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ENERGY AND MINERAL REQUIREMENTS FOR RENEWABLE AND

ALTERNATIVE FUELS USED FOR

TRANSPORTATION AND OTHER

PURPOSES.

OVERSIGHT HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND

MINERAL RESOURCES

OF THE

COMMITTEE ON RESOURCES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

Thursday, May 18, 2006

Serial No. 109-54

Printed for the use of the Committee on Resources

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

or

Committee address: http://resourcescommittee.house.gov

(II)

COMMITTEE ON RESOURCES

RICHARD W. POMBO, California, Chairman

NICK J. RAHALL II, West Virginia, Ranking Democrat Member

Don Young, Alaska

Jim Saxton, New Jersey

Elton Gallegly, California

John J. Duncan, Jr., Tennessee

Wayne T. Gilchrest, Maryland

Ken Calvert, California

Barbara Cubin, Wyoming

Vice Chair

George P. Radanovich, California

Walter B. Jones, Jr., North Carolina

Chris Cannon, Utah

John E. Peterson, Pennsylvania

Jim Gibbons, Nevada

Greg Walden, Oregon

Thomas G. Tancredo, Colorado

J.D. Hayworth, Arizona

Jeff Flake, Arizona

Rick Renzi, Arizona

Stevan Pearce, New Mexico

Henry Brown, Jr., South Carolina

Thelma Drake, Virginia

Luis G. Fortun ̃ o, Puerto Rico

Cathy McMorris, Washington

Bobby Jindal, Louisiana

Louie Gohmert, Texas

Marilyn N. Musgrave, Colorado

Vacancy

Dale E. Kildee, Michigan

Eni F.H. Faleomavaega, American Samoa

Neil Abercrombie, Hawaii

Solomon P. Ortiz, Texas

Frank Pallone, Jr., New Jersey

Donna M. Christensen, Virgin Islands

Ron Kind, Wisconsin

Grace F. Napolitano, California

Tom Udall, New Mexico

Rau ́l M. Grijalva, Arizona

Madeleine Z. Bordallo, Guam

Jim Costa, California

Charlie Melancon, Louisiana

Dan Boren, Oklahoma

George Miller, California

Edward J. Markey, Massachusetts

Peter A. DeFazio, Oregon

Jay Inslee, Washington

Mark Udall, Colorado

Dennis Cardoza, California

Stephanie Herseth, South Dakota

Steven J. Ding, Chief of Staff

Lisa Pittman, Chief Counsel

James H. Zoia, Democrat Staff Director

Jeffrey P. Petrich, Democrat Chief Counsel

SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

JIM GIBBONS, Nevada, Chairman

RAU ́ L M. GRIJALVA, Arizona, Ranking Democrat Member

Don Young, Alaska

Barbara Cubin, Wyoming

Chris Cannon, Utah

John E. Peterson, Pennsylvania

Stevan Pearce, New Mexico

Thelma Drake, Virginia

Vice Chair

Bobby Jindal, Louisiana

Louie Gohmert, Texas

Richard W. Pombo, California, ex officio

Eni F.H. Faleomavaega, American Samoa

Solomon P. Ortiz, Texas

Jim Costa, California

Charlie Melancon, Louisiana

Dan Boren, Oklahoma

Edward J. Markey, Massachusetts

Nick J. Rahall II, West Virginia, ex officio

(III)

CONTENTS

Page

Hearing held on Thursday, May 18, 2006 ............................................................. 1

Statement of Members:

Gibbons, Hon. Jim, a Representative in Congress from the State of

Nevada ........................................................................................................... 1

Prepared statement of ............................................................................... 3

Grijalva, Hon. Rau ́l M., a Representative in Congress from the State

of Arizona, Prepared statement of ............................................................... 5

Statement of Witnesses:

Carlson, Eric J., Principal, TIAX LLC ............................................................ 37

Prepared statement of ............................................................................... 39

Copulos, Milton R., President, National Defense Council Foundation ........ 45

Prepared statement of ............................................................................... 46

Frank, James D., Chairman, Marathon PGM Corporation .......................... 21

Prepared statement of ............................................................................... 23

Guzy, Chris, Chief Technology Officer, Ballard Power Systems .................. 29

Prepared statement of ............................................................................... 31

Menzie, W. David, Chief, Minerals Information Team, U.S. Geological

Survey ............................................................................................................ 10

Prepared statement of ............................................................................... 12

Rose, Robert, Executive Director, U.S. Fuel Cell Council ............................. 33

Prepared statement of ............................................................................... 35

Stewart, Shelley, Jr., Senior Vice President, Operational Excellence and

Chief Procurement Officer, Tyco International (US), Inc. ......................... 5

Prepared statement of ............................................................................... 8

Storer, Robyn M., Consultant Mining Analyst, Westhouse Securities LLP 15

Prepared statement of ............................................................................... 16

(1)

OVERSIGHT HEARING ON THE ENERGY AND

MINERAL REQUIREMENTS FOR RENEWABLE

AND ALTERNATIVE FUELS USED FOR

TRANSPORTATION AND OTHER PURPOSES.

Thursday, May 18, 2006

U.S. House of Representatives

Subcommittee on Energy and Mineral Resources

Committee on Resources

Washington, D.C.

The Subcommittee met, pursuant to call, at 11:00 a.m. in Room

1324, Longworth House Office Building, Hon. Jim Gibbons

[Chairman of the Subcommittee] presiding.

Present: Representatives Gibbons and Drake.

STATEMENT OF THE HON. JIM GIBBONS, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEVADA

Mr. GIBBONS. Good morning, everyone. The oversight hearing by

the Subcommittee on Energy and Mineral Resources will come to

order.

The Subcommittee is meeting today to hear testimony on the

energy and mineral requirements for renewable and alternative

fuels used for transportation and other purposes. Under Committee

Rule 4(g), the Chairman and the Ranking Member can make opening statements. If any Members have other statements, they can be

included in the hearing record under unanimous consent.

