The U.S. Government has recently become aware that it has a supply chain in addition to an industrial base, and has grown vaguely concerned that its supply chain may be vulnerable to interruption, which may lead to disruptions in goods and services needed for warfighters.  We reported on this new focus in this article, but at that time the Pentagon’s Industrial Policy Directorate seemed to be worried more about loss of critical skills than anything else.  Meanwhile, § 843 of the FY National Defense Authorization Act (P.L. 111-84) required the Government Accountability Office (GAO) to investigate and report back to Congress on the state of “rare earth materials in the defense supply chain”.  The report was transmitted to Congress on April 1, 2010, but published on the internet on April 14, 2010.  The full report can be found at the GAO site.

For those of us lacking a scientific background, GAO provided a helpful definition of “rare earth materials” and explained why they are important to defense programs such as radars, precision-guided munitions, as well as to more mundane items such as cell phones and computer hard-drives.  GAO stated that—

Rare earth elements are used in many applications for their magnetic and other unique properties. These include the 17 chemical elements beginning with lanthanum, element number 57 in the periodic table, up to and including lutetium, element number 71, as well as yttrium and scandium….  Rare earth materials—rare earth ores, oxides, metals, alloys, semifinished rare earth products, and components containing rare earth materials—are used in a variety of commercial and military applications, such as cell phones, computer hard drives, andDepartment of Defense (DOD) precision-guided munitions. Some of these applications rely on permanent rare earth magnets that have unique properties, such as the ability to withstand demagnetization at very high temperatures.

As GAO noted, producing rare earth materials requires a number of steps, including mining, separating, refining, forming, and (finally) manufacturing.   (This background will be helpful later.)

GAO reported several rather alarming findings, including—

• While rare earth ore deposits are geographically diverse, current capabilities to process rare earth metals into finished materials are limited mostly to Chinese sources.
• The United States previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position that could affect worldwide supply and prices.
• Based on industry estimates, rebuilding a U.S. rare earth supply chain may take up to 15 years and is dependent on several factors, including securing capital investments in processing infrastructure, developing new technologies, and acquiring patents, which are currently held by international companies.
• Government and industry officials have identified a wide variety of defense systems and components that are dependent on rare earth materials for functionality and are provided by lower-tier subcontractors in the supply chain.
• Defense systems will likely continue to depend on rare earth materials, based on their life cycles and lack of effective substitutes.
• We [GAO] found examples of components in defense systems that use Chinese sources for rare earth materials and are provided by lower-tier subcontractors.
• DOD has not yet identified national security risks or taken department-wide action to address rare earth material dependency, but expects to consider these issues in its ongoing study expected to be completed by the end of September 2010.

GAO reported that, prior to 1985, the U.S. performed all rare earth material supply chain and production steps, from mining to manufacturing.  However, with the closure of the Mountain Pass (CA) production facility, the relocation of Magnequench’s plant to China, and the closure of Hitachi Magnetics Corporation’s Edmore, MI production facility, the U.S. has been essentially 100% out of the rare earth material production business since 2005.  Although the Mountain Pass facility resumed operations in 2007, return to the pre-1985 state could take as many as 15 years (i.e., not until 2025).  In the meantime (according to GAO)—

China has adopted domestic production quotas on rare earth materials and decreased its export quotas, which increases prices in the Chinese and world rare earth materials markets.  China increased export taxes on all rare earth materials to a range of 15 to 25 percent, which increases the price of inputs for non-Chinese competitors.

We don’t want to be overly alarmist here—but this is a potentially very serious problem that could affect a number of major defense acquisition programs, from the DDG-51’s Hybrid Electric Drive Ship Program to the M1A2 Abrams Tank’s reference and navigation system.  We encourage DOD’s Industrial Policy Directorate to get moving on this potential supply chain “interruption”.

In unrelated news, this is our 200^th blog article posted on the website.