National Defense Stockpile: Disposal of Excess Zinc (Letter Report,
11/07/96, GAO/NSIAD-97-30).

Pursuant to a congressional request, GAO reviewed issues surrounding a
dispute between the American Zinc Association (AZA) and the federal
government about the Department of Defense's (DOD) sale of excess zinc
from the National Defense Stockpile, focusing on: (1) the government's
basis for its interpretation of the statutory phrase "usual markets" as
applied to the zinc sales program; and (2) DOD efforts to not unduly
disrupt the zinc market.

GAO found that: (1) the statute that governs sales from the stockpile
does not define the usual markets for stockpile materials; (2)
accordingly, the Defense National Stockpile Center (DNSC) and the Market
Impact Committee have concluded that the usual market for stockpile zinc
sales is the total U.S. market for all grades of zinc, not just the
grades being sold from the stockpile; (3) DNSC published its policy on
timing of sales, amounts to be sold, and relation of sales prices to
market prices, provided plans to the appropriate congressional
committees for approval, sold less zinc than it was authorized to sell,
and gave increased emphasis to selling at prices close to commercial
market prices; and (4) DNSC plans to continue to closely monitor prices
when accepting bids to ensure that the market is not unduly disrupted.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-30
     TITLE:  National Defense Stockpile: Disposal of Excess Zinc
      DATE:  11/07/96
   SUBJECT:  Property and supply management
             Strategic materials
             Military inventories
             Commodity sales
             Commodity marketing
             Surplus federal property
             Price regulation
             Metals
             Property disposal
IDENTIFIER:  National Defense Stockpile
             DOD Zinc Sales Program
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Military Readiness, Committee
on National Security, House of Representatives

November 1996

NATIONAL DEFENSE STOCKPILE -
DISPOSAL OF EXCESS ZINC

GAO/NSIAD-97-30

Disposal of Excess Zinc

(709178)


Abbreviations
=============================================================== ABBREV

  AZA - American Zinc Association
  DNSC - Defense National Stockpile Center
  DOD - Department of Defense

Letter
=============================================================== LETTER


B-270963

November 7, 1996

The Honorable Herbert H.  Bateman
Chairman, Subcommittee on Military
 Readiness
Committee on National Security
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we review issues
surrounding a dispute between the American Zinc Association\1 (AZA)
and the federal government about the Department of Defense's (DOD)
sale of excess zinc from the National Defense Stockpile.  AZA
believes that the amount of zinc DOD plans to sell annually is too
high and will cause undue disruption of the usual markets for zinc. 
This report assesses (1) the government's basis for its
interpretation of the statutory phrase "usual markets" as applied to
the zinc sales program and (2) DOD's efforts to not unduly disrupt
the zinc market. 


--------------------
\1 AZA's membership consists of 18 domestic and foreign firms that
produce zinc concentrate, metal, oxide, and dust for U.S. 
consumption. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The National Defense Stockpile is a reserve of strategic and critical
materials that may be unavailable in the United States in sufficient
quantities to meet unanticipated national security requirements.  The
Defense Logistics Agency's Defense National Stockpile Center (DNSC)
has managed the stockpile since 1988.  Zinc is one of 92 strategic
and critical materials stored in the stockpile.  It is commonly used
for galvanizing, die-casting, manufacturing brass and bronze, and
making the U.S.  penny.  It is produced in various grades--special
high grade, high grade, continuous galvanizing, controlled lead, and
prime western--that are distinguishable by the amount of impurities
they contain, such as lead, cadmium, and iron.  Special high grade is
the most pure, prime western the least.  As of March 30, 1996, DNSC
has nearly 300,000 tons\2

of slab zinc, valued at $300 million, stored at 15 facilities in 9
states.  (See app.  I.) About 91 percent is either high grade (48
percent) or prime western grade (43 percent). 

The Strategic and Critical Materials Stock Piling Act, 50 U.S.C.  98
et seq., as amended, prohibits the sale of any stockpile material
unless the disposal, and the quantity of the material to be disposed
of, is authorized by law.  The act also states that

     "to the maximum extent feasible .  .  .  efforts shall be 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." [Emphasis
     added.]

DNSC has been authorized to sell up to 50,000 tons of zinc in fiscal
year 1996 and 50,000 tons in fiscal year 1997.  It is conducting
monthly sales using sealed bidding procedures.  Bids for a minimum of
20 tons are accepted from producers, processors, traders, and
consumers on an "as-is, where-is" basis.\3 Between 1993 and March
1996, DNSC sold approximately 77,000 tons\4 of zinc for about $60
million.  DNSC's plans, as provided to the Congress, indicate that,
if authorized, it intends to sell up to 50,000 tons annually until
the inventory is depleted.  Money generated from sales is put into
the National Defense Stockpile Transaction Fund and used for
stockpile operations or, as authorized and appropriated by the
Congress, for other defense purposes. 


--------------------
\2 As used in this report, "tons" are short tons of 2,000 pounds
each. 

\3 The term "as is, where is" means DNSC does not guarantee the
quality of the zinc and the buyer is responsible for transportation
from the storage site. 

