirement to buy
strategic materials critical to national security from American
sources'' currently lists specialty metals as strategic materials
critical to national security.
In its Report to Congress of its meeting of July 17, 2007, the SMPB
reported that it had formed, met, and agreed to initially focus its
efforts on determining the need to take action to ensure a long term
domestic supply of specialty metals as designated in 10 U.S.C. 2533b;
and to direct the Board's Executive Secretary to conduct an initial
analysis of national security issues associated with strategic
materials (specialty metals); and to report the results of that
analysis at the next SMPB meeting.
The SMPB held its second meeting on December 12, 2008 during which
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.
Accordingly, the Board should initially focus its efforts on
determining which strategic materials are ``materials critical to
national security'' and require a long term domestic source of supply.
The SMPB also validated an Initial Analysis of National Security
Issues Associated with Strategic Materials.
B. Initial Analysis of National Security Issues Associated With
Strategic Materials
Summary
Reliable access to the materiel it needs is a bedrock requirement
for the Department of Defense. However, reliable access does not always
necessitate a domestic source.\1\ In fact, the Department wants to take
full advantage of the competitive benefits offered by access to the
best global suppliers; and to promote consistency and fairness in
dealing with its allies, all the while assuring that an adequate
industrial base is maintained to support defense needs. Consequently,
the Department uses, and sometimes may be dependent on, reliable non-
U.S. suppliers. At the same time, the Department is not willing to
accept foreign vulnerability which poses risks to national security.
Non-U.S. suppliers represent a foreign vulnerability if their use would
present an unacceptable risk that the Department would be unable to
access the capabilities, products, or services that it needs, when it
needs them.
---------------------------------------------------------------------------
\1\ For the purposes of this analysis, a domestic source is a
member of the ``national technology and industrial base'' as defined
in Title X of the United States Code, section 2500: ``persons and
organizations that are engaged in research, development, production,
or maintenance activities conducted within the United States and
Canada.''
---------------------------------------------------------------------------
The key finding of this analysis is that specialty metals, as
defined in 10 U.S.C. 2533b, are not ``materials critical to national
security'' for which only a U.S. source should be used; and there is no
national security reason for the Department to take action to ensure a
long term domestic supply of these specialty metals.\2\ The
``criticality'' of a material is a function of its importance in DoD
applications, the extent to which DoD actions are required to shape and
sustain the market, and the impact and likelihood of supply disruption.
The analysis showed that specialty metals are ``strategic materials''
which may require special monitoring and attention/action; but not, in
general, a domestic source restriction.\3\ Should reliable supplies/
capacities be insufficient to meet potential requirements for a
projected conflict, other risk mitigation options, including
stockpiling, could represent an effective alternative.
---------------------------------------------------------------------------
\2\ Congress has placed no domestic source restrictions on the
ores and other basic materials that are the precursors to specialty
metals. However, for truly critical materials, reliable sources of
supply for such ores and other basic materials also may be
necessary.
\3\ Notwithstanding this finding, the Department is complying,
and will comply, with all statutory domestic source requirements.
---------------------------------------------------------------------------
High purity beryllium, however, is a critical material. Even in
peacetime, defense applications dominate the market; it is essential
for important defense systems and unique in the function it performs.
In addition, domestic production capabilities have atrophied, and there
are no reliable foreign suppliers. Accordingly, the Department should
continue to take those special actions necessary to maintain a long
term domestic supply of high purity beryllium. In fact, the Department
has established a project
[[Page 8062]]
under Title III of the Defense Production Act with U.S. supplier Brush-
Wellman to build and operate a new high purity beryllium production
facility.
The Strategic Materials Protection Board (SMPB) should review and
validate any internal or external recommendations that identify
strategic materials that are essential for a wide variety of important
defense applications and for which there is a relatively high potential
for supply disruption. For example, a relatively high potential for
supply disruption would be represented by a situation in which reliable
supplies (U.S. or non-U.S.) are projected to be insufficient to support
the defense needs of the United States during peacetime and/or during a
conflict. In such circumstances, DoD market intervention such as
increasing or establishing reliable production capability and/or
stockpiling may be an effective risk mitigation strategy.
Analysis
Specialty metals are not ``critical materials.'' There is no
national security reason for the Department to take action to ensure a
long term domestic supply of specialty metals.
The Specialty Steel Industry of North America (SSINA) produced a
report in December 2005 entitled ``Specialty Metals and the National
Defense.'' \4\ In it, the SSINA asserted that ``specialty metals are
vitally important to virtually every U.S. military platform'' and
provided a listing of the many DoD weapons systems that contain
specialty metals. While many important DoD systems do incorporate
specialty metals, incorporation into a DoD system does not, by itself,
make a material ``critical to national security.'' If incorporation
alone was sufficient, every type of material from plastic, to rubber
and glass, would be a critical material. More discriminating criteria
are needed to distinguish critical materials from the larger set of
strategic materials.
