Section 843 includes language from the original House Bill used almost verbatim in the final law.  It requires that

“not later than April 1, 2010, the Comptroller General shall submit to the Committees on Armed Services of the Senate and House of Representatives a report on rare earth materials in the supply chain of the Department of Defense”.

The law states that the report must address, at a minimum, the following:

1. An analysis of the current and projected domestic and worldwide availability of rare earths for use in defense systems, including an analysis of projected availability of these materials in the export market.
2. An analysis of actions or events outside the control of the Government of the United States that could restrict the access of the Department of Defense to rare earth materials, such as past procurements and attempted procurements of rare earth mines and mineral rights.
3. A determination as to which defense systems are currently dependent on, or projected to become dependent on, rare earth materials, particularly neodymium iron boron magnets, whose supply could be restricted (A) by actions or events identified pursuant to paragraph (2); or (B) by other actions or events outside the control of the Government of the United States.
4. The risk to national security, if any, of the dependencies (current or projected) identified pursuant to paragraph (3).
5. Any steps that the Department of Defense has taken or is planning to take to address any such risk to national security.
6. Such recommendations for further action to address the matters covered by the report as the Comptroller General considers appropriate.

The law defines the term `rare earth’ to mean the lanthanoids (atomic numbers 57-71) plus yttrium and scandium. The anomalous reference to thorium as a rare earth in the earlier language of the bill, is now absent.  The term `rare earth material’ includes rare earth ores, semi-finished rare earth products, and components containing rare earth materials.

Having just attended the Critical & Strategic Metals Conference in Washington, DC, I was struck by anecdotes from government employees, on how timeframes of 9 months and longer, for not dissimilar reports, were not enough time to do their work as well as they would have liked.  April 1, 2010 is only 5 months away. Are these guys going to be able to do a thorough-enough job, to get Congress the information it needs?

We shall see.

Rather than re-hashing what has been already been shared elsewhere online about the meeting – here are some links to great articles on the meeting from Lisa Reisman (co-chair of the meeting) and Stuart Burns from Metal Miner:

• Supply Risk Management and Rare Earth Metals a Big Disconnect
• Electric Cars Could Pose a Challenge to Rare Earth Supply in “Nightmare Scenario”
• Displacing China as a Rare Earth Producer is No Small Feat
• Rare Earths, Critical and Strategic Metals and the US Legislative Agenda
• Rare Earth Metals Conference: Electric Vehicle Demand
• To Stockpile or Not to Stockpile that is the Rare Earth Question

In addition, Tracy Weslowsky of Wescow, a Founding Editor of RareMetalBlog, posted a thought-provoking piece at the RareMetalBlog based on the perspective she presented during a panel discussion at the meeting:

• Bubble Debate on Investment Opportunities in Critical and Strategic Metals

Finally, co-chair Jack Lifton last week published a well-timed, new article called The Rare Earth Crisis of 2009 which was circulating during the meeting, and is well worth a read.

I heartily recommend that you read each and every one of these links, to get an idea of what is going on in this important area. Well done to Lisa Reisman, Jack Lifton, the folks at Infocast, and to all of the speakers andpanelists, for a job well done.

Candidly, I came away with the distinct impression that although we now know where we can get the raw materials necessary for the growth of the technology metals sector – the question that needs to be answered is this: who is going to refine these materials and turn them into useful metals & alloys?  In the absence of such capabilities in North America, we will once again be heavily reliant on the good graces of our colleagues in China…

• Key Questions Necessary to Ask of the Critical Metals Industry
•  Do Stockpiles Work?
• Rare Earths – The Problem Child and Attention Deficit America
• The ‘Alternative Energy’ Metals
• Lithium Supply – Abundant Supply or At Risk?
• Mapping Supply Risk to Specific Sourcing Strategies
• Government Action in the Strategic Materials Market
• Is the Resource Base Available for the Scaling of Wind, Solar and Energy Storage?

There are of course plenty of other sessions too. I’ll try to post my thoughts and perspective on this meeting later this week, being particular mindful to note any commentary and perspective presented on the supply chain for permanent magnet materials, and their end uses.

Strategic Materials and the Law – Continued

There is yet a further insurance policy for those looking to have rare earth materials formally recognized as strategic materials. The Senate version of the NDAA for FY2010, S 1390, passed in late July 2009 and also contained language concerning rare earth materials [26]. The accompanying Senate Report to S 1390 recommended the inclusion of “a provision that would require the Defense Science Board to report to Congress on the usage of rare earth materials in the supply chain of the Department of Defense. The report would address the extent to which weapon systems may become dependent on rare earth materials supplied by sources that could be interrupted” [27]. The recommendation made it into the Act itself, with the Defense Science Board being asked in Section 837 to address:

• the current and projected domestic and world-wide availability of rare earth materials for use by the Department of Defense in its weapon systems;

• the extent to which weapon systems acquired by the Department of Defense are currently dependent on, or are projected to become dependent on, rare earth materials supplied by sources that could be interrupted;

• the risk to national security, if any, of dependence on such sources for rare earth materials;

• any steps that the Department of Defense has taken or is planning to take to address any such risk to national security;

• such recommendations for further action to address the matters covered by the report as the Defense Science Board considers appropriate.