Let me begin by adding my remarks this morning. We are looking at the status of two mineral commodities that are critical to our

existing and future use of electricity—that being copper and platinum. We are looking at these two metals, and why are we talking

about alternative fuels at the same time? Well, all of us have heard

about how we must break our addiction to oil and move on to using

alternative fuel vehicles and hybrid cars. We will look at how these

commodities are used in electrical systems, gas-electric hybrid vehicles, and in fuel cells for hydrogen vehicles and stationary power

generation.

We will hear today about how deposits containing these metals

are distributed both nationally and internationally. We will hear

about the state of the domestic and international supply of these

metals, and we will also hear about the existing demand and projected demand for these commodities in the world markets. We will

ask if there will be enough supply coming out of the ground to meet

the projected demand, and we will also examine our nation’s

2

mineral policies and ask, what can we do to enhance access to future supplies? Just what is the story of copper in our modern

world? Is it the metal that has served us throughout the development of civilization? In fact, it is that metal.

Early in our civilization, it served us in the crafting of weapons

until it was replaced by iron. It has been used to make jewelry,

bronze statues, bells, and brass buttons. It is used in the plumbing

and wiring of our houses, offices, and factories and in our air conditioners, a critical use for anyone who has ever been in Washington,

D.C., in August, may I say?

Most of us folks would think of copper as an old economy metal,

and they would be right, but it is also the premier, new economy

metal. We use it to generate, distribute, and use electricity. It is

at the heart of electronics and telecommunications, and it will play

an increasing role in transportation uses. Hybrid vehicles—cars

and buses—many of which are now running on Washington streets,

combine combustion-based engines, electric motors, and batteries.

Copper is in those electric motors and in the rest of the wiring. The

difference is in the amount of copper. A hybrid car uses about twice

the amount of copper used in a luxury car. The hybrid cars use

about 100 pounds per car. Buses use even more.

We are in a world in which citizens of India and China are seeking to have a lifestyle that approximates ours, and they compete

with our own hybrid cars, air conditioners, computers, and televisions. The question to ask ourselves is this: Is there enough copper to meet everyone’s needs? We will hear about the answer to

that question from our first panel of experts. They represent the

supply chain, from the end user to the producer.

But first I want to talk about platinum. This is a mineral commodity that has a very interesting role in the new economy. For

many years, it was a jeweler’s and a chemist’s metal. Platinum

plus diamonds was the ultimate expression of devotion, and chemical reactions aided by platinum turned raw petroleum into refined

products.

In the 1970s, platinum was enlisted by Detroit to help clean up

the air. Catalytic converters have helped us significantly reduce air

pollution from the cars we drive. Overall, automobile emissions

have been reduced by 31 percent, and per-vehicle carbon monoxide

emissions are 85 percent lower.

The use of platinum in the jewelry and transportation industry

now accounts for about 80 percent of platinum usage, but it also

gives us a significant success story: cleaner air and significant platinum recycling. Almost 12 percent of demand is met by recovering

platinum from scrapped catalytic converters. This is a true resource conservation and recovery story.

Now we are on the verge of seeing new uses for platinum in the

transportation sector. It is used in fuel cells, which have the potential to make cars and buses even cleaner and to drastically reduce

our dependence on foreign sources of petroleum. We will hear about

platinum usage from a fuel cell manufacturer today. We will hear

about the types of fuel cells and what generally goes into making

them. We will hear about the potential for growth of fuel cell usage

in the transportation industry, and, once again, we will be asking

3

about the sources of supply and ask ourselves if there is enough

to go around. Last, we will hear about the national security implications of having adequate supplies of mineral commodities and the clear

need we all have for unbiased public sources of mineral commodity

information. Speaking on this matter, I would like to commend the

Interior Appropriations Committee for supporting the energy programs under the jurisdiction of the House Resources Committee

authorized by the Energy Policy Act of 2005. I am very pleased that the Appropriations Committee restored funding for the USGS Mineral Information Team and admonished

the Administration to not continue to propose the elimination of

the program in future budget requests. The Mineral Information

Team provides invaluable information on the worldwide use, production, and demand for mineral commodities and keeps tabs on

what the U.S. imports are and from where they are coming.

Demand for mineral commodities has risen dramatically over the

past few years, largely due to China and India’s economic growth

and industrialization. Their competition has driven up the prices of

commodities to all Americans. It could threaten the vital national

security interests of this nation by fully depriving us of foreign

sources of supply.

In some cases, the denial of access to mineral resources could result in a decision to commit U.S. forces to maintain that access. In

this circumstance, knowledge is both power and security. I hope

the Administration will finally take careful note of the views of the

Congress in this matter.

So now I want to thank the witnesses for joining us today. I look

forward to your testimony. Under unanimous consent, I will ask

that the written statement of the Ranking Member, Mr. Grijalva,

be submitted for the record.

[The prepared statement of Mr. Gibbons follows:]

Statement of The Honorable Jim Gibbons, Chairman,

Subcommittee on Energy and Mineral Resources

The Subcommittee meets today to review the status of two mineral commodities

that are critical to our existing and future use of electricity—copper and platinum.

Why are we looking at these two metals and why are we talking about alternative

fuels at the same time?

Well, all of us have heard about how we must break our addiction to oil and move

on to using alternative fuel vehicles and hybrid cars.

We’ll look at how these commodities are used in electrical systems, gas-electric

hybrid vehicles and in fuel cells for hydrogen vehicles and stationary power generation.

We will hear how deposits containing these metals are distributed both nationally

and internationally. We will hear about the state of the domestic and international

supply of these metals. We will hear about the existing demand and projected demand for these commodities in the world markets.

We will ask if there will be enough supply coming out of the ground to meet the

projected demand.