\4 During this period, DNSC sold 64,235 tons to the commercial sector
and 12,735 tons to the U.S.  Mint. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The statute that governs sales from the stockpile does not define the
usual markets for stockpile materials.  Accordingly, executive branch
officials have discretion in identifying the relevant market for
particular sales.  DNSC and the Market Impact Committee,\5 the
intergovernmental group that is statutorily required to advise DNSC
on the U.S.  and foreign effects of sales from the stockpile, have
concluded that for stockpile sales of zinc, the usual market is the
total U.S.  market for all grades of zinc, not just the grades being
sold from the stockpile.  AZA considers the usual market to be the
U.S.  market for only the particular grades being sold from the
stockpile.  We believe the government's determination has a sound
basis.  It is based on practices that exist in the zinc industry, and
it is consistent with the views of zinc market participants with whom
we discussed this matter. 

DNSC has policies and procedures for selling zinc without unduly
disrupting the zinc market.  Specifically, it has publicized its
policy on timing of sales, amounts to be sold, and relation of sales
prices to market prices; provided plans to the appropriate
congressional committees for approval; sold less zinc than it was
authorized to sell; and given increased emphasis to selling at prices
close to commercial market prices. 

The government recognizes that stockpile sales can affect some
sellers more than others, despite its attempts to minimize
disruption.  The sales may, for example, have a greater impact on the
sellers of the grades being sold from the stockpile, and a seller of
one grade could be more affected than a seller of several grades. 
The increase in zinc supplies can lower prices and cause particular
producers or processors to lose business.  However, the Market Impact
Committee contends that this is normal commercial activity, not an
undue disruption.  DNSC plans to continue to closely monitor prices
when accepting bids to ensure that the market is not unduly
disrupted. 


--------------------
\5 The Market Impact Committee is made up of representatives of the
Departments of Agriculture, Commerce, Defense, Energy, the Interior,
State, and the Treasury; the Federal Emergency Management Agency; and
such other persons as the President considers appropriate.  The
representatives from the Departments of Commerce and State are the
cochairs. 


   GOVERNMENT'S VIEW OF USUAL
   MARKET FOR ZINC HAS A SOUND
   BASIS
------------------------------------------------------------ Letter :3

When evaluating the potential for undue market disruption, DNSC and
the Market Impact Committee consider the usual market for zinc to be
the total U.S.  market for all grades of the commodity.  AZA
contends, however, that the statute requires an evaluation based only
on the markets for the grades of zinc the stockpile plans to sell. 
We find that the statute does not specify the market the government
is to examine and that the government's determination to consider the
entire zinc market has a sound basis. 


      STATUTE DOES NOT SPECIFY THE
      MARKET THE GOVERNMENT IS TO
      EXAMINE
---------------------------------------------------------- Letter :3.1

The Stock Piling Act authorizes the acquisition, management, and
disposal of "strategic and critical materials" and requires efforts
by the stockpile managers, to the maximum extent feasible, "to avoid
undue disruption of the usual markets of producers, processors, and
consumers of such materials." AZA argues that the phrase "such
materials" refers only to the specific grades of zinc being disposed
of from the stockpile and that the phrase "usual markets" refers only
to producers, processors, and consumers of those specific grades. 
The government, on the other hand, believes that "material" refers to
the commodity of zinc, regardless of grades; therefore, the usual
markets to which the statute refers means the total market for the
commodity, not just the markets for the specific grades being sold
from the stockpile. 

Although it is clear from the Stock Piling Act that the phrase such
materials refers to the strategic and critical materials disposed of
under the act, the statute does not require a market analysis based
on specific grades of stockpile commodities.  In addition, while the
act requires efforts to avoid undue disruption of the usual markets
for materials sold from the stockpile, it does not define the phrase
usual markets or otherwise specify what markets the government is to
examine to determine whether stockpile sales could be unduly
disruptive.  Furthermore, while it is clear from the act's
legislative history that the Congress was concerned with the market
effects of stockpile sales, there is no indication that the Congress
envisioned an evaluation at any particular market level.  Generally,
without a statutory definition or clear indication of congressional
intent, an agency charged with implementing a statute has the
discretion to define a phrase such as usual markets.  The courts have
said that an agency's determination in such circumstances will not be
overturned, provided it has a reasonable basis.\6


--------------------
\6 See Associated Metals and Minerals Corp.  v.  Carmen, 704 F.2d 629
(1983). 


      GOVERNMENT'S POSITION HAS A
      SOUND BASIS
---------------------------------------------------------- Letter :3.2

We believe the determination by DNSC and the Market Impact Committee
concerning the usual markets for zinc has a sound basis.  According
to DNSC officials, their determinations are based on the practices
for each industry and commodity.  Some commodities consist of grades
that have separate industry uses and generally cannot be substituted
for one another, according to DNSC.  For example, the mineral
fluorspar,\7

another stockpile material being disposed of, is divided into grades
having distinct end uses--a metallurgical grade used in the
manufacture of certain metals and an acid grade used by the glass
industry.  In contrast, in some cases, different grades of zinc may
be used for the same purpose, such as certain types of galvanizing. 
Annual legislation authorizing sales from the stockpile reflect these
differences between commodities.  Disposals of certain commodities,
such as zinc and lead, are authorized on a generic basis;
authorization for disposing of other commodities, such as fluorspar,
is given by separate grades and amounts.\8

DNSC and the Market Impact Committee's view of the zinc market as an
entire market is a long-standing one shared by previous managers of
the stockpile.  Specifically, the General Services Administration and
the Federal Emergency Management Agency, both prior managers of the
stockpile, have defined the usual market for zinc as the entire
market. 