The term ‘‘rare earth material’’ in this Section “includes rare earth ores, semi-finished rare earth products, and components containing rare earth materials”. We can see that the aims of this report were similar to those of HR 2647.

The Defense Science Board is a longstanding US entity that includes DoD personnel in addition to other individuals drawn from the larger scientific and technical community [28]. As such, it might be considered more objective, with regard to assessing DoD needs and responsibilities, than the DoD-only SMPB.

The next stage in the evolution of the NDAA for FY2010 will be the conference between the House and Senate, in order to create a unified document for the President to sign into law. It is unlikely that requirements for both the General Accountability Office and the Defense Science Board to investigate rare earths will remain in the final version, but it is clear that at least one of them will have the mandate to do this work.

It is also clear that beyond the present legislation, there will continue to be friction between Congress and the DoD on the issue of defense spending and regulation. In the latter half of August 2009, President Obama threatened to veto “unnecessary defense spending”, citing the presidential helicopter program, backup engines for the F-35 fighter project and a proposal to purchase 12 more F-22 fighters as examples of military spending of more benefit to the contractors involved, than the US soldiers they purported to help. The President said that lobbyists were “pushing weapons that even our military says it doesn’t want” [29].

While issues pertaining to specialty metals are usually found further down the DoD supply chain, there is a risk that the existing procurement restrictions embodied in the specialty metals provisions, as they relate for example, to rare earth-containing high performance magnets, might lead to significantly higher costs to the DoD (and ultimately to the US taxpayer) for components that use such materials.

Other Perspectives

It is useful to look at other assessments relating to strategic materials, to see if there are pointers regarding rare earth materials and the potential consequences for placing future restrictions on their procurement, via the option of designating them as specialty metals.

The previously mentioned Institute of Defense Analyses report commissioned by the SMPB and published in October 2008 was one such study. It contains a fleeting, albeit flawed reference to rare earths, through the inclusion of data from Molycorp Minerals, inaccurately described as a producer of “rare earth magnets”. However, the study concluded that “the U.S. strategic metals industry is investing in new processing plants and equipment”, and that “[s]pecial [sic] metals investment is primarily driven by demand for commercial aircraft applications” and not military applications [9].

The 2008 report on the National Defense Stockpile by the National Research Council (NRC) noted that “[o]ne simple method for mitigating the risks of dependence on vulnerable foreign supplies is to simply bar goods manufactured or sourced outside national boundaries from defense procurement ” [30]. The report went on to note that “[r]estrictive measures of this sort have implications for procurement costs that may not be attractive. By nature, they are not very flexible tools for managing supply chain risks, although discretion for waiver almost always exists if officials are willing to invest significant political capital in exercising this discretion. Import restrictions, if exercised, may also create undesired obstacles to U.S. exports when copied, or retaliated against, abroad. They can, however, reduce dependence on foreign supplies at reasonable cost, but only if they are imposed some time before a crisis” [30].

Another report from the NRC, this time on the criticality of certain minerals to the US economy, was also published in 2008. In this document, the authors surmised that “while foreign competition for minerals is one aspect in a range of factors affecting the supply of minerals to the U.S. economy, a high degree of import dependence for certain minerals is not in itself a reason for concern. However, import dependence can expose a range of U.S. industries to political, economic, and other risks that vary according to the particular situation. Informed planning to maintain and enhance domestic economic growth requires knowledge of potential restrictions in the supply of non-fuel minerals, as well as the strategies to mitigate the effects of those restrictions” [31]. The authors did note the criticality of rare earth elements, but not in the context of procurement restriction.

Finally, in its 2009 report to Congress on national industrial capabilities, the DoD noted that it “desires that the industrial base on which it draws be reliable, cost-effective, and sufficient to meet strategic objectives. However, an infinitely robust industrial base is not the ultimate objective of the [DoD]. Rather, reliable, cost-effective, and sufficient industrial capabilities are a means to the [DoD]’s ultimate objective: the development, production, and support of defense materiel necessary to provide for the nation’s defense” [32].

Clearly the next 6-9 months will be critical as one of the entities tasked by Congress to investigate rare earth materials and their place in the DoD supply chain, does its work. Equally critical will be what happens as the battles lines are further drawn between the DoD and Congress on this matter, and between the various special interests advocating for a loosening of the specialty metal provisions, and those who wish to see the existing rules tightened, with additional materials added to the list.

Final Thoughts

On the basis of Congressionally-mandated reports by the DoD and independent third parties, there appears to be little evidence that either the national security or economic needs of the US would benefit from a future designation of rare earth materials as strategic materials via their addition to the specialty metals list – particularly in a sole source situation, albeit a domestic one. Certainly it is important for the US to secure access to rare earths for both defense and non-defense applications. It would make sense to do this through a more cooperative concerted effort, perhaps sponsored by Congress AND the DoD (if they can be persuaded to work more closely together) along with private enterprise, to accelerate the pace required to establish multiple North American sources of rare earth materials [33].