We will examine our nation’s mineral policies and ask what we can do to enhance

access to future supplies.

Just what is the story of copper in our modern world? It is the metal that has

served us throughout the development of civilization.

Early in our civilization, it served us in the crafting of weapons, until it was replaced by iron. It has been used to make jewelry, bronze statues, bells and brass

buttons. It is used in the plumbing and wiring of our houses, offices and factories—

and in our air conditioners—a critical use for anyone who has ever been in Washington, DC in August.

4

Most folks would think of copper as an old economy metal ‘‘and they would be

right. But it is also the premier new economy metal.

We use it to generate, distribute and use electricity—it is at the heart of electronics and telecommunications and it will play an increasing role in transportation

uses.

Hybrid vehicles—cars and buses—many of which are now running on Washington’s streets, combine combustion based engines, electric motors and batteries. Copper is in those electric motors and in the rest of the wiring.

The difference is in the amount of copper—a hybrid car uses about twice the

amount of copper used by a luxury car—the hybrids use about 100 pounds per car

‘‘buses even more.

Now we are in a world in which the citizens of India and China are seeking to

have a lifestyle that approximates our—complete with their own hybrid cars, air

conditioners, computers, and televisions.

The question to ask ourselves is this—- is there enough copper to meet every one’s

needs?

We will hear about the answer to that question from our first panel of experts—

they represent the supply chain from the end user to the producer. But first I want

to talk about platinum.

This is a mineral commodity that has a very interesting role in the new economy.

For many years it was a jeweler’s and a chemist’s metal—platinum plus diamonds

was the ultimate expression of devotion—and chemical reactions aided by platinum

turned raw petroleum into refined products.

In the 1970’s, platinum was enlisted by Detroit to help clean up the air—catalytic

converters have helped us significantly reduce air pollution from the cars we drive.

Overall automobile emissions have been reduced by 31 percent, and per vehicle

carbon monoxide emissions are 85 percent lower.

The use of platinum in the jewelry and transportation industries now accounts

for about 80 percent of platinum usage.

But it also gives us a significant success story—cleaner air and significant platinum recycling—almost 12 percent of demand is met by recovering platinum from

scrapped catalytic converters—this is true resource conservation and recovery.

Now we are on the verge of seeing new uses for platinum in the transportation

sector.

It’s used in fuel cells, which have the potential to make cars and busses even

cleaner and to drastically reduce our dependence on foreign sources of petroleum!

We will hear about platinum usage from a fuel cell manufacturer. We will hear

about the types of fuel cells and what generally goes into making them. We will

hear about the potential for growth of fuel cell usage in the transportation industry.

Once again we will be asking about the sources of supply and ask ourselves if

there is enough to go around.

Lastly, we will hear about the national security implication of having adequate

supplies of mineral commodities.

And the clear need we all have for unbiased public sources of mineral commodity

information.

Speaking to this matter, I would like to commend the Interior Appropriations

Committee for supporting the energy programs under the jurisdiction of the House

Resources Committee authorized by the Energy Policy Act of 2005.

I am very pleased that the Appropriations Committee restored funding for the

USGS Minerals Information Team and admonished the Administration to not continue to propose the elimination of the program in future Budget requests.

The Minerals Information Team provides invaluable information on the world

wide use, production and demand for mineral commodities and keeps tabs on what

the U.S. imports and from where.

Demand for mineral commodities has risen dramatically over the past few years

largely due to China and India’s economic growth and industrialization.

Their competition has driven up the price of commodities to our citizens. It could

threaten the vital national security interests of the nation by fully depriving us of

foreign sources of supply.

In some cases the denial of access to mineral resources could result in a decision

to commit U.S. forces to maintain that access. In this circumstance, knowledge is

both power and security. I hope the Administration will finally take careful note of

the views of the Congress in this matter.

So now, I want to thank the witnesses for joining us today and I look forward

to your testimony.

[The prepared statement of Mr. Grijalva follows:]

5

Statement of The Honorable Raul Grijalva, Ranking Democrat,

Subcommittee on Energy and Mineral Resources

Mr. Chairman, I join you in welcoming our panels of expert witnesses to today’s

hearing.

As the title of today’s hearing implies, our domestic copper and platinum resource

bases can be used to produce alternative transportation vehicles, such as hybrid

cars, and fuels for industrial, commercial and residential uses. Currently, according

to several sources, including the Copper Development Association, the U.S. is completely self-sufficient in copper resources and production.

My home state of Arizona, in fact, continues to produce about 60 percent of the

nation’s copper and in 2004 brought in record revenues to the U.S. economy, as

noted in a recent report published by the Arizona Mining Association.

Yet, while copper production is good for the economy, I have concerns about the

treatment of copper mining workers, especially with regard to the July 2005 labor

union strikes against Asarco Mining Company in Phoenix, Arizona. Mining companies are flush with cash and yet are not giving the proper raises and benefits to

their miners.

Further, the Environmental Protection Agency (EPA) identifies sites containing

copper as some of the most serious hazardous places in the nation. When the soils

of farmland are polluted with copper, animals will absorb concentrations that are

damaging to their health. Asarco continues to pollute the environment by operating

its copper smeltering plant in Hayden, Arizona. Industrial exposure to copper

fumes, dusts, or mists may result in metal fume fever in human beings.

Today, with copper and platinum commodities at record high prices, and a world

market that is unstable for the foreseeable future; we must take caution to produce

and use such minerals in a manner that does not leave the American public vulnerable to increased health and safety issues and greater pollution in our environment.

In conclusion, I hope that this Subcommittee will look beyond the surface of using

these two very expensive commodities as part of our National energy strategy. I look

forward to a spirited discussion with today’s witnesses.

Mr. GIBBONS. I would like to introduce our first panel. Our first

panel is Mr. Shelley Stewart, Tyco International; David Menzie,

U.S. Geological Survey; Robyn Storer, Westhouse Securities, LLP;

and James Frank, Marathon PGM Corporation.