Our discussions with zinc market participants--that is, companies
producing or processing zinc, those buying and selling zinc as
traders or brokers, those that consume zinc in their manufacturing
processes, and individuals who study or report on the zinc
markets--support this view of the larger market.  Some of these
discussions were with AZA members.  The consensus was that some zinc
consumers adjust their purchases of different grades of zinc
according to changing market factors.  Some producers adjust their
production of different grades according to supply and demand for
each grade.  According to the participants, the impact of market
events, such as an increased supply because of stockpile sales, could
affect not only the market of the particular grade sold, but also the
overall market because a significant decline in the price of one
grade would be expected to depress the prices of other grades. 
Pricing data we reviewed show that prices of different grades tend to
follow similar patterns. 

Although some zinc consumers may not purchase materials sold from the
stockpile, we do not believe that the Stock Piling Act requires the
government to limit its review of the usual markets to only those
consumers likely to buy zinc from the stockpile.  According to DNSC,
a company may not buy stockpile zinc for a number of reasons.  For
example, even if a company could use the grade of zinc being sold,
the material may not be available in sufficient quantity or quality,
or at low enough prices, to justify changing suppliers.  Even though
such a company may not buy zinc from the stockpile, that company
could be affected by the increase in supply resulting from stockpile
sales. 

The government recognizes that sales from the stockpile can affect
some participants in the market more than others.  Stockpile sales
increase supplies that can drive down prices and cause a particular
producer or processor to lose business.  The stockpile is in effect
an additional zinc producer.  One major U.S.  zinc producer, for
example, produces only one grade of zinc, which is one of those DNSC
has offered for sale.  This producer stated that it had lost sales
because of the stockpile sales.  However, the Market Impact Committee
stated that the loss of business by one producer, in and of itself,
does not necessarily unduly disrupt the overall market.  Some
customers taking advantage of lower prices from a new supplier is a
normal commercial activity. 

One factor that may limit the impact of stockpile sales on U.S.  zinc
producers is the international character of the zinc market.  Zinc is
an internationally traded commodity.  In 1994, the latest year for
which data were available, U.S.  zinc consumption (all grades) was
about 17 percent of the world's consumption, and the United States
had to rely on imports for about 67 percent of the 1.2 million tons
of slab zinc consumed.  According to zinc market participants and
analysts, although prices and market conditions for zinc can differ
by country, international trade tends to spread the effects of
changing market conditions across countries.  For example, if U.S. 
prices fell, then suppliers would decrease their sales to the U.S. 
market and increase their sales to other markets, thus distributing
the price effects to those other markets. 


--------------------
\7 Fluorspar is the commercial name of the mineral fluorite.  It is
necessary in most steel and aluminum production processes and is used
in making glass and enamel. 

\8 See, for example, sections 3301 to 3303 of Public Law 102-484, as
amended, 50 U.S.C.  98d note. 


   DNSC HAS POLICIES AND
   PROCEDURES TO AVOID UNDULY
   DISRUPTING THE ZINC MARKETS
------------------------------------------------------------ Letter :4

DNSC has established policies and procedures to avoid unduly
disrupting the zinc markets.  Specifically, it has publicized its
sales and price policy and solicited public comments; sold less zinc
than it was authorized to sell; and tried to sell zinc close to
market prices. 


      DNSC'S POLICY IS PUBLICIZED
---------------------------------------------------------- Letter :4.1

DNSC's policy for disposing of zinc is to (1) dispose of those
quantities of materials as authorized by the Congress; (2) maximize
revenues, though not necessarily maximize sales; and (3) be
responsive to industry and congressional concerns.  In addition, a
policy statement was published in the October 17, 1994, Federal
Register.\9

DNSC also works closely with the Market Impact Committee.  The
Committee reviews a range of data and analysis compiled by DNSC and
other agencies, and it may also review DNSC's proposed sales methods. 
It is the Committee's policy to solicit industry views concerning the
proposed disposals.  The Committee is particularly interested in any
information that would indicate a potential market disruption if DNSC
sold any zinc.  Based on this evidence, the Committee can recommend
reductions in the proposed commodity disposal levels.  If DNSC
refuses to accept the Committee's recommendations, it must provide
written justification with its submission of the annual materials
plan to the Congress.  According to the Committee, a steady,
well-publicized disposal program helps increase market certainty,
whereas irregular sales contributes to market uncertainty. 


--------------------
\9 59 Fed.  Reg.  52,284 (1994). 


