Rep. Hank Johnson (D-Ga.), who yesterday announced he would co-chair the new congressional Rare Earth Caucus, said he would fight for the 2013 National Defense Authorization Act to include measures to promote rare earths. In a statement, Johnson said, “A strong rare earth policy will reduce our dependence on China and create American jobs.”

About 5 percent of the rare earth materials consumed in the United States go toward the defense sector, but the materials are critical for key military systems including smartbombs and fighter jets. DOD is in the process of tracking down where the materials appear in its supply chain as a first step toward devising a broader strategy, but some lawmakers say the department is moving too slowly.

Advocates cite DOD’s dependence on the materials as a reason that the department should create a stockpile of rare earth elements and related technologies — a move that would provide a boost to domestic production. Critics, however, say this is just a ploy to tap the Defense budget to support industry.

Johnson is working closely on the issue with Rep. Mike Coffman (R-Colo.), the caucus chairman and a colleague on the Armed Services Committee. Coffman has authored several provisions on rare earths, including ones pressing the Defense Department to get a better handle on its use of the materials. Two of those provisions wound up in the 2012 Defense spending bill.

One requires the DOD agency in charge of strategic minerals to devise a plan for establishing an inventory of rare earth products, including magnets. The other requires the secretary of Defense to study the feasibility of recycling, recovering and reprocessing rare earth elements that are in everything from fluorescent lighting to weapons systems.

Jeff Green, a former Armed Services Committee staffer and lobbyist for rare earth companies, said the Pentagon still needed to do more to assess its rare earth element vulnerability. He is counting on Coffman and Johnson to push DOD to finish work on previous and future congressional mandates on the issue.

“The Defense Department seems to be having a hard time really nailing down their internal demand and coming up with their mitigation approaches,” Green said in an interview. His company, J.A. Green and Co., recently formed an advisory council on strategic materials, which includes retired military officers.

With production of rare earths elements still predominantly in China, companies elsewhere are reaching out to lawmakers about what they can provide. “There has definitively been good engagement with members of the Rare Earths Caucus and outreach by industry,” Green said.

Australia-based rare earths producer Lynas Corp. Ltd., one of Green’s clients, spent $80,000 in lobbying last year. Molycorp Inc., the current U.S. leader, spent more than $600,000, disclosure records show.

Legislative language authored by Johnson and Rep. Ed Markey (D-Mass.), ranking member of the House Natural Resources panel, wound up in H.R. 2011 passed in the committee last year. The measure also included proposals by Coffman (E&ENews PM, July 20, 2011).

But with the legislation still waiting in line for consideration by the full House, and the Senate stalled on its own proposals, boosters say spending bills are a useful policy avenue. Johnson said: “We’ve got to move more aggressively on rare earths and the defense bill is a great vehicle.”

These steps should include taking joint action with the European Union, Japan and others to bring China into compliance with its World Trade Organization obligations on how to manage rare earths and other critical industrial materials, including the its imposition of export restraints, he testified at a Jan. 26 hearing on China’s Global Quest for Resources and Implications for the United States.

Congress should also require a U.S. government-wide definition of “strategic and critical” materials, and should encourage the establishment of “a common definition with key allies,” according to Green.

Based on the testimony it collects during the year, the commission formulates recommendations for actions by the U.S. Congress.

Another action Congress could take would be to require that the Defense Department’s Strategic Materials Protection Board issues long-delayed recommendations on which materials are actually strategic, he said.

As part of the trade element of an overall strategy, the Congress should urge the Office of the U.S. Trade Representative to issue a report on Chinese compliance with its WTO obligations on strategic and critical minerals, he told the Commission.

According to Green, Congress also should require Federal agencies to use “existing tools” to create incentives for the extraction and manufacture of strategic and critical materials in the U.S. Those tools could include stockpile arrangements of different types, such as maintaining vendor-managed inventories and buffer stocks and invoking Title III of the Defense Production Act, which authorizes incentives to create, expand and preserve domestic industrial manufacturing of technologies and items necessary to meet national security requirements.

He also urged that the federal government consider grants, tax credits or other incentives; and streamlined permitting.

Green also wants the Congress and the administration to acknowledge that a policy of “reduce, reuse, recycle and substitute” in and of itself is “woefully inadequate” for preserving supply of strategic and critical materials “because it tacitly embraces current market conditions, thereby encouraging states to follow what have been described as predatory practices in the rare earth market,” according to his written testimony.

Green, the CEO of J.A. Green & Company, also pressed for the creation of a “development fund” that would seek to promote the development and manufacture in the U.S. and allied nations of strategic materials for the U.S. defense market. The fund would be used to “offset high barriers to entry, long-lead times, and foreign predatory practices,” he recommended.