Ladies and gentlemen, we have a ritual here at the committee

where we swear in all of our witnesses, so if you would each rise

and raise your right hand.

[Witnesses sworn.]

Let the record reflect that each of our witnesses answered in the

affirmative. I turn now to our very first panel member. Shelley,

welcome. The floor is yours. We look forward to your testimony.

STATEMENT OF SHELLEY STEWART, VICE PRESIDENT,

SUPPLY CHAIN, TYCO INTERNATIONAL (US) INC.

Mr. STEWART. Thank you very much. Mr. Chairman and Members of the Subcommittee, my name is Shelley Stewart. I am the

Senior Vice President of Operational Excellence and Chief Procurement Officer for Tyco International. I also serve on the Board of

Directors of the ISM, Institute for Supply Chain Management, and

I am the Chairman of the Howard University School of Business

Supply Chain Management advisory program. I am responsible for

$25 billion in global procurement spending. I lead the company’s

efforts to reduce cost and increase efficiency.

Tyco International is a global, diversified company that provides

vital products and services to customers in four business segments:

electronics, fire and security, health care, and engineered products

and services. With a 2005 revenue of $40 billion, Tyco employs

250,000 people worldwide. Tyco operates in 50 U.S. states and in

6

more than 100 countries worldwide. In the U.S., we employ 85,000

individuals who share an extraordinary commitment to excellence

and to the communities in which they live and work.

From the operating room to the boardroom, Tyco offers the products and the services the modern world needs to grow. Tyco fills

an incredibly wide range of many diverse needs of businesses and

governments, education, medical institutions, and commercial industries ranging from food to automobiles. For example, the connectors in your cell phones and computers, the many security access control systems used throughout Washington, as I look

around, in this room as well, and the sprinkler systems installed

in the ceiling for fire suppression are likely Tyco products.

On behalf of Tyco International, I would like to extend my appreciation for the opportunity to testify regarding global copper prices

and their impact on end users like Tyco, who use this commodity

to manufacture goods used by people across the world. We appreciate the committee opening a dialogue on this issue and hope to

be a valued resource to you as we continue to examine this activity.

From architecture to telecommunications, copper is in numerous

products we rely on each day. Not surprisingly, copper is a vital

component to many thousands of Tyco products, sometimes serving

as the major cost driver of producing those products. Out of the

$10 billion that Tyco spends annually on direct materials, that is,

materials that go directly into the products we manufacture, copper

now accounts for 7 percent, up from 4.5 percent just last year. Copper wire, cable, and tubing are used in many commercial and residential installations of ADT and Simplex/Grinnell access control,

home security, fire suppression and detection devices. These devices are essential to keeping families and businesses safe and secure.

Our engineered products division also uses copper to manufacture industrial, commercial, and residential applications, providing

solutions from floor heating, snow melting and de-icing to temperature measurement, wiring, and leak-detection systems. The AFC

cable business unit utilizes copper to manufacture electrical distribution products used in construction and modernization of commercial office buildings, institutional facilities, shopping centers,

and multifamily dwellings.

Most significantly, Tyco’s electronics business uses copper in the

millions of electrical connectors that we manufacture. In fact,

Tyco’s electronics division alone purchases nearly 50 million

pounds of copper each year. These connectors are found in many

products, including automobiles, computers, televisions, mobile

phones, and other consumer electronics.

For our products that require copper, there is no alternative

metal. Copper offers unique formability, conductivity, and stress relaxation not available in any other metals.

There is an old adage that ‘‘a penny saved is a penny earned,’’

and in today’s world of rising metal prices, pennies, or more accurately, copper, is becoming a precious commodity that has a tremendous impact on savings and earnings.

Since 2003, the price of copper has risen more than 350 percent.

Prices have risen more than 62 percent since February of this year,

and, in all likelihood, they have not peaked yet.

7

Several factors have contributed to this steady rise in prices.

Labor disputes in Chile and Mexico and political unrest in Indonesia that is threatening copper production has caused price increases. Heavy demand and consumption of copper in Europe and

China has created shortages, thus driving up costs, and, interestingly, hedge fund investments in the metals markets, including

copper, are extremely heavy due to the weak dollar, again driving

up the price of these commodities.

Soaring copper prices are also a reflection of a healthy and robust economy driven by increased manufacturing and construction,

both domestically and abroad. Congress and the Administration

should be applauded for enacting economic policies the fuel such

growth, yet this growth, coupled with the other factors I have outlined, has stoked the demand for copper to a point where the increased cost is negatively affecting businesses and consumers.

Drastic changes in the weighted average price of copper, as we

have seen recently, disrupt business planning and revenue forecasts. These cost increases are often passed on to customers in the

form of surcharges, indexed pricing, and direct-to-customer billing

of subcontracted material, and whatever is not passed on to

consumers ends up negatively impacting companies’ bottom lines,

adversely affecting investors, stockholders, and employees.

Early this month, as Tyco reported quarterly profits, we adjusted

our full-year earnings forecast. Soaring copper prices contributed

greatly to this adjustment. In 2005, Tyco purchased more than

$468 million worth of copper on the global market, equaling nearly

280 million pounds. This year, purchasing the same volume of copper at the current price will cost the company $681 million, for an

estimated year-over-year increase of $213 million, or 46 percent.

Put in perspective, Tyco’s copper cost increases above the previous

year’s average, or as we call them, ‘‘head winds,’’ for 2005 was $73

million. In 2006, we will nearly triple that, incurring cost increases

amounting to $60 million per quarter. For example, in Tyco Electronics alone, we have nearly reached our $285 million budget for

copper spending in the first five months of 2006.