In addition to meeting national security objectives, such a plan could provide a competitive landscape for all those involved in the rare earth supply chain, by avoiding the replacement of one single source situation (i.e. procurement from China) with another. Such a plan might also go some way to alleviate fears of the potential future nationalization of such resources, in the interests of national security – fears which perhaps inhibit further private investment into the rare earth supply chain, in the near term.

Perhaps there already exists a viable approach. The Defense Production Act Title III Program is a DoD-wide initiative to “create assured, affordable, and commercially viable production capabilities and capacities for items essential for national defense” [34]. According to the Web site set up by the DoD’s Office of Technology Transition for this program, “Title III promotes production capabilities that would otherwise be inadequate to support the material requirements of defense programs in a timely and affordable manner. Title III focuses on materials and components that could be used in a broad spectrum of defense systems”. The site goes on to say that “Title III projects create numerous economic and technological benefits for domestic industries and consumers” [34].

Examples of current projects being undertaken through this program include:

• work to “ensure a continuing supply of primary (high purity) beryllium metal to the United States and its allies for defense and critical civilian applications”;

• work to “establish, strengthen, and expand a domestic source for advanced thermal batteries”;

• work to establish “a domestic full-scale production capability for thin silicon-on-insulator (SOI) wafers”.

These are just a few of many examples. This type of approach, might be worth considering for a domestic rare earth materials development program.

References

9. Scott Arnold et al, ‘Assessment of Industry Investment in U.S. Domestic Production of Strategic Materials’, Institute for Defense Analyses, Oct 2008.

26. S 2647, ‘National Defense Authorization Act for Fiscal Year 2010′, Sec. 837, 24 Jul 2009.

27. US Senate Armed Services Committee, ‘Report on S 1390: National Defense Authorization Act for Fiscal Year 2010′, Senate Report 111-35, 2 Jul 2009.

28. Defense Science Board, ‘History of the Defense Science Board’, Office of the Under Secretary of Defense for Acquisition, Technology & Logistics Web site, last accessed 21 Aug 2009.

29. Julianna Goldman, ‘Obama Promises to Veto Unnecessary Defense Spending’, Bloomberg Web site, 17 Aug 2009, last accessed 2 Sep 2009.

30. National Materials Advisory Board of the National Research Council, ‘Managing Materials for a Twenty-first Century Military’, The National Academies Press, Washington, D.C., 2008.

31. Committee on Earth Resources of the National Research Council, ‘Minerals, Critical Minerals and the U.S. Economy’, The National Academies Press, Washington, D.C., 2008.

32. US Department of Defense, ‘Annual Industrial Capabilities Report to Congress’, Office of the Under Secretary of Defense for Acquisition, Technology & Logistics – Industrial Policy, Mar 2009.

33. Jack Lifton, ‘Is China Planning to Restrict or Eliminate Export of ‘Heavy’ Rare Earth Metals?’, Seeking Alpha Web site, 19 Aug 2009, last accessed 5 Sep 2009.

34. US Department of Defense, ‘Defense Production Act Title III Homepage’, Office of the Under Secretary of Defense for Acquisition, Technology & Logistics – Technology Transition, www.acq.osd.mil/ott/dpatitle3/, last accessed 16 Sep 2009.

Strategic Materials and the Law – Continued

As to be expected, not everyone disagreed with the SMPB report. David Gallacher, a Washingon, D.C. attorney with the firm Sheppard Mullin, is a practitioner in government contracts and compliance with regulatory requirements. He wrote soon after the publication of the report that to his surprise, “the Board seems to have actually embraced some common sense, running counter to the implicit ‘policy demands’ that protectionists like Senator Evan Bayh (D-IN) seem to be pushing” [20]. This was a reference to a press release issued in May of 2008, by Senator Bayh and then-Senator Hillary Clinton (D-NY) during Clinton’s presidential campaign, demanding that the DoD rigorously enforce laws pertaining to specialty metals [21].

Gallacher and his Sheppard Mullin colleague John Chierichella have previously called the specialty metals restrictions “a relic of a former age, ill-suited to the realities of our global marketplace and current procurement demands” [22]. Sheppard Mullin’s clients include entities on the other side of the specialty metals debate, such as prime contractors in the aerospace and defense sectors [23]. At the time of the formation of the SMPB, they referred to its creation as “the most irrelevant of the ‘reforms’ implemented by the [NDAA for FY2007]”, calling it “a board that no one asked for and no one except Congress wants”, ensuring that “debate on specialty metals remains alive, even if it does not move toward progress” [22]. In his response to the SMPB’s report, Gallacher hoped that “this latest analysis from the Strategic Materials Protection Board will provide a foundation for some long overdue Congressional action to simplify, if not eliminate, what has become one the most complex aspects of DOD contracting” [20] i.e. the specialty metals provision.