---------------------------------------------------------------------------
\4\ SSINA is a Washington, DC-based trade association
representing virtually all continental specialty metals producers.
The December 2005 report is available at http://www.ssina.com/news/
releases/pdf_releases/12_06_05_Defense_Paper.pdf.
---------------------------------------------------------------------------
The designation of a strategic material should be predicated on it
meeting a ``technical'' criterion: The material should be essential for
important defense systems and unique in the function it performs--there
are no viable material alternatives available.
Critical materials are a subset of strategic materials. The
Department of Defense should designate a material as ``critical to
national security'' only if it meets the ``technical'' criterion of a
``strategic'' material; and also meets two additional criteria:
``Business'' criterion: The Department of Defense
dominates the market for the material, and its active and full
involvement and support is necessary to sustain and shape the strategic
direction of the market; and
``Security of Supply'' criterion: There is significant and
unacceptable risk of supply disruption due to vulnerable U.S. or
qualified non-U.S. suppliers.
The Department agrees that strategic materials, including specialty
metals, are essential for important defense systems, and in many cases
are unique in the functions they perform. Therefore specialty metals
are considered strategic materials. However, specialty metals do not
meet the other criteria necessary to be considered critical materials.
The Department of Defense does not dominate the market for
specialty metals; its active and full involvement and support is not
necessary to sustain and shape the strategic direction of the market;
and the risk of supply disruption is not significant. According to the
SSINA, ``defense applications account for less than 10% of revenues in
specialty metals companies.'' \5\ Recent Defense Contract Management
Agency analysis of certain metals found that DoD consumes less than 1
percent of total U.S. steel production; about 6 percent of U.S.
aluminum production; and between 8 and 10 percent of domestic titanium
production. In 2007, U.S. and non-U.S. military end-use applications,
including military aerospace, represented about 5 percent of worldwide
titanium consumption. The health of the domestic specialty metals
industry is, and will continue to be, determined by its ability to sell
core commercial products to commercial customers.
---------------------------------------------------------------------------
\5\ SSINA press release, June 23, 2005.
---------------------------------------------------------------------------
Whether or not DoD applications are dominant in the specialty
metals market, the Department has the ability, when necessary, to
require that its orders be filled in advance of non-DoD orders. Under
the Defense Priorities and Allocations System (DPAS; 15 CFR 700), U.S.
suppliers must give DoD orders delivery preference over non-DoD
(commercial) orders in the event of a supply constraint or delivery
conflict. DPAS authorities, coupled with the size of the domestic
specialty metals production capacity relative to limited DoD
consumption, ensures the Department is able to purchase the quantity of
specialty metals it needs from U.S. industry.
For a material to be elevated to ``critical material'' status there
must also be a significant risk of supply disruption. For specialty
metals, in addition to strong U.S. suppliers, there are reliable
foreign suppliers. Specialty steels and metal alloys are produced
globally; leading producers include Japan, South Korea, Germany, India,
Brazil, Mexico, Canada, Australia, and the UK. Titanium and titanium
alloys are produced in Japan, Italy, Germany, France, and the UK.
Zirconium and zirconium alloys are produced in Canada, Germany, France,
and Japan. Although many metals are commodities and traded throughout
the global market, there are cases in which the price of a metal varies
by region. Table 1 summarizes the sources and prices for a select set
of metals. It highlights the extent to which such metals are imported
into the United States, the largest producers world-wide and the
largest importers into the Unite States, and differences in metal
prices in domestic and foreign markets. (Note that there is no
statutory domestic source restriction for titanium sponge.)
Table 1--Sources and Prices for Select Metals
----------------------------------------------------------------------------------------------------------------
Domestic Foreign
Import Largest world Largest U.S. source source
Material reliance producers (% of import sources (% price ($/ price ($/
(%) world production) of U.S. imports) metric ton) metric ton)
----------------------------------------------------------------------------------------------------------------
Aluminum........................ 26 China 32........... Canada 55......... $1,942 $1,852
........... Russia 11.......... Russia 17.........
........... Canada 8........... Brazil 4..........
Raw Steel....................... 12 China 37........... Canada 17......... 756 710
........... Japan 9............ E.U. 16...........
[[Page 8063]]
........... U.S. 7............. Mexico 11.........
Cobalt.......................... 78 Congo 36........... Norway 21......... 43,266 44,899
........... Canada 13.......... Russia 19.........