These significant investments in copper cannot be underestimated, and the staggering surge in copper prices impacts Tyco’s

competitiveness worldwide. Moreover, these high costs put pressure

on our medium-to-small suppliers. Therefore, they are turning to

Tyco for help by proposing price increases and shorter payment

terms to get money in the near term to finance copper or to offset

their higher finance costs.

As the Chief Procurement Officer and head of Supply Chain for

Tyco, it is my responsibility to manage the total cost of goods and

services Tyco needs to manufacture its thousands of products, products that are vital to millions of people in the U.S. and around the

world. Though the markets for commodities such as copper and

other metals often fluctuate, percents of sustained and substantial

increase make it difficult for my organization to manage costs. This

impacts our ability to develop overall product and pricing strategy

as well as our ability to accurately predict our financial results,

which is a strong expectation from our shareholders.

Skyrocketing metal costs also make it difficult to avoid increasing prices for our own products. Eventually, whether these

8

products are for residential, commercial, or industrial uses, it is the

consumer who will ultimately end up absorbing these increases.

While there are several contributing factors to the high price of

copper, the underlying market issue is more than likely supply and

demand. Is there enough copper today to meet demand, and what

does the future hold for copper producers and suppliers? Do we

have enough copper? Are there enough suppliers to satisfy the potential demand?

I will leave these questions to the experts, but I do know that,

as a customer, I am highly dependent upon copper products in virtually every hour of my modern life, from the computer I used to

prepare this statement to the car I drove to get here today.

The world cannot afford for companies to be hamstrung with

high copper prices, especially when companies like Tyco International are using copper to manufacture products, or components

to products, that are so vital to everyone’s lives.

As this committee continues to examine the impact of copper

prices on consumers and businesses, I hope that you will keep today’s testimony in mind. On behalf of Tyco International, I ask

that you consider the true impact of copper prices on our company

and the thousands of products we make. Thank you for your time,

and thank you for providing me with this opportunity.

[The prepared statement of Mr. Stewart follows:]

Statement of Shelley Stewart, Jr., Senior Vice President, Operational

Excellence & Chief Procurement Officer, Tyco International (US), Inc.

Introduction

Mr. Chairman, Ranking Member Grijalva and members of the sub-committee, my

name is Shelley Stewart, Jr. I am Senior Vice President of Operational Excellence

and Chief Procurement Officer for Tyco International, USA. I also serve on the

Board of Directors for the Institute of Supply Chain Management and am Chairman

of Howard University’s School of Business Supply Chain Advisory Board. At Tyco,

I am responsible for 25 billion dollars in global procurement spending and I lead

the company’s efforts to reduce cost and increase efficiency.

Tyco International is a global, diversified company that provides vital products

and services to customers in four business segments: Electronics, Fire & Security,

Healthcare and Engineered Products & Services. With 2005 revenue of $40 billion,

Tyco employs approximately 250,000 people worldwide. Tyco operates in all 50 U.S.

states and in more than 100 countries worldwide. In the U.S. we have 85,000 employees all of whom share an extraordinary commitment to excellence and to the

communities in which they live and work.

From the operating room to the boardroom, Tyco offers the products and services

the modern world needs to grow. Tyco fills an incredibly wide range of the many

diversified needs of businesses and governments, educational and medical institutions, and commercial industries ranging from food to automobiles. For example, the

connectors in your cell phones and computers, the many security access control systems used throughout Washington, and the sprinklers installed in the ceiling for fire

suppression are likely Tyco products.

On behalf of Tyco International, I would like to extend my appreciation for the

opportunity to testify regarding global copper prices and its impact on ‘‘end users,’’

like Tyco, who use this commodity to manufacture goods used by people across the

world. We appreciate the committee opening a dialogue on this issue and hope to

be a valued resource as you continue to examine it.

Tyco and Copper

From architecture to telecommunications, copper is in numerous products we rely

on each day. Not surprisingly, copper is a vital component to literally thousands of

Tyco products, sometimes serving as a major cost driver of producing those products.

Out of the $10 billion that Tyco spends annually on direct materials—materials

that go directly into the products we manufacture—copper now accounts for nearly

7%, up from 4.5% just last year. Copper wire, cable and tubing are used in commerVerDate 11-MAY-2000 14:34 Sep 08, 2006 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 S:\DOCS\27720.TXT HRESOUR1 PsN: HRESOUR1
9

cial and residential installations of ADT and Simplex/Grinnell access control, home

security, fire suppression and detection devices. These devices are essential to keeping families and businesses safe and secure. Our Engineered Products division also uses copper to manufacture industrial, commercial and residential applications, providing solutions from floor heating,

snow melting and de-icing to temperature measurement, wiring and leak detection

systems. The AFC Cable business unit utilizes copper to manufacture electrical distribution products used in the construction and modernization of commercial office

buildings, institutional facilities, shopping centers, and multifamily dwellings. Most significantly, Tyco’s electronics business uses copper in the millions of elec- trical connectors we manufacture. In fact, Tyco’s electronics division alone purchases

nearly 50 million pounds of copper each quarter. These connectors are found in

many products including automobiles, computers, televisions, mobile phones and

other consumer electronics.

For our products that require copper, there is no alternative metal. Copper offers

unique formability, conductivity, and stress relaxation not available in other metals.

The Price Problem

There is an old adage that a ‘‘penny saved is a penny earned.’’ And in today’s world of rising metal prices, pennies, or more accurately, copper, is becoming a precious commodity that has a tremendous impact on savings and earnings. Since 2003 the price of copper has risen more than 350 percent. Prices have risen

more than 62 percent since February of this year. And, in all likelihood they haven’t

peaked yet.

Several factors have contributed to this steady rise in prices. Labor disruptions

in Chile and Mexico and political unrest in Indonesia that is threatening copper production has caused price increases. Heavy demand and consumption of copper in

Europe and China has created shortages, thus driving up costs. And, interestingly,

Hedge Fund investments in the metals market, including copper, are extremely

heavy due to the weak dollar, again driving up the price of these commodities.