      DNSC HAS SOLD LESS THAN IT
      WAS AUTHORIZED
---------------------------------------------------------- Letter :4.2

DNSC must submit an annual materials plan to the Congress to show the
quantity of materials to be disposed of, the views of the Market
Impact Committee on the projected domestic and foreign economic
effects of such disposals, the recommendations submitted by the
Committee relative to the disposals, and justification for the
disposal.  Table 1 provides a summary of the amounts requested and
approved. 



                                Table 1
                
                  Zinc Disposal Amounts Requested and
                                Approved

                          (Tons in thousands)


                                          1993    1994    1995    1996
--------------------------------------  ------  ------  ------  ------
As originally proposed to the Congress      50      50      75      50
As subsequently revised by DNSC and         75      50      34      50
 submitted to the Congress for the
 next annual materials plan cycle
As approved by the Congress                 75      50      34      50
----------------------------------------------------------------------
Source:  DNSC. 

The most recent plan, submitted on February 15, 1996, requested
authority to dispose of up to 50,000 tons for fiscal year 1997.  The
plan also included DNSC's proposal to sell up to 50,000 tons annually
until the inventory is depleted. 

DNSC has sold less zinc than it was authorized over the last several
years.  Between March 1993, when DNSC began selling zinc, and March
1996, DNSC has sold approximately 77,000 tons, although it was
authorized to sell 209,000 tons.  Figure 1 provides a yearly
comparison of the amounts sold and amounts authorized. 

   Figure 1:  Comparison of
   Amounts of Zinc Sold with
   Amounts Authorized (fiscal year
   1993 through March 1996)

   (See figure in printed
   edition.)

Note:  Preliminary data provided by DNSC shows that the total amount
sold in fiscal year 1996 was about 15,000 tons. 

Source:  DNSC. 


      DNSC HAS SHOWN CONCERN FOR
      SELLING CLOSER TO MARKET
      PRICES
---------------------------------------------------------- Letter :4.3

Industry members and metals analysts told us that the stockpile's
sales prices are as important as quantity when it comes to market
disruption.  AZA officials stated that DNSC was selling stockpile
zinc at fire-sale prices, well below the London Metal Exchange\10 and
other market prices.  Even though DNSC's policy is that all excess
materials will be sold as close to market prices as possible, its
sales of zinc in 1993 and part of 1994 were at prices below the
London Metal Exchange.  Both the Market Impact Committee and AZA
urged DNSC to raise its minimum price level, which it did, beginning
in late 1994.  Since 1994, the prices DNSC has accepted for zinc have
been above the London Metal Exchange's prices. 

The London Metal Exchange sets the world price for special high grade
zinc daily.  Producers add an additional charge, referred to as a
premium, to the Exchange price to set their selling prices.  A
premium can vary by producer, sales contract, and customer, and
covers such things as transportation, quality guarantees, and
financing terms.  As figure 2 shows, through the second quarter of
fiscal year 1994, the stockpile made all sales at prices below the
London Metal Exchange prices.  From the fourth quarter of fiscal year
1994 to the present, all sales prices have been above the London
Metal Exchange price. 

   Figure 2:  Ranges of Prices
   Accepted in Relation to the
   London Metal Exchange

   (See figure in printed
   edition.)

Note:  No sales were authorized in the first two quarters of fiscal
year 1995. 

Source:  DNSC. 

The relation of DNSC's sales prices to the London Metal Exchange
prices is only one measure of how closely DNSC is selling to market
prices.  Figure 3 compares the DNSC sales prices to both the London
Metal Exchange and spot market prices from April 1995 to August 1996. 
The data shows that the prices for high grade and prime western
grades sold by DNSC and those for spot sales in the commercial market
are roughly 2 to 3 cents apart, a difference which DNSC and the
Market Impact Committee believe is reasonable given that the
government does not provide transportation, financing, or
certification of product quality.  DNSC's terms require buyers to pay
for transportation, pay for the product prior to delivery, and accept
the product on an "as is" (quality not certified) basis.  Commercial
terms typically require the seller or producer to pay for
transportation, provide for financing (often 30 to 40 days), and
certify the quality of the product. 

The DNSC data in figure 3 represent the average sales prices for high
grade and prime western zinc sold at the regular DNSC sales on the
third Tuesday of every month.  The spot market prices are the
commercial prices, averaged, for high grade and prime western zinc,
as reported by the American Metal Market for the date of each DNSC
sale.  The London Metal Exchange data are the prices set by the
London Metal Exchange for special high grade zinc on the same day as
the DNSC sales.  Although the London Metal Exchange price is based on
special high grade, the premium for other grades is typically marked
against the special high grade price. 

   Figure 3:  Comparison of DNSC
   Monthly Zinc Sales Prices With
   London Metal Exchange and
   Commercial Market Prices

   (See figure in printed
   edition.)

Source:  DNSC and metals trade publications. 