In her March 2009 update to the ongoing Congressional Research Service report on specialty metals, Valerie Bailey Grasso reviewed the report of the SMPB in the context of the larger debate on specialty metal provisions, noting that “[s]ome policymakers believe that the specialty metal provision conflicts with free trade policies and that the presence and degree of such competition is the most effective tool for promoting efficiencies and improving quality. Others believe that domestic specialty metal suppliers need the protections afforded by domestic source provisions, and that keeping a robust, domestic specialty metal industry is a hedge against any future enemy threat” [24].

In a subsequent review of the history of the specialty metal provision, Grasso further notes that “[f]rom the inception of the specialty metal provision, both Congress and DoD emphasized that a test of reasonableness would be applied; that the specialty metal provision should not pose an administrative burden upon DoD contractors nor the federal government”. She went on to quote a statement by Lieutenant General Donald J. Hoffman, Military Deputy in the Office of the Assistant Secretary of the Air Force for Acquisition, before the HASC Subcommittee of Air and Land Forces on March 7, 2007. Hoffman said that as part of the waiver process in 2006 for the ARMRAM missile program, “the government contractor spent over 2,200 man hours to review 4,000 parts, and produced a documentation to justify the waiver. This documentation was eight inches tall in printed form. All this work was to justify a waiver for $14,000 on an item that is valued at $566,000” [24]. We’d be hard pressed to find a better example of an “administrative burden”.

In response to such anecdotes, Jeff Green commented that “there have been significant modifications to the specialty metals clause since 2007, to ease the implementation of the law including new authorities that allow the unrestricted use of commercial-off-the-shelf (COTS) items, a de minimis exception that allows unrestricted use of up to 2% of an end item, a national security exception and a co-mingling authority to allowing mixing of foreign and domestic metal” [15].  However, while such modifications have in fact been implemented, for the most part these concessions specifically do not apply to high performance magnets which contain specialty metals (i.e. Sm-Co) and thus complications do remain.

There are those then, within the DoD and outside of it, who, for a variety of reasons do not want to see any further specialty metals-related restrictions or other parameters. This resistance will be encountered by those who would like to see the formal definition of rare earth materials as strategic materials, from a national security point of view – at least, via the specialty metals route. That said, such proponents do have something of an insurance policy. In addition to the mandate for the SMPB to address the issue of rare earth materials, Section 828 of HR 2647 also included a requirement that the Comptroller General (who directs the Government Accountability Office) submit to the House and Senate Armed Services Committees, “a report on the usage of rare earth materials in the supply chain of the Department of Defense”.

The purpose of the report was to “determine the availability of rare earth materials, including ores, semi-finished rare earth products, components containing rare-earth materials, and other uses of rare earths by the Department of Defense in its weapon systems” [1]. The requirements became even more specific, to include:

• an analysis of past procurements and attempted procurements by foreign governments or government-controlled entities, including mines and mineral rights, of rare-earth resources outside such nation’s territorial boundaries;

• an analysis of the worldwide availability of rare earths, such as samarium, neodymium, thorium and lanthanum, including current and potential domestic sources for use in defense systems, including a projected analysis of projected availability of these materials in the export market;

• a determination as to which defense systems are currently dependent on rare earths supplied by non-domestic sources, particularly neodymium iron boron magnets.

There was an interesting minor anomaly in the language of Section 828 here; Sub-section d) defined the term “rare earth”, as used in Section 828, to mean “the chemical elements, all metals, beginning with lanthanum, atomic number 57, and including all of the natural chemical elements in the periodic table following lanthanum up to and including lutetium, element number 71. The term also includes the elements yttrium and scandium” [1]. These are the same seventeen elements that the International Union of Pure and Applied Chemistry defines as rare earth metals [25] and yet in the specific requirement to analyze the worldwide availability of rare earths noted above, thorium was also listed a rare earth. Was this an inadvertent error, or was the inclusion intentional?

Article continues in Running the Gauntlet: Part 4.

References

1. HR 2647, ‘National Defense Authorization Act for Fiscal Year 2010′, Sec. 828, 25 Jun 2009.

15. Telephone interview with Jeff Green, J. A. Green & Company, LLC, 24 Aug 2009.

20. David Gallacher, ‘DOD Conclude That Specialty Metals Are Not Materials Critical To The National Security Interests Of The U.S.’, Government Contracts Blog, Sheppard Mullin, 9 Apr 2009.

21. Office of US Senator Evan Bayh, ‘Bayh Presses Pentagon to Comply With Laws to Protect Defense Manufacturing Base’, Press Release, 8 May 2008.

22. David Gallacher & John Chierichella, ‘Berry Amendment Reform – The Sound And The Fury’, The Government Contractor, Vol. 48, No. 39, 370, 25 Oct 2006.

23. Joshua Hamerman, ‘Sheppard Mullin Launches Aerospace / Defense Effort’, Mergers & Acquisitions Report, Vol. 20, No. 39, 15 Jan 2007.

24. Valerie Bailey Grasso, ‘The Specialty Metal Provision and the Berry Amendment: Issues for Congress’, Congressional Research Service, RL33751, 5 Mar 2009.

25. IUPAC, ‘Nomenclature of Inorganic Chemistry: IUPAC Recommendations 2005′, p 51, RSC Publishing, 2005.

Article continues in Running the Gauntlet: Part 4.