Soaring copper prices are also a reflection of a healthy and robust economy driven

by increased manufacturing and construction both domestically and abroad. However, we believe other factors such as dwindling supplies and speculative buying

from Hedge Funds have influenced the copper price. Congress and the Administration should be applauded for enacting economic policies that have fueled such

growth.

Yet, this growth coupled with the other factors I have outlined has stoked the demand for copper to a point where the increased cost is negatively affecting businesses and consumers. Drastic changes in the weighted average price of copper, as

we have recently seen, disrupt business planning and revenue forecasts. Whenever

possible, these cost increases are often passed on to our customers in the form of

surcharges, indexed pricing and direct-to-customer billing of subcontracted material.

And, whatever is not passed on to consumers ends up negatively impacting companies bottom lines—adversely affecting investors, stock holders and employees.

Earlier this month, as Tyco reported quarterly profits, we adjusted our full-year

earnings forecast. Soaring copper prices contributed greatly to this adjustment. In

2005, Tyco purchased more than $468 million dollars worth of copper on the global

market, equaling nearly 280 million lbs. This year, purchasing the same volume of

copper at the current price will cost the company $681 million, for an estimated

year-over-year spend increase of $213 million, or 46 percent. Put into perspective,

Tyco’s copper cost increases above the previous year’s average, or as we call them

‘‘headwinds’’, for 2005 was $73 million. In 2006 we will nearly triple that, incurring

cost increases amounting to almost $60 million per quarter. For example, in Tyco

Electronics alone we have nearly reached our $285 million budget for copper spending in the first 5 months of 2006.

These significant investments in copper cannot be underestimated and the

staggering surge in copper prices impacts Tyco’s competitiveness in the worldwide

market.

Moreover, these high costs also put pressure on our medium to small suppliers.

Therefore, they are turning to Tyco for help by proposing price increases and shorter

payment terms to get money in the near-term to finance copper or to offset their

higher finance costs.

As Tyco’s Chief Procurement Officer and head of Supply Chain, it is my responsibility to manage the total cost of the goods and services Tyco needs to manufacture

its thousands of products—products that are vital to millions of people in the U.S.

and around the world. Though the markets for commodities such as copper and

other metals often fluctuate, periods of sustained and substantial increase make it

very difficult for my organization to manage costs. This impacts our ability to deVerDate 11-MAY-2000 14:34 Sep 08, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 S:\DOCS\27720.TXT HRESOUR1 PsN: HRESOUR1
10

velop our overall product and pricing strategy, as well as our ability to accurately

predict our financial results, which is a strong expectation from our shareholders.

Sky rocketing raw material costs also make it difficult to avoid increasing prices for

our own products. Eventually, whether these products are for residential, commercial, or industrial uses, it is the consumer that will ultimately end up absorbing the

increase.

Conclusion

While there are several contributing factors to the high price of copper, the underlying market issue is more than likely supply and demand. Is there enough copper

today to meet demand and what does the future hold for copper producers and suppliers? Do we have enough copper? Are there enough suppliers to satisfy potential

future demand? I will leave these questions to the experts. But I do know that as

a consumer, I am highly dependent upon copper products in virtually every hour

of my modern life, from the computer I used to prepare this statement to the car

I drove to get here to be with you today.

The world cannot afford for companies to be hamstrung with high copper prices.

Especially, when companies like Tyco International are using copper to manufacture

products, or components to products, that are so vital to our everyday lives.

As this committee continues to examine the impact of copper prices on consumers

and business I hope that you will keep today’s testimony in mind. On behalf of Tyco

International I ask that you consider the true impact of copper prices on our company and the thousands of products we make.

Mr. GIBBONS. Thank you very much, Mr. Stewart. Your testimony is stark and to the point and very informative for us, and I

appreciate the fact that you have found the copper to write your

statement and the car to get here this morning as well, so thank

you very much.

Mr. STEWART. Thank you very much.

Mr. GIBBONS. I turn now to Mr. David Menzie from the U.S. Geological Survey. Mr. Menzie, again, welcome back to the committee.

We look forward to hearing from you.

STATEMENT OF W. DAVID MENZIE, CHIEF, MINERALS

INFORMATION TEAM, U.S. GEOLOGICAL SURVEY

Mr. MENZIE. Thank you, Mr. Chairman. Mr. Chairman and

Members of the Subcommittee, thank you for the opportunity to appear at this hearing. I am David Menzie, a geologist with the U.S.

Geological Survey.

Prices of metals are again rising, raising concerns about future

metal supplies. The price of copper has increased from around 70

cents a pound in January of 2003 to $3.80 a pound yesterday. Recently, USGS scientists investigated future mineral scarcity, with

an emphasis on copper, in a paper published by Resources for the

Future. That study concluded that although global copper resources

are abundant, rapid increases in copper consumption could lead to

temporary shortages.

A number of factors will affect future supplies of copper, including level of consumption, estimates of copper resources, investment

in mineral exploration, the state of the minerals professions, scrutiny and restrictions on mineral extraction, and environmental residuals.

Economic development and rising incomes in some Asian countries have led to rapid increases in mineral consumption. Some

have suggested increased consumption of minerals by developing

countries is not sustainable, either because resources will be insufficient to meet consumption or because of the environmental

11

consequences of increased production. We estimated the consumption in the 20 most populous countries to 2020. World copper consumption was estimated to increase from about 15 million tons in

2000 to 27 million tons in 2020. Developing countries accounted for

most of the increase. Consumption in China was forecasted to increase from 2 million tons in 2000 to 5.6 million tons in 2020.

Currently, 90 percent of copper that is consumed comes from

mines and 10 percent from recycled material. Unless recycling can

be dramatically increased, escalating demand for copper will have

to either be met by increased mine production or substitution.