DNSC receives bids within a wide range of prices, both above and
below the London Metal Exchange.  Sometimes, it receives multiple
bids from a single bidder at prices above, at, and below the London
Metal Exchange.  DNSC must decide which ones to accept and which ones
to reject.  DNSC has rejected more bids than it has accepted in every
year it has offered zinc for sale.  (See fig.  4.) In fiscal year
1996, for example, it accepted only one of every four bids received. 
(App.  III lists DNSC's sales activities, including the bids accepted
and bids rejected.)

   Figure 4:  Comparison of Bids
   Accepted and Rejected (fiscal
   year 1993 through March 1996)

   (See figure in printed
   edition.)

Source:  DNSC. 

DNSC plans to continue to closely monitor prices when accepting bids
to ensure that the market is not unduly disrupted.  DNSC's actions,
we believe, demonstrate that it is paying attention to the market and
is committed to avoiding an undue disruption.  It is important that
DNSC accept prices for its zinc that are as close to market prices as
possible. 


--------------------
\10 The London Metal Exchange is the major open zinc trading market
and sets the official daily reference price for the top grade
(special high grade) of zinc.  The official daily price is used by
buyers and sellers as a reference point for all grades of zinc for
the next 24 hours. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :5

We asked DOD, the Market Impact Committee, AZA, U.S.-based AZA
members, and a number of other companies and organizations with whom
we discussed this matter to comment on a draft of this report.  DOD
and the Market Impact Committee fully concurred with the report. 
Their comments are included as appendix IV. 

AZA disagreed with the report's conclusions, stating that we reached
those conclusions based on our accepting certain inaccurate
government data, avoiding certain AZA facts, and introducing
irrelevant material.  First, while AZA agreed that the phrase "usual
markets" is not defined in the act, it said that we did not properly
consider congressional intent in reviewing the government's
interpretation of the phrase "usual markets." It stated that because
the legislative history indicates that the Congress was particularly
concerned about the effect on the markets that stockpile sales might
have, those charged with construing the phrase must choose the
construction that results in the minimum amount of market impact. 

It is our view, however, that the legislative history does not
require such an interpretation of the statute.  In this regard, the
legislative history, including the Senate report cited by AZA (S. 
Rpt.  No.  804, 79th Cong.,
1st Sess.  1945) shows that while the Congress was concerned about
market impact, the concern was that "sudden disposals" of stockpile
materials "might break the market," not that all market disruption
must be avoided.  Some additional language was included in the body
of the report to clarify our position. 

Next, AZA stated that certain materials we cited in the report were
not relevant as justification for the government's action to avoid
unduly disrupting the usual zinc market.  We believe the materials
are relevant, but have added a figure and text comparing DNSC sales
prices to spot market prices to clarify our position. 

Finally, AZA stated that we had not reported certain facts it
believed were relevant to the dispute between the government and
itself about the size of what AZA views as the usual market for high
grade and prime western zinc.  We have provided additional
information for clarification in appendix II.  The complete response
of AZA and our specific comments to the points raised are included as
appendix V. 

Of the AZA members commenting on our draft report, one fully agreed
with our conclusions and another generally agreed but believed
certain statements relating to uses of different grades of zinc and
market factors were misleading.  We have clarified the discussion on
this in the final report to address these concerns.  A third member
said it was disappointed with our interpretation that the
government's view of the usual market has a sound basis.  The
members' comments are included as appendix VI. 

Four other respondents--an association of zinc consumers, a zinc
broker, a zinc trader, and a metals trade publication
official--concurred with our findings and conclusions.  Their
comments are included in appendix VII. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

The focus of our work was on the dispute between the government and
AZA as it related to the government's interpretation of the statutory
phrase "usual markets" as applied to the zinc sales program, and
DOD's efforts to not unduly disrupt the zinc market.  To assess the
merits of each side's position on the government's interpretation and
its efforts not to disrupt the zinc market, we met with the Executive
Director of AZA and reviewed data AZA provided us.  We met with the
Administrator, Deputy Administrator, General Counsel, and zinc
commodity specialists at DNSC and reviewed the data they provided us. 
We also met with the cochairs of the Market Impact Committee and each
of the Committee members and reviewed the minutes of each meeting
where zinc disposals were considered during the last 3 years.  And,
we met with industry and metals analysts for the Department of
Commerce and the Bureau of Mines (now part of the U.S.  Geological
Survey) to determine how they calculated the size of the zinc
markets. 

We reviewed the applicable statute, its legislative history, and
relevant court cases.  We discussed the statute and its
interpretation with DNSC's counsel and with the executive director of
AZA. 

To complement our discussions with AZA and to obtain the views on the
government's interpretation of usual markets and its efforts not to
disrupt the markets, we met with each of the various groups
represented in the zinc market--that is, companies producing or
processing zinc, those buying and selling zinc as traders or brokers,
those that consume zinc in their manufacturing processes, and
individuals who study or report on the zinc markets--we reviewed
various documents these companies and organizations had submitted to
DNSC or the Market Impact Committee and contacted them about the
government/AZA dispute and/or their particular operations.  We also
asked each company or organization whose correspondence we reviewed
or we contacted to comment on a draft of this report.  We have
included copies of the responses in the appendixes.  The list of
companies and organizations we contacted or whose documents we
reviewed were the following: 

  -- producers or processors

Big River Zinc Corp., Sauget, Illinois

Huron Valley Steel, Belleville, Michigan

Savage Zinc, Inc., Clarksville, Tennessee

Zinc Corporation of America, Monaca, Pennsylvania

  -- brokers or traders

Parks-Pioneer Metals Co., Milwaukee, Wisconsin

Trademet, Inc., Scarsdale, New York

  -- zinc consumers or their associations

American Galvanizers Association, Aurora, Colorado

Frontier Hot-Dip Galvanizing, Inc., Buffalo, New York

Galvan Industries, Inc., Harrisburg, North Carolina

Independent Zinc Alloyers Association, Washington, D.C. 