“Despite having considerable rare earth deposits domestically, the U.S. has become reliant on China for nearly all rare earth imports,” Mr. Green stated. “There is not a deliberate U.S. Government plan. We have, in essence, defaulted… inactivity has become our plan.”

The Chinese dominate all stages of the rare earth supply chain through a deliberate government policy that considers how strategic and critical materials fundamentally fuel economic growth, Mr. Green noted.

To mitigate U.S. economic and national security vulnerabilities, Mr. Green offered recommendations for inclusion in future legislation. “We, in the United States, now face a choice. We can continue to ignore this to our detriment, or we can lay the foundation for American success in the 21^st century.”

Jeff Green is the President and founder of J.A. Green & Company and a renowned advocate for the rare earth and strategic materials industries.

Jeff Green’s written testimony to the Commission can be found here.

The goals of the group will be to identify strategic and critical materials, inform the US government, industry participants and public sector about these materials, produce policy recommendations and promote a mentality and perspective with public and private leaders to address risk with the current supply chain. At present, just over 95% of the world’s supply of rare earths is produced within China. The country, however, has made strides over the last two years in order to consolidate the industry, reduce exports and mitigate illegal mining in order to reduce environmental degradation associated with the production of these products.

“The whole idea is to put together highly credible senior leaders that understand strategic materials. We are a national security focused group to start, but likely to expand into other sectors,” Jeff Green, President of J.A. Green and Company, reported to Asian Metal. “We are targeting people with a deep understanding of supply chain and logistics.”

In mid-2011, amid speculation that China could further reduce H2, 2011 export quotas, rates for the materials skyrocketed, causing panic among consumers. With prices peaking at historical highs in July of last year, many consumers reduced their consumption and began to consume inventories, with this market attitude persisting in 2012. With applications ranging from lasers to missile guidance systems, much concern surrounds the United States’ strategy to address supply disruption, particularly when 95% is sourced from a single producing nation. According to Green, the greatest threat facing the United States’ supply is its lack of a clear and consistent government policy to identify and mitigate risk.

“Typically the Defense Department looks has a top-down approach at strategic materials. This council brings the bottom-up perspective to look at policies for the departments and allows us to recognize risk. It is an advisory group, not a lobbying group,” Green added. “Should anyone from congress want information, we are able to meet, discuss and even present. Each member of the council has a very important role to play in helping the US government form policy on these specific issues.”

To address this issue, the Obama administration and the U.S. Congress must move beyond simply studying the issue and adopt policies and initiatives to promote a diversity of domestic and foreign supplies of rare earths and other strategic materials from more secure sources, according to Jeff Green, president and founder of J.A. Green & Company.

The company coordinates Washington lobbying work on behalf of a coalition of companies that mine rare earths or make or use downstream products that incorporate them.

These new policies must include catching up with Europe and Japan in identifying which critical materials must be secured, as well as providing incentives for fostering domestic and foreign production and cooperation, he said.

“A WTO case is important and we should demand that China comply with its WTO obligations,” Green said. “But a WTO solution alone can just drive prices down in a market where it takes higher prices to incentivize production.”

The Office of the U.S. Trade Representative has held off on making a decision on whether to challenge Chinese export restraints on rare earths until the WTO Appellate Body takes final action on a Chinese appeal of an apparent U.S. win in an earlier challenge over similar export restraints imposed on raw materials that serve as inputs to industry.

On Jan. 12, the U.S. and China issued a joint statement in Geneva effectively setting a deadline for the AB to rule. They said they would deem the AB decision, which has been delayed 90 days because of complex circumstances, as valid under the terms of the Dispute Settlement Body (DSB) if it is issued by Jan. 31.

If the AB upholds the comprehensive win delivered to the U.S. position by the original dispute panel, that could prompt the U.S. and others to move forward on a rare earths export restraint challenge, industry sources predicted.

The highly imbalanced nature of the current global supply structure for rare earths, wherein China controls 95 percent of current production, makes a successful WTO challenge of its policies valuable for the future even if such a legal process is long and drawn out, several industry sources argued.

“Bringing a WTO case on rare earths would be helpful, even if it takes three years to get a result, because Chinese dominance of supply is a long-term problem that is not going away anytime soon,” said Peter Dent, the vice president for business development for Electron Energy Corporation, which makes rare-earth magnets in Pennsylvania. “Even if non- Chinese production is increased in coming years, China will still have a lot of market muscle, especially in the heavy rare earths, at least through the end of the decade. A successful WTO challenge can put pressure on China to alter its policies related to export taxes and quotas,” he said.