Strategic Materials and the Law – Continued

In the subsequent report on HR 2647 that accompanied the original bill, the HASC criticized the SMPB’s re-definition of the term “strategic material”, claiming that this new definition undermined the purpose of the SMPB’s existence. The report was particularly scathing of the SMPB’s omission of any reference in these definitions, to the “range of materials that Congress has designated as critical to national security and, as such, has provided significant protection or domestic preference in DoD policy and in statute” [11] i.e. the specialty metals defined at 10 USC §2533b.

These comments from the HASC were made despite the fact that the first and second SMPB reports did indeed make reference to specialty metals – and despite the fact that the aforementioned Institute for Defense Analyses study noted that “the sponsor of the study [i.e. the SMPB] has defined a strategic material as the specialty metals included in Section 2533b of Title 10, United States Code” [9]. The true root cause of the HASC’s irritation was most likely with the key finding of the second report, which was 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” [6].

To add insult to the HASC’s injury, the SMPB report went on to state that the incorporation of specialty metals into a DoD system did not, by definition, make a material critical to national security. As the authors astutely noted, “[i]f 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” [6].

The final straw for the HASC was the last piece of the report, which stated that the SMPB had determined that there was a grand total of one material deemed to be critical to national security, namely high purity beryllium. This did not go over at all well with the HASC, with it commenting that it did “not find this conclusion to be plausible” and that it expected that the SMPB would “swiftly revisit” the definition of “materials critical to national security”, in order to ensure that “it is able to identify gaps in our domestic defense supply chain and provide the President, the Secretary of Defense, and Congress with information, analysis, and advice on strategic materials which are critical to the operations of the Department of Defense” [11].

Clearly then, these findings were not what the HASC had been expecting. In recent years, sourcing restrictions associated with specialty metals have become ever more complex, as competing lobbyists representing a variety of entities have successfully managed to introduce ever more convoluted language into the annual NDAA bills, in the interests of self-preservation on all sides. In this report from the DoD’s SMPB, the HASC and associated special interests were now confronted with the DoD’s considered opinion that, for all intents and purposes, these restrictions no longer made sense, despite best efforts to show otherwise. In a further footnote in the report, the authors cannily noted that “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” [6].

It wasn’t just the HASC that publicly took exception to the SMPB report. While there was little media attention at the time of its publication, some observers did weigh in on the report’s findings. Laurence Lasoff, a lobbyist for the Specialty Steel Industry of North America, said that “[w]e believe there is no legal basis for the conclusion that strategic materials are not critical because DoD is not the pre-eminent customer. There is no legal basis whatsoever for a definition of ‘critical’ based upon the fact that DoD has to be the principal customer” [12].

Individuals working for congressional leaders who drove the creation of the SMPB were even more incredulous. Jeff Green, Policy Counsel to the HASC at the time that Duncan Hunter was its Chair, was among a number of staffers who played a key role in the creation of the SMPB and other legislation concerning specialty metals. According to Green, the conclusion in the SMPB report represented a “fundamental failure to comply with congressional intent”. He went on to say that “[n]ot identifying the issue of rare earths in high performance magnets [coming from China] totally misses the mark. The technical inaccuracies in the report are astounding” [12].

Green’s comments on high performance magnets related directly to language in the HASC’s report that accompanied the NDAA for FY2008, in which the HASC urged the DoD and SMPB to “consider the critical contributions to national security made by the domestic high-performance magnet industry, especially during consideration of any past or future domestic non-availability determinations, and to ensure the continued availability of these items from domestic sources”. The HASC further encouraged the DoD and SMPB to “consider protections for certain classes of high-performance magnets, such as rare earths and ferrites, which are commonly used in Department of Defense weapons systems, but are not currently protected in statute” [13].

Green now lobbies Congress from the private sector, with current clients including a handful of domestic permanent magnet material producers [14]. He recently noted that Congress put the DoD on notice of their concern about rare earths as early as May 2007, specifically requesting that the SMPB review the issue. Green stated that the “DoD’s own definition of ‘critical’ materials includes a review of potential ‘significant and unacceptable risk of supply disruption’, yet the DoD did not review a market where China controls over 96% of rare earth resources. To me, that is a situation of great concern and the type of scenario the [SMPB] was designed to review. Rare earth components are found in all sorts of defense systems and until the [DoD] gets a handle on the usage of these materials and their availability, the intent of the [SMPB] won’t be met” [15]. Green also noted that the DoD was making strides in their review of rare earths, but that a final analysis was not expected until at least 2010.

The final version of the NDAA for FY2008 included amendments to the specialty metals provision at 10 USC §2533b and its applicability to commercial items. It included specific language which restricted certain aspects of the procurement of high performance magnets for DoD projects [10]. The specialty metals provision is implemented via the Defense Federal Acquisition Regulation Supplement (DFARS). In July 2009, the DoD issued a final ruling on the implementation of changes to the DFARS, pertaining to specialty metals [16].