Rogers Galvanizing Company, Tulsa, Oklahoma

Tennessee Galvanizing, Jasper, Tennessee

U.S.  Zinc, Houston, Texas

  -- metals analysts and others

CRU International Ltd., London, United Kingdom

International Lead/Zinc Study Group, London, United Kingdom

Ryan's Notes, Pelham, New York

We visited the DNSC storage site at Letterkenny Army Depot, near
Chambersburg, Pennsylvania, to examine how DNSC stores zinc and
prepares it for sale.  We did not assess DNSC's sales methods--that
is, its selling on the "spot" market, as opposed to selling under
long-term contracts--or the impact of congressionally imposed sales
price constraints.  The fiscal years 1995, 1996, and 1997 DOD
appropriations acts have prohibited DNSC from accepting prices from
prospective bidders if zinc prices decline more than 5 percent below
the London Metals Exchange market price reported on the date the act
was enacted.\11

We performed our review from December 1995 to August 1996 in
accordance with generally accepted government auditing standards. 


--------------------
\11 The most recent version is found in section 8101, Department of
Defense Appropriations Act for Fiscal Year 1997, as found in the
Omnibus Consolidated Appropriations Act for Fiscal Year 1997
(P.L.  104-208, Sept.  30, 1996). 


---------------------------------------------------------- Letter :6.1

We are providing copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Appropriations,
Subcommittee on Defense; Senate Committee on Armed Services; House
Committee on Appropriations, Subcommittee on National Security; House
Committee on National Security; the Director, Office of Management
and Budget; the Secretary of Defense; the Director, Defense Logistics
Agency; the Administrator, DNSC; the cochairs of the Market Impact
Committee; AZA; and all parties that assisted us in this review.  We
will also make copies available to other interested parties upon
request. 

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix VIII. 

Sincerely yours,

David R.  Warren, Director
Defense Management Issues


DEFENSE NATIONAL STOCKPILE CENTER
ZINC STOCKPILE STORAGE SITES AND
INVENTORY
=========================================================== Appendix I

   Figure I.1:  DNSC Zinc Storage
   Sites

   (See figure in printed
   edition.)

   Source:  Defense National
   Stockpile Center (DNSC).

   (See figure in printed
   edition.)



                                    Table I.1
                     
                          Zinc Inventory by Storage Site

                                 (Weight in tons)


Storage
site         Special        High  Intermedia       Brass       Prime
location  high grade       grade          te     special     western       Total
--------  ----------  ----------  ----------  ----------  ----------  ----------
Huntsvil                                                   10,414.36   10,414.36
 le,
 Ala.
Stockton        5.29        3.34                               35.11       43.74
 ,
 Calif.
Granite     2,320.49                            5,176.02   10,391.24   17,887.75
 City,
 Ill.
Savanna,    9,607.20   25,163.12                4,269.79   13,004.61   52,044.72
 Ill.
New                    31,995.78                  247.87               32,243.65
 Haven,
 Ind.
Somervil                                                   14,183.29   14,183.29
 le,
 N.J.
Scotia,                 1,880.83                4,268.91                6,149.74
 N.Y.
Seneca,                                                     2,195.16    2,195.16
 N.Y.
Voorhees               57,585.33                            1,539.16   59,124.49
 ville,
 N.Y.
Sharonvi                               43.60      246.19   13,051.52   13,341.31
 lle,
 Ohio
Warren,                                                       483.15      483.15
 Ohio
Chambers                8,517.53                           30,128.56   38,646.09
 burg,
 Pa.
Marietta               18,021.99                            8,549.34   26,571.33
 , Pa.
Mechanic                                                    4,594.04    4,594.04
 sburg,
 Pa.
Point                                  78.08      241.32   20,638.44   20,957.84
 Pleasan
 t,
 W.Va.
================================================================================
Total      11,932.98  143,167.92      121.68   14,450.10  129,207.98  298,880.66
--------------------------------------------------------------------------------
Source:  DNSC. 