The most pressing near-term action is for the administration to develop a government-wide definition of strategic or critical materials, they said.

The Energy Department last month announced its list of critical materials for industrial use, they said. The next step toward this goal is for the Department of Defense’s Strategic Materials Protection Board to complete a report that is supposed to identify materials whose long-term secure supply is critical to national security, he said. According to Greene, that report is two years overdue.

On the legislative front, most industry groups support the Critical Minerals Policy Act (S. 1113) introduced by Sen. Lisa Murkowski (R-AK) in the Senate, as well as the Rare Earths Supply Chain Technology and Resources Transformation Act (H.R. 1388) offered by Rep. Mike Coffman (R-CO) in the House.

A vital next step, said Green, will be for Murkowski and Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM) to agree to mark up Murkowski’s bill, which is backed by a bipartisan group of 19 Senate co-sponsors.

S. 1113 sets out a comprehensive set of policies to address each part of the supply chain — from mining and processing to manufacturing and recycling — that relies on minerals that the U.S. Geological Survey determines to be critical to the economy.

There is growing unease among industry sources and analysts that the U.S. political process is moving too slowly to address security of supply issues as compared to Japan and Europe, whose governments already have identified critical materials and have begun initiatives aimed at diversifying supply and promoting recycling. But they remain hopeful that the issue can be addressed in the coming year on a bipartisan basis, even though 2012 is an election year.

“Growing dependence on foreign nations like China for so many strategic materials creates a strategic vulnerability and needs to be addressed at a higher level” than just the interagency process, which has so far led to research and development studies, said Green in a Jan. 13 interview. “It’s inadequate to just study when China continues to become more and more dominant in key materials.”

“The fact that the United States is still studying the problem rather than taking actions similar to those being taken by Japan and Europe does not reflect well on us,” Dent agreed in a Jan. 16 interview.

“It should be a wake-up call to see how other countries relentlessly exploit the resources of the world to their own advantage in a mercantilistic way, while we just leave it up to the market to sort out on its own. We need to view this as a supply chain security issue and take appropriate action,” he said.

Dent said China’s latest public announcement of its intentions with respect to managing rare earth exports, issued late last year, indicates a further narrowing of the overall quota by 4,000 tons in the first half of the year along with the suggestion that supplies would then be stepped up during the last half of 2012 so that 2012 overall levels remain on par with those that existed in 2011.

Prices for many rare earths have dropped significantly over the past six months, but some U.S. industry sources argue they would have declined further if not for Chinese government intervention.

“What we are suspecting and seeing in the rare earths marketplace is that the Chinese government has moved beyond its policy of export taxes and quotas to a policy of enforcing minimum prices,” said Dent. “A number of the rare earths have come down 15 to 30 percent in price, and then flat-lined. The prices should have continued to fall, but they didn’t. That’s because the Chinese government would not let them fall further.”

Critical materials that merit policy action to secure supply extend well beyond those elements categorized as “rare earths” to a broader range of inputs that are vital to industrial and defense supply chains.

For instance, the mineral vanadium is a key ingredient for one type of battery that China plans to incorporate into storage options for alternative and traditional energy over the next five years, according to a company executive who attended a conference on renewable energy integration and storage in Beijing last month.

As China’s central government seeks to meet its goal of obtaining 11.4 percent of its energy from non-fossil sources by the end of 2015, compared to 8 percent today, it should be expected that it will take actions, such as export restraints, to secure supplies of the inputs required to store that energy, said American Vanadium Vice Chairman Ron MacDonald in an interview after attending the conference.

For this reason, MacDonald visited Washington last month to relay updated information to policymakers that he believed should be considered as they determined whether vanadium is deemed a critical material by U.S. government agencies.

In a related development, J.A. Green & Company last week announced the creation of a nine-member Strategic Materials Advisory Council, whose aim is to “facilitate constructive dialogue between the U.S. government and industry, leading to sound public policy that safeguards our national interests and supports a robust industrial base.”

The council is comprised of experts “with first-hand knowledge in the supply chain, from mining and extraction to manufacturing of high tech products,” according to a Jan. 12 announcement.

The group will identify strategic and critical materials used in defense and energy applications, and inform members of the executive branch, Congress, industry and the public about the role strategic and critical materials play in the U.S. industrial base.

It also will offer policy recommendations and “risk-mitigation strategies” to counter industrial-base and nationalsecurity threats, while also promoting a “proactive and forward-looking approach by the U.S. government and industry “to avoid disruptions in future developments that depend upon strategic and critical materials.”

The only lobbyist on the council is Green, and he said the group’s function is not to lobby, but to provide “thought leadership” on the issue of the need for a U.S. strategy toward securing critical materials.