The final ruling included commentary on the definition of “high performance magnet”, noting that it meant magnets that derive the “majority of their magnetic properties from rare earth materials”. By definition, this excludes ferrites and alnico magnet materials, although alnico magnets would still be considered specialty metals by virtue of their cobalt (Co) content. The definition of “high performance magnets” now includes neodymium-iron-boron (Nd-Fe-B) magnet materials, in addition to samarium-cobalt (Sm-Co) magnet materials which were already considered to be specialty metals due to their Co content. The DoD did note in this final ruling that Nd-Fe-B magnets do not normally contain specialty metals and would thus not be subject to the specialty metals clause.

It is important to reiterate that Sm-Co magnets are at present considered to be specialty metals for reasons other than their rare earth element content. However, definitions can change. As noted above, per the NDAA for FY2008 there are two ways to designate a metal or alloy as being a “strategic material”, with the subsequent associated scrutiny on procurement: either the SMPB defines it as such, or the specific metal or alloy gets listed as a specialty metal in the specialty metals provision within 10 USC §2533b and DFARS. In the former case, ultimately the DoD makes the determination; in the latter case, simple language from Congress would do the trick.

Since at present, there is no large-scale production of rare earth materials in North America, a scenario where rare earths are added to the specialty metals list would seem unlikely as it would make little sense. In the case of safeguarding domestic rare earth magnet production, for example, there is a single North American producer of Sm-Co, and there is at present no production of Nd-Fe-B magnet material at all.

However, the past 12-18 months have seen significant activity and interest in the revival of a once-thriving North American rare earth mining sector. Molycorp Mineral’s Mountain Pass mine in California is coming back into operation and there are significant deposits of rare earths elsewhere in the US and Canada, which are available for development, with the right investment and infrastructure strategy. Molycorp is promoting its “mine to magnet” strategy and in July 2009 announced its intention to create a joint venture with Arnold Magnetic Technologies, to produce rare earth magnets [17]. There have been numerous recent media stories on the proposed production of electric vehicles, and the significant quantities of rare earth-containing magnets and batteries that such vehicles would contain [18].

Late in the summer of 2009, a report that China planned to restrict and in some cases ban the export of rare earth elements [19], leading to a lack of access to such materials within 3-5 years, ignited a media frenzy, and once again put US strategic materials policies in the spotlight with regard to both defense and non-defense applications. It is entirely possible that, once Molycorp has its “mine to magnet” strategy in place, the calls for rare earths to be put on the specialty metals list will grow stronger.

The Findings in HR 2647 obviously readdressed the issue of safeguarding domestic access to rare earth elements for national security purposes, by requiring the SMPB to give consideration to rare earth materials. Given the outcome of the prior SMPB work detailed above however, and the usually non-binding nature of such Findings, proponents of the DoD formally defining rare earth materials as strategic materials, should probably not hold their collective breaths.

Article continues in Running the Gauntlet: Part 3.

References

6. Department of Defense Strategic Materials Protection Board, ‘Report of Meeting Held on December 12, 2008′, Office of the Deputy Undersecretary of Defense for Industrial Policy, 23 Feb 2009.

9. Scott Arnold et al, ‘Assessment of Industry Investment in U.S. Domestic Production of Strategic Materials’, Institute for Defense Analyses, Oct 2008.

10. Public Law 110-181, ‘ National Defense Authorization Act for Fiscal Year 2008′, Sec. 803, 28 Jan 2008.

11. US House Armed Services Committee, ‘Report on HR 2647: National Defense Authorization Act for Fiscal Year 2010′, House Report 111-166, 18 Jun 2009.

12. Richard McCormack, ‘Defense Department To The U.S. Specialty Metals Industry: We Don’t Need You’, Manufacturing & Technology News, Vol. 16, No. 6, 17 Apr 2009.

13. US House Armed Services Committee, ‘Report on HR 1585: National Defense Authorization Act for Fiscal Year 2008′, House Report 110-146, 11 May 2007.

14. Center for Responsive Policy, ‘Lobbying: JA Green & Co’, OpenSecrets.org Web site, last accessed 21 Aug 2009.

15. Telephone interview with Jeff Green, J. A. Green & Company, LLC, 24 Aug 2009.

16. Department of Defense – Defense Acquisition Regulations System, ‘Defense Federal Acquisition Regulation Supplement; Restriction on Acquisition of Specialty Metals (DFARS Case 2008-D003): Final Rule’, Federal Register 74:144 (July 29, 2009), GPO Access Web site, last accessed 2 Sep 2009.

17. Molycorp Minerals, LLC & Arnold Magnetic Technologies Corporation, ‘Molycorp Minerals and Arnold Magnetic Technologies Account JV to Manufacture Rare Earth Magnets in the US’, Press Release, BusinessWire, 13 July 2009.

18. Steve Gorman, ‘As hybrid cars gobble rare metals, shortage looms’, Reuters, 31 Aug 2009.

19. Ambrose Evans-Pritchard, ‘World faces hi-tech crunch as China eyes ban on rare metal exports’, The Daily Telegraph, London, 24 Aug, 2009.

Article continues in Running the Gauntlet: Part 3.