INFORMATION ON THE DISPUTE BETWEEN
THE GOVERNMENT AND THE AMERICAN
ZINC ASSOCIATION CONCERNING MARKET
SIZE
========================================================== Appendix II

The American Zinc Association (AZA) and the government have long
disputed the size of the usual market for high grade and prime
western zinc.  According to AZA's definition of the usual markets for
high grade and prime western grade slab zinc, using 1994 data, the
usual market is 250,000 tons of actual consumption a year.  Officials
of the Department of Commerce--members of the Market Impact
Committee--estimate the market of these grades to be about 350,000
tons a year, counting both slab and hot metal.\1

AZA's estimates are based on high grade and prime western
consumption, as reported by its members, and U.S.  Bureau of the
Census data on imports from all countries not represented in AZA and
adjusted to include stockpile sales and changes in stocks. 
Commerce's estimates are based on Bureau of Mines survey data,
Commerce and Census import data, and discussions with zinc
importers--many of whom are AZA members. 

The government has revised its estimate of this market from over
600,000 tons to 446,000 tons to its current estimate of 350,000 tons. 
The latest revision was due primarily to revised estimates of large
steel mill consumption of high grade and prime western grade and in
the amount of high grade and prime western grade tonnage imported. 

A major factor underlying the remaining 100,000-ton difference
between the two estimates is the treatment of internal hot prime
western metal produced by one prime western processor and used in its
zinc oxide production facility (about 62,000 tons).  AZA did not
include this amount in its estimate of the production of slab prime
western grade zinc, stating that this is hot metal, not slab.  The
government agreed that this tonnage should not be reported as slab
and revised the reporting of it under the heading of "zinc metal."
The government nevertheless maintains that although this prime
western zinc is not converted to slab, it should be included in the
estimates of the size of the high grade and prime western zinc market
because prime western zinc is being consumed. 

An additional difference (38,000 tons) between AZA and the government
is that the government's estimates of potential domestic consumption
of high grade and prime western zinc includes tonnage that "hot-dip"
galvanizers\2 use, but that is currently being supplied by special
high grade zinc.  The government believes that high grade or prime
western can be used for this purpose and should be used in the market
size estimates.  AZA, however, stated that "potential" consumption
should not be considered in any discussion of usual markets. 

In summary, the two sides now agree with each other's numbers, but
not how those numbers are to be used.  In any event, the government's
determination of undue disruption of the usual market does not depend
on the specific size of the high grade and prime western market
alone, but rather on the larger market for all grades of zinc. 


--------------------
\1 Slab refers to cast zinc metal.  Hot metal refers to liquid or
molten zinc not cast into slabs. 

\2 Hot-dipping is a galvanizing process in which objects are immersed
in molten zinc. 


SUMMARY OF DNSC'S SALES ACTIVITIES
========================================================= Appendix III

                                                              Prices accepted as
                                                                        measured
                    Sale    Bids    Bids    Bids              against the London
                       s  receiv  accept  reject     Tons   Metal Exchange price
Sales dates         held      ed      ed      ed     sold     (range in percent)
------------------  ----  ------  ------  ------  -------  ---------------------
Quarterly sales summary
--------------------------------------------------------------------------------
March-June 1993        7     172      57     115    4,812         -7.67 to -5.28
July-September         6     163      84      79    7,588         -6.20 to -2.52
 1993
October-December       6     192      96      96    8,496         -5.02 to -2.47
 1993
January-March 1994     6     285     103     182    8,961         -4.06 to -1.93
April-June 1994        6     300      95     205    9,668         -0.51 to +1.64
July-September         6     245     104     141   13,883         +1.05 to +4.77
 1994

October-December No sales authorized 1994
--------------------------------------------------------------------------------

January-March 1995 No sales authorized
--------------------------------------------------------------------------------
April-June 1995        3     115      59      56    4,150        +6.25 to +10.51
July-September         3      69      45      24    4,892         +5.43 to +7.23
 1995
October-December       2      39       6      33      542         +5.18 to +7.16
 1995
January-March 1996     3      60      19      41    1,243         +2.84 to +5.10

Yearly sales summary
--------------------------------------------------------------------------------
Fiscal year 1993      13     335     141     194   12,400         -7.67 to -2.52
Fiscal year 1994      24   1,022     398     624   41,008         -5.02 to +4.77
Fiscal year 1995       6     184     104      80    9,042        +5.43 to +10.51
Fiscal year 1996       5      99      25      74    1,785         +2.84 to +7.16
 (first half)
================================================================================
Total                 48   1,640     668     972   64,235
--------------------------------------------------------------------------------
Note:  Figures do not include sales to the U.S.  Mint. 

Source:  DNSC. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM GOVERNMENTAL
ORGANIZATIONS
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix V
COMMENTS FROM THE AMERICAN ZINC
ASSOCIATION
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the American Zinc Association's
letter dated September 6, 1996. 

GAO COMMENTS

1.  The final report (app.  II) reflects the numbers used by the
Market Impact Committee. 

2.  The final report (app.  II) shows that the government has revised
its reporting. 

3.  Neither we nor the Market Impact Committee has asserted that the
stockpile slab could substitute for the hot metal in the particular
company's production of zinc oxide.  Zinc oxide producers use slab
zinc or zinc recovered from recycled materials as their feed.  This
particular company, as AZA pointed out, does not use slab as its
feed.  It uses hot metal that has not been converted into slab. 
Whether the prime western zinc refined by this company is first
converted into slab or is kept as hot metal is not relevant to
whether it is part of the high grade/prime western zinc market. 