However, development also increased demands for substitute commodities. Therefore, projected consumption is likely to come mainly

from mine production.

Reserves of the inventory of mines; as the inventory is reduced,

the reserves must be replaced either from identified resources or

from discovering new deposits. World copper reserves are currently

about 470 million tons. Total [identified and undiscovered] world

copper resources are not well known because an assessment of undiscovered world resources has not been made. Current estimates

of world copper resources, about 1.6 billion tons, would likely be

significantly increased by an assessment of global undiscovered

copper resources.

We estimate that about 1.1 billion tons of copper will be needed

to meet consumption between 2000 and 2020 and to maintain a

proportional reserve. This is more than three times the amount of

copper in the five largest deposits currently known. Much of the

material will come from undiscovered deposits. Because a very few

large deposits typically contain the majority of copper resources, a

small number of large, undiscovered deposits will be critical to supplying copper in the future.

Analysis of mineral exploration budgets and changes in mining

companies and universities are reasons to question whether sufficient reserves will be available. Exploration budgets increased

through the early nineties, but they peaked in 1997 at $5.2 billion

and then declined sharply to as low as $1.9 billion in 2002 before

rebounding to just over $5 billion in 2005.

During the 1990s, large companies eliminated grassroots exploration. Geologists in these companies either joined junior companies or left the industry. The restructuring has resulted in fewer

exploration geologists funded by smaller exploration budgets.

Future resources are likely to be in deposits concealed beneath

covering rock or sediments. Such deposits will be more difficult to

discover and more costly to mine. Reorganizations in universities

have resulted in fewer and smaller academic departments to train

the needed scientists and engineers to deal with this problem.

A further cause for concern about society’s ability to produce

minerals that will be needed by the developing countries is increased scrutiny and restriction of mineral extraction. In the

United States, and opened to mineral exploration has declined significantly, and population growth in the mountain west has led to

increased scrutiny of mineral development. Scrutiny of projects outside the United States is also increasing.

Increased residuals from mineral production and use will accompany increased consumption. About 350 tons of waste rock and 147

12

tons of tailings are generated for each ton of copper produced. Assuming that grades of ores do not change, mining and milling of

copper will produce about 130 billion tons of waste rock and 56 billion tons of tailings between 2000 and 2020. To summarize, Mr. Chairman, although the world has abundant resources of copper, rapid increases in copper consumption can lead

to temporary shortages of copper. Reasons for these temporary

shortages may include reduced investment in mineral exploration,

a decline in the number of mineral professionals, increased restriction on mineral extraction, and increased environmental costs for

mineral extraction and use, and increased costs of discovering new

copper resources. Thank you, Mr. Chairman.

[The prepared statement of Mr. Menzie follows:]

Statement of W. David Menzie, Chief,

Minerals Information Team, U.S. Geological Survey

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity

to appear at this hearing on energy and mineral requirements for development of

renewable and alternative fuels used for transportation and other purposes. My

name is David Menzie. I am a geologist with the U.S. Geological Survey (USGS) and

serve as Chief of the Mineral Information Team’s International Minerals Section,

a component of the USGS Mineral Resources Program. The USGS is the primary

Federal provider of scientific and economic information for objective resource assessments and unbiased research results on national and international mineral

potential, production, trade, consumption, and environmental effects. The USGS

provides information to help inform land use and resource planning decisions on

specific management units and for national and international economic, foreign policy, and national security decisions.

Rising costs of metals are again heightening concerns about future supplies of

these important commodities. Copper is among the metals that have experienced a

dramatic increase in price. In January 2003, the price of copper was around $0.70

per pound and it was readily available as copper stocks exceeded 1.2 million metric

tons (Mt). At the end of March 2006, copper prices reached $2.46 per pound and

stocks were just over 150,000 metric tons (t). Stocks fell to below 50,000 t in July

2004 and some smelters had difficulty in obtaining sources of copper. The recent rise

in copper prices is the result of increased copper consumption by developing countries. Some authors suggest that increased consumption of minerals by developing

countries is not sustainable either because copper resources are insufficient to meet

growing consumption or because the environmental consequences of increased resource production will be too costly.

USGS scientists have addressed the question of future mineral scarcity, with emphasis on copper, in a paper titled ‘‘Mineral Resources and Development in the

Twenty-first Century’’ that was published by Resources for the Future in their 2005

book, Scarcity and Growth Revisited. This study concluded that although the world

has abundant resources of copper, rapid increases in copper consumption may lead

to temporary shortages. The USGS considered a number of factors that will affect

future supplies of copper, including: (1) rising consumption related to economic

growth in developing countries; (2) estimates of copper availability; (3) investment

in mineral exploration; (4) the state of the minerals professions; (5) increased scrutiny of and restrictions on mineral extraction; and, (6) increased environmental residuals (pollutants resulting from mineral production and use). I will discuss each

of these factors in turn.

1. Economic Growth and Mineral Consumption

Rapid economic development and rising income levels in a number of countries,

especially in Asia, have led to a rapid increase in consumption of mineral commodities following a consistent pattern of increasing per capita consumption with increasing income (per capita GDP). Levels of mineral consumption are low in lesserdeveloped countries with low income levels; however, mineral consumption increases

very rapidly as countries begin to industrialize and incomes pass a threshold level.

Per capita mineral consumption then stabilizes at higher levels when countries

begin to develop the service and information sectors of their economies. The current

rapid increase in mineral consumption is the result of a number of large countries

approaching or having reached threshold income levels for consumption.