Introduction

The rare earths are a group of seventeen little-known elements in the periodic table, comprised of the fifteen lanthanoid elements (from lanthanum through to lutetium, with atomic numbers 57 through 71) plus scandium and yttrium. In recent years there has been a considerable uptick in public discussions on rare earth materials and their growing importance to the US economy and those of other Western nations. This is hardly surprising, given recent developments in hybrid vehicles, electric vehicles and innovative electrical generators for wind turbines. Such technologies rely extensively on permanent magnet motors, and batteries, both of which utilize rare earth elements.

Industry experts try to make sense of sometimes-conflicting projections for future rare earth usage, while noting the lack of significant North American production of rare earths at present. It is not surprising therefore, that there is an almost daily barrage of news describing impending doom for these emerging energy-related technologies, without a change in US mindset when it comes to reliance on rare earth material imports.

There is another dimension to these materials, however, that is starting to gain greater attention, particularly as domestic sourcing of rare earth materials is thawing from its recent “Ice Age” and as new rare earth plays are investigated and begin to be developed, both in North America and beyond. We’re talking here about the criticality of rare earth materials to US national defense objectives – beyond the more obvious economic needs of the US.

There have been rumblings lately, of moves by some to look at rare earths in the same light as other materials whose procurement for US Department of Defense (DoD) contracts are subject to import restrictions – the so-called specialty metals. A closer look at this trend is warranted, since, despite growing optimism in some quarters, it will be some years before the known rare earth resources in North America can be fully brought on line. This evaluation of rare earth materials in the context of import restrictions, is in contrast to the related, but distinctly different topic of domestic stockpiling and buffer stocks.

To better understand the impact that classifying rare earth materials as strategic materials would have, in particular as specialty metals, we need to examine such a potential move in the context of existing strategic and critical materials, which are deemed to be of potential or actual national security interest to the US.

Strategic Materials and the Law

Late in June 2009, the US House of Representatives passed HR 2647, the National Defense Authorization Act (NDAA) for FY2010 [1]. In recent years, the annual Congressional NDAA bills have included language of significant consequence to the procurement of strategic materials, and this year was no exception.

Section 828 of the Act included language concerning “the availability of rare earth materials and components containing rare earth materials in the defense supply chain”. The Findings of this Section noted that it was necessary to “ensure the uninterrupted supply of strategic materials critical to national security”. “Strategic materials” in this case explicitly referred to “rare earth materials”, in addition to the specialty metals [2]. Also listed was the requirement to “support the defense supply-chain, particularly when many of those materials are supplied by primary producers in unreliable foreign nations” – presumably a reference to the People’s Republic of China. Such Findings generally describe Congressional intent only, and do not carry the force of law, since, while such comments are often included in the initial House and Senate versions of legislation, they are typically removed from the final version of the binding legislation.

The second part of Section 828 noted that “less common metals” such as the rare earths and thorium were “critical to modern technologies, including numerous defense critical technologies and these technologies cannot be built without the use of these metals and materials produced from them and therefore could qualify as strategic materials, critical to national security”. If these Findings were included in the final version of the law, the DoD’s Strategic Materials Protection Board (SMPB) would need to determine a strategy for ensuring the “domestic availability” of these materials, and to present such a strategy to the President for consideration. Given the typically non-binding nature of such Findings, however, this is perhaps unlikely.

That said, it is interesting that the House would want to go back to the well when it comes to the SMPB, despite the likely non-binding nature of the language of the Findings, given the uneasy relationship that exists between the two entities. Set up as part of the FY2007 NDAA “in order to identify items that are critical to United States national security interests” [3], the SMPB consists of representatives of the US Secretary of Defense, the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Under Secretary of Defense for Intelligence and the Secretaries of the Army, Navy and Air Force [4].

The SMPB got off to a rocky start by failing to convene and meet for the first time, ahead of the statutory deadline required by the legislation that created it. After complaints from Duncan Hunter (R-CA), Ranking Member and former Chairman of the House Armed Services Committee (HASC), the SMPB finally convened in July 2007 [5]. In its subsequent initial report to Congress, the SMPB simply noted that it had formed and met, and that it would look to focus its efforts on “determining the need to take action to ensure a long term domestic supply of specialty metals as designated in 10 USC 2533b” [6].

The SMPB’s second meeting did not take place until the end of 2008, and it further endeared itself to the HASC by publishing a highly controversial second report in early 2009, detailing the meeting’s outcome. The key finding of this report was that “[s]pecialty metals are not ‘critical materials’”, further concluding that “[t]here is no national security reason to ensure a long term domestic supply of specialty metals” [6] – an outcome that apparently took the HASC and others rather by surprise.

Prior to the 2008 meeting, the SMPB formed a Strategic and Critical Materials Working Group in order to complete other specific reports required by Congress. These included:

• a report for the House on the National Defense Stockpile, amid concerns during the 109th Congress about “the DoD’s ability to ensure the timely availability of materials to meet the current needs of the military services” [7];

• a similar report for the Senate of the 110th Congress on “strategic and critical materials”, with specific reference to “critical materials that may be needed by U.S. defense industries in case of a major international emergency” [8];

In addition, the SMPB commissioned a report from the Institute for Defense Analyses [9], to meet the requirement of the NDAA for FY2008 that the SMPB “perform an assessment of the extent to which domestic producers of strategic materials are investing and planning to invest on a sustained basis in the processes, infrastructure, workforce training, and facilities required for the continued domestic production of such materials to meet national defense requirements” [10].