4.  The final report (app.  II) reflects that while the two sides now
agree with each other's numbers, they do not agree on how those
numbers are to be used.  In any event, the government's determination
of undue disruption of the usual market does not depend on the
specific size of the high grade and prime western market alone, but
rather on the larger market for all grades of zinc.  Also, we revised
the text to clarify the source of the numbers. 

5.  It is not our position that all zinc is the same, that all grades
have the same uses, or that there is perfect substitution among the
grades.  Rather, our position is that the different grades of zinc
can be considered to be in the same market because most producers can
switch from one grade to another, some consumers (galvanizers) can
use different grades for the same purpose, and prices of the
different grades of zinc move in similar patterns. 

6.  As AZA points out, bids are rejected for many reasons.  Some bids
are "low-ball" and are rejected.  However, we disagree with AZA's
comment that DNSC rejects bids because there are sometimes more bids
than tonnage available for sale.  Under DNSC's current sales
arrangements, there is no monthly limit as to the amount that can be
sold, except as dictated by the yearly limit set forth in the annual
congressional authorization.  At the start of the current sales
program for zinc, DNSC's solicitation publicized that the government
was soliciting bids for approximately 8 million pounds, or 4,000
tons, a month.  In October 1995, the amount per month was raised to
100 million pounds, or 50,000 tons, which was the entire
authorization for the year.  Despite AZA's assertion, DNSC said that
it had not rejected bids because it had received more bids than the
amount available for sale.  DNSC indicated that the primary reason
bids were rejected was because the price offered was too low and
would not have maximized revenue for the government. 

7.  To clarify our point that DNSC is showing concern for the prices
at which it sells zinc, we added figure 3 comparing DNSC's selling
prices with those for spot market transactions in the commercial
market.  It shows that for the period cited, DNSC's sales prices were
within 2 to 3 cents of the commercial market.  Both DNSC and the
Market Impact Committee believe that the difference is reasonable
considering the different terms of sale for DNSC and commercial
transactions.  Comments from producers, consumers, and others on our
draft report also support this position.  DNSC's sales require the
buyer to pay for transportation from the government depot, pay for
the zinc before delivery, and accept the zinc on an "as-is" basis. 
Commercial transactions are made on a delivered price basis, provide
for 30- to 40-day financing, and have the zinc's quality certified. 

8.  (See comment 5.) We have not concluded that all zinc is the same,
but rather that different grades of zinc can be in the same market. 
Most producers can switch production from one grade of zinc to
another.  If a producer who is currently selling prime western or
high grade zinc can get a better return on its investment by selling
another grade, it may do so (after factoring in customer
relationships that the producer may want to maintain).  Thus, that
producer's ability to switch production to another grade means that
the price decrease required to absorb additional supply, such as
stockpile sales, is less than it would be if all sellers of high
grade or prime western had no alternative but to continue to supply
high grade or prime western zinc. 

9.  (See comment 8.) As stated, we did not conclude that zinc itself
is fungible in all, or even most, uses, at least not given the range
of price differences in the market.  There are, however, some
substitution possibilities for some zinc consumers, and most zinc
suppliers.  This limits the degree that the price of one grade of
zinc will rise or fall without affecting the prices of other grades. 

10.  We agree that where a statutory term is undefined, the
interpretation that best reflects the intent of the Congress should
generally be adopted.  However, contrary to the AZA statement,
nothing in the act's legislative history requires DNSC to adopt AZA's
view of usual markets.  Our final report reflects this position. 

11.  (See comments 8 and 9.) We did not state that consumers switch
from higher to lower grades of zinc.  However, in commenting on our
draft report, one consumer (U.S.  Zinc) that uses slab zinc to
produce zinc oxide indicated that it could substitute stockpile high
grade for imported special high grade for most of its needs.  We did
say that some consumers can switch from one grade of zinc to another
and this is one reason for including different grades of zinc in the
same market.  The 38,000 tons of high grade or prime western zinc
that some hot-dip galvanizers can use, and is currently being
supplied by special high grade zinc, is an example of potential
consumption substitution. 




(See figure in printed edition.)Appendix VI
COMMENTS FROM INDIVIDUAL MEMBERS
OF THE AMERICAN ZINC ASSOCIATION
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on letters from individual members
of AZA. 

GAO COMMENTS

1.  For clarification, we have revised the text of the final report. 

2.  We did not conclude that zinc itself is fungible in all, or even
most uses, at least not given the range of price differences in the
market.  There are, however, some substitution possibilities for some
zinc consumers and most zinc suppliers.  This limits the degree that
the price of one grade of zinc will rise or fall without affecting
the prices of other grades. 




(See figure in printed edition.)Appendix VII
COMMENTS FROM OTHER INTERESTED
PARTIES
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Brad H.  Hathaway, Associate Director
Reginald L.  Furr, Assistant Director
J.  Kenneth Brubaker, Evaluator-in-Charge
Barbara L.  Wooten, Evaluator
Celia J.  Thomas, Economist
Carolyn S.  Blocker, Communications Analyst


*** End of document. ***