[House Hearing, 111 Congress]
[From the U.S. Government Publishing 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

                              ----------                              

                     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
                              ----------                              

                        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

                              ----------                              

                  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.

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    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:

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    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.

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    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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