Others on the council are ex-Acting Assistant Secretary of the Army for Acquisition, Logistics and Technology Dean Popps; retired Vice Admiral Barry Costello; retired U.S. Air Force Major General Jeffrey Reimer, former Defense Logistics Agency Administrator for Strategic Materials Cornel Holder; Founding Principal of Technology Metals Research and President and Director of Innovation Metals Corp. Gareth Hatch; ex-U.S. Geological Survey rare-earths commodity specialist James Hedrick; Co-Founder and Director of Technology Metals Research Jack Lifton; and former House Armed Services Committee policy staff director Stephanie Sanok.

The Council will:

• Identify strategic and critical materials used in defense and energy applications, including materials that may face future supply interruption.
• Inform Executive Branch officials, Members of Congress, industry and the public about the role of strategic and critical materials in the U.S. industrial base.
• Produce policy recommendations and risk-mitigation strategies to counter current and future threats to the industrial base, and national security.
• Promote a proactive and forward-looking approach within the United States Government and industry to avoid disruptions in future developments that depend upon strategic and critical materials.

J.A. Green & Company President Jeff Green stated, “The Strategic Materials Advisory Council will offer unparalleled expertise and leadership to help secure materials that are truly critical to our nation’s economic, technological, and national security. Our goal is to facilitate constructive dialogue between the U.S. Government and industry, leading to sound public policy that safeguards our national interests and supports a robust industrial base.”

Toward these ends, the Advisory Council expects to convene regularly and meet with key Government and industry officials, promulgate background materials, analyze alternatives and provide recommendations regarding the most effective approach to securing access to strategic and critical materials.

PARTICIPANTS:

Eminent experts with first-hand knowledge of materials in the supply chain, from mining and extraction to manufacturing of high-tech products, include:

Dean Popps: Mr. Popps served as Army Acquisition Executive and Acting Assistant Secretary of the Army for Acquisition, Logistics, and Technology. He also served in the Coalition Provisional Authority. Before entering government service, Mr. Popps was a successful private attorney and telecommunications entrepreneur.

Vice Admiral Barry Costello, USN (ret.): VADM Costello transitioned from the U.S. Navy in 2007 after 34 years of service. VADM Costello’s career included posts as Commander, Third Fleet, Chief of Legislative Affairs, and chief of all U.S. Surface Naval forces during Operation Iraqi Freedom in 2003.

Major General Jeffrey Riemer, USAF (ret.): Maj Gen Reimer recently transitioned from the U.S. Air Force after 34 years of service, last serving as Program Executive Officer for the F-22 Program. Maj Gen Riemer has a wide range of experience including important posts in the acquisition and test communities.

Cornel Holder: Mr. Holder has served in numerous roles at the Defense Logistics Agency, including Administrator for Strategic Materials. Mr. Holder brings years of experience with industrial base issues to the Council, including his experience creating the Department of Defense Strategic Material Security Program (SMSP).

Gareth Hatch, Ph.D.: Dr. Hatch is the Founding Principal of Technology Metals Research and President and Director of Innovation Metals Corp. He had been Director of Technology at Dexter Magnetic Technologies, focusing on magnetic materials for aerospace, defense, medical, data storage, oil & gas, and renewable energy sectors.

James Hedrick: Mr. Hedrick recently completed a 31-year career in public service as a rare-earth commodity specialist at the U.S. Geological Survey. He has prepared the U.S. Government’s Rare Earths reviews and written on several other minerals and metals. Mr. Hedrick previously worked for the U.S. Army Corps of Engineers and the U.S. Bureau of Mines, where he was an expert on strategic deposits and the environment.

Jack Lifton: Mr. Lifton is the co-founder and Director of Technology Metals Research and a Senior Fellow of the Institute for the Analysis of Global Security. He has over 50 years of experience in the global automotive, heavy equipment, electrical, mining, smelting, and refining industries, where he is known for his extensive knowledge of platinum group metal products, rare earth compounds, and “minor metals.”

Stephanie Sanok: Ms. Sanok is a Senior Fellow at a highly-regarded bipartisan think tank, where she focuses on defense strategies, foreign affairs, and acquisition issues. With more than a decade of government service, Ms. Sanok has served as director of the House Armed Services Committee’s policy staff, at the State Department, and in the Pentagon.

Jeff Green: Mr. Green was formerly the staff director for the House Armed Services Committee’s Subcommittee on Readiness. He is the president and founder of J.A. Green & Company and an attorney admitted to practice in Florida, New Jersey and the District of Columbia. His consultancy focuses on strategic materials and industrial bases issues.