........... Zambia 11.......... Canada 10.........
Copper.......................... 37 Chile 37........... Chile 39.......... 3,715 3,716
........... Peru 8............. Canada 32.........
........... U.S. 8............. Peru 15...........
Nickel (metal).................. 21 Russia 19.......... Canada 41......... 11,248 10,698
........... Canada 15.......... Russia 16.........
........... Australia 11....... Norway 11.........
Titanium (sponge)............... 64 Japan 28........... Kazakhstan 51..... 18,060 7,800
........... Russia 23.......... Japan 37..........
........... China 23........... Russia 7..........
Zinc (refined).................. 58 China 27........... Canada 64......... 1,231 1,152
........... Peru 14............ Mexico 17.........
........... Australia 13....... Kazakhstan 9......
High Purity Beryllium........... (\1\) U.S. 77............ Kazakhstan 42..... 357,000 (\2\)
........... China 15........... Germany 24........
........... Mozambique 5....... U.K. 6............
----------------------------------------------------------------------------------------------------------------
Sources: USGS 2008 Mineral Commodities Summaries, American Metal Market, COMEX, CRU Monitor, London Metal
Exchange, Metal Bulletin, New York Dealer, New York Mercantile Exchange, Platts, Purchasing Magazine.
\1\ Net exporter.
\2\ Not available.
In accordance with DoD Handbook 5000.60-H, ``Assessing Defense
Industrial Capabilities,'' reliable foreign suppliers are usually
acceptable, and in fact are encouraged to allow the Department to
obtain a wider competitive cost and technology base. Foreign dependence
does not necessarily mean foreign vulnerability. Therefore, the
Department uses foreign sources where advantageous and within the
limitations of the law. However, in some circumstances foreign
suppliers are not acceptable:
Foreign sources may pose an unacceptable risk when there
is a high ``market concentration'' combined with political or
geopolitical vulnerability. A sole source supplier existing only in one
physical location and vulnerable to serious political instability may
not be available when needed.
Suppliers from politically unfriendly or anti-American
foreign countries, as defined by statute or U.S. Government policy, are
not used to meet U.S. defense needs.
A U.S. source may be needed for technologies and products
that are either classified, offer unique warfighting superiority, or
could be used by foreign nations to develop countermeasures.
Suppliers that cannot or will not provide products for
military applications for political reasons are not feasible sources.
The Department of Defense is required by law to purchase a
particular product from U.S. sources only.
In some instances, the Department must pay a premium in order to
maintain a domestic production capability. For ``critical'' materials
and comparable ``critical'' military-unique systems, subsystems, and
components, the Department is willing to pay that premium to mitigate
risk and ensure national defense/security. However, in addition to a
price premium, in such cases the Department also may assume risk
associated with insufficient production capacity to meet rapidly
increased contingency or operational requirements. ``Captive'' DoD
markets frequently size themselves to meet steady-state ``peacetime''
DoD demand and may not be able to surge production as rapidly as
desired.
For example, the Department recently experienced a significant
shortfall in thin gauge MIL-A grade steel armor production capacity
necessary to support rapid production of the Mine Resistant Ambush
Protected (MRAP) vehicle and other operationally-important ground
vehicles requiring protective armor. 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.
Conclusions
In summary, the fact that specialty metals are essential for
important defense systems does not mean that specialty metals are
critical materials, nor that national security requires that only U.S.-
produced specialty metals be used for DoD applications.
Beryllium
High purity beryllium is both a strategic and a critical material.
High purity beryllium is essential for important defense systems,
and it is unique in the function it performs. High purity beryllium
possesses unique properties that make it indispensable in many of
today's critical U.S. defense systems, including sensors, missiles and
satellites, avionics, and nuclear weapons.
The Department of Defense dominates the market for high purity
beryllium and its active and full involvement is necessary to sustain
and shape the strategic direction of the market.
There is a significant risk of supply disruption. Without DoD
involvement and support, U.S. industry would not be able to provide the
material for defense applications. There are no reliable foreign
suppliers that could provide
[[Page 8064]]
high purity beryllium to the Department.
Recognizing that high purity beryllium meets all the conditions for
being a critical material, the Department should take, and has taken,
special action to maintain a domestic supply. The Department has used
the authorities of Title III of the Defense Production Act to contract
with U.S. firm Brush-Wellman, Inc. to build and operate a new high
purity beryllium production plant. The new facility will produce pure
beryllium capable of meeting the specifications required for myriad
national security applications.
Dated: February 6, 2009.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. E9-3708 Filed 2-20-09; 8:45 am]
BILLING CODE 5001-06-P