In the course of tackling the various reports that the SMPB was mandated to complete, a number of definitions were introduced by the SMPB in order to maintain consistency of language across all reports. Two key definitions, at the heart of the subsequent controversy surrounding the report published in 2009, were:

1) Strategic Material – a material:

• which is essential for important defense systems;
• is unique in the function it performs;
• for which there are no viable alternatives.

2) Critical Material (a.k.a. “material critical to national security”) – a Strategic Material for which:

• the DoD dominates the market for the material;
• the DoD’s full and active involvement and support are necessary to sustain and shape the strategic direction of the market;
• there is significant and unacceptable risk of supply disruption due to vulnerable U.S. or qualified non-U.S. suppliers.

The SMPB went on to determine that “any material designated as critical will require a risk assessment and a strategy to ensure domestic availability”. The problem here was that there was already a statutory definition of the term “strategic material” included in the FY2008 NDAA language by Congress – such a material specifically being defined as:

• a material designated as critical to national security by the SMPB in accordance with 10 USC §187; or
• a specialty metal as defined by 10 USC §2533b.

Article continues in Running the Gauntlet: Part 2.

References

1. HR 2647, ‘National Defense Authorization Act for Fiscal Year 2010′, Sec. 828, 25 Jun 2009.

2. Public Law 109-364, ‘John Warner National Defense Authorization Act for Fiscal Year 2007′, 10 USC §2533b, 17 Oct 2006.

3. US House Armed Services Committee, ‘House and Senate Conferees Approve the Conference Report for the National Defense Authorization Act for Fiscal Year 2007′, Press Release, 26 Sep 2006.

4. Public Law 109-364, ‘John Warner National Defense Authorization Act for Fiscal Year 2007′, 10 USC §187, 17 Oct 2006.

5. John Buchanan, ‘Mission Impossible’, Forward Online, 8 Mar 2008.

6. Department of Defense Strategic Materials Protection Board, ‘Report of Meeting Held on December 12, 2008′, Office of the Deputy Undersecretary of Defense for Industrial Policy, 23 Feb 2009.

7. US House Armed Services Committee, ‘Report on HR 1815: National Defense Authorization Act for Fiscal Year 2006′, House Report 109-89, 20 May 2005.

8. US Senate Appropriations Committee, ‘Department of Defense Appropriations Bill, 2008′, Senate Report 110-155, 14 Sep 2007.

9. Scott Arnold et al, ‘Assessment of Industry Investment in U.S. Domestic Production of Strategic Materials’, Institute for Defense Analyses, Oct 2008.

10. Public Law 110-181, ‘ National Defense Authorization Act for Fiscal Year 2008′, Sec. 803, 28 Jan 2008.

Article continues in Running the Gauntlet: Part 2.

—–
“In the past couple of years there has been a considerable uptick in public discussions on rare earth materials and their growing importance to the US economy. This is hardly surprising, given recent developments in hybrid vehicles, electric vehicles and innovative electrical generators for wind turbines. Such technologies make use of rare earth elements, after being incorporated into permanent magnets or batteries. Industry experts try to make sense of sometimes-conflicting projected numbers for future rare earth usage, while noting the lack of significant domestic production of rare earths at present. It is not surprising therefore, that there is an almost daily barrage of news describing impending doom for these emerging energy-related technologies, without a change in US reliance on rare earth material imports.

There is another dimension to these materials, however, that is now gaining greater attention, particularly as domestic sourcing of rare earth materials is actually thawing from its recent Ice Age, and as more potential rare earth plays are investigated and developed, both in North America and beyond.

We’re talking of course about the criticality of rare earth materials to US national security – economic security, yes, but more important, to national defense objectives. There have been recent moves to look at rare earths in the same light as other materials whose procurement for US Department of Defense (DoD) contracts are subject to import restrictions (the so-called specialty metals). A closer look at this trend is warranted, since, despite growing optimism in some quarters, it will be some years before the known rare earth resources in North America can be fully brought on line. The evaluation of rare earth materials in the context of import restrictions is in contrast to the related but distinctly different topic of domestic stockpiling and buffer stocks, which will be examined in a future article.

To better understand the impact of rare earth materials potentially being classified as strategic materials in the legal sense (and in particular as specialty metals), we need to see how they fit into the recent historical context pertaining to existing strategic and critical materials, which are deemed to be of potential national security interest of the US”.
—–

The paper then looks at the current defense authorization bills going through the US Congress, what they have to say about rare earth materials, and then looks at the potential consequences of this legislation and comparing it to existing strategic and critical materials. It also highlights the significant friction between the DoD and Congress, on this and related issues. I believe that it covers some ground relating to rare earths that has had little public exposure before now.

Feel free to download a pre-print of the paper, and to let me know what you think of it.