13

The USGS used the relation between per capita income and per capita copper consumption to estimate copper consumption in the 20 most populous countries in

2020. The results suggest that world copper consumption will increase an estimated

3.1 percent per year from 14.9 Mt in 2000 (our base year) to 27 Mt in 2020. Most

of the increased consumption will take place in developing countries. For example,

copper consumption in the United States and Japan will increase from 3 Mt and

1.3 Mt in 2000 to 3.5 Mt and 1.4 Mt respectively in 2020, while copper consumption

in China and India will increase from 2 Mt and 400,000 t in 2000 to 5.6 Mt and

1.6 Mt respectively in 2020.

2. Estimates of Copper Availability

Currently, about 90% of all copper consumed comes from mining and processing

new ores. About 10% of copper is from recycled sources. Recent studies reported in

the Wall Street Journal, the Washington Post, and trade publications question

whether recycling rates can be significantly increased. Unless recycling can be dramatically increased, the escalating demand for copper will either have to be met

through increased mine production or through substitution of other commodities

that exhibit the same properties and can serve the same functions as copper. Economic development increases the demand for a full suite of industrially useful mineral commodities—not just copper. Therefore, limits may exist to the availability of

substitute commodities. Thus, much of projected copper consumption is likely to be

mine production of copper from reserves.

Copper reserves represent the working inventory of mines; as that inventory is

reduced, the reserves will need to be replenished from other (non-reserve) identified

resources and by discovering new deposits of copper. There are about 45 Mt of copper reserves in the United States. Identified copper resources in the United States

are estimated to be about 260 Mt. About 290 Mt of copper are estimated to exist

in undiscovered deposits in the United States based upon a detailed probabilistic

assessment of undiscovered mineral resources. World copper reserves are currently

about 470 Mt. Total (identified and undiscovered) world copper resources are less

well known. An assessment of undiscovered world resources comparable to that for

the United States does not exist. Completion of the probabilistic assessment of undiscovered resources for the United States increased previous estimates of United

States’ total copper resources significantly. Based upon these results, it is expected

that the current estimates of total world copper resources (1.6 billion tons) would

be significantly increased by a modern global mineral assessment including an estimate of the amount of copper in undiscovered deposits worldwide.

Our study estimated that approximately 1.1 billion tons of copper will need to be

added to reserves if the world is to meet projected copper consumption at present

recycling rates and to maintain reserves at the same level relative to copper production. The study concluded that to meet anticipated copper consumption between

2000 and 2020 and to maintain a proportional amount of reserves will require more

than three times the amount of copper as is contained in the 5 largest deposits currently known (Chuquicamata, El Teniente, Escondida, and Las Bronces in Chile and

Morenci in Arizona). Although some of this material exists in discovered deposits,

much of the material will need to come from undiscovered deposits. Because a small

number of very large deposits typically contain the majority of copper resources, a

small number of large undiscovered deposits will be critical to supplying copper in

the future.

Based on available information, it appears that sufficient supplies of copper exist

to meet the needs of developing countries; however, the production of these resources will depend upon a number of factors including adequate levels of mineral

exploration, the development of new technologies for mineral discovery and production, and social and legal environments that allow for mineral exploration and production.

3. Investment in Mineral Exploration

An analysis of mineral exploration budgets, together with organizational changes

within corporations engaged in mineral exploration, and within universities that

teach economic geology, mineral economics, and mining engineering illustrates reasons for concern. Although significant resources exist, a ready inventory of copper

may not be available to meet the increased demand imposed by developing economies. A strong focus on exploration for gold and diamonds, coupled with declining

levels of exploration spending, likely contributed to the temporary shortages of copper last year. Mineral exploration budgets increased throughout the early 1990s,

reaching a peak of $5.2 billion in 1997 and then declining sharply after 1997. Exploration budgets reached a low of $1.9 billion in 2002 before rebounding to $5.1 billion

in 2005. Prices of most mineral commodities rose sharply in 2004.

14

4. State of the Minerals Professions

During the late 1990s, many large companies restructured to eliminate grassroots exploration (exploration in untested areas where mineral deposits are not

known to exist). In some cases, economic geologists who had been in these companies formed or joined junior companies; in other cases, they left the industry. The

restructuring of mineral exploration has most likely resulted in fewer exploration

geologists funded by smaller exploration budgets.

Over the next 20 years, an increasing proportion of resources that remain to be

discovered are likely to be in concealed deposits that lie beneath significant quantities of covering rock or sediments. Such deposits will be more difficult to discover

and will likely be more costly to produce. Reorganization in universities that teach

economic geology, mineral economics, and mining engineering has resulted in smaller academic departments to teach scientists and engineers needed to meet the technical challenges that will be presented by future mineral exploration and development.

5. Increased Scrutiny of and Restrictions on Mineral Extraction

Our study concluded that a further cause for concern about society’s ability to

produce the amount of minerals that will be needed by developing countries is the

increasing social scrutiny of and restrictions on mineral resource extraction. In the

United States, the amount of land open to mineral exploration has declined significantly since the passage of the original Wilderness Act in 1964. In addition, population growth in urban areas of the mountain west (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming) has led to increased scrutiny of

domestic mineral development projects. Scrutiny of mineral projects outside of the

United States is also increasing as mineral-producing countries are demanding

greater control over their natural resources.

6. Increased Environmental Residuals from Mineral Production and Use

Increased mineral consumption, increased residuals from mineral production and

use, and disposal of mineral products that are implicit in the growth of developing

economies will require the implementation of new strategies to reduce residuals

from resource production and to increase recycling. On average, about 350 t of waste

rock and 147 t of tailings are generated for each ton of copper produced. Assuming

that grades of ore produced do not change, the model implies that mining and milling of copper ores will produce about 130 billion tons of waste rock and 56 billion

tons of tailings between 2000 and 2020. Copper smelting can release both sulfur dioxide and arsenic to the atmosphere and hydrosphere. Amounts of these materials

that might be released depend on the proportions of copper and arsenic that are

processed by pyrometallurgical methods (using high temperatures to transform metals and their ores) and the technology employed in the smelter. The amount of

waste rock and tailings are unlikely to be reduced unless copper ores are leached

in place. The amounts of arsenic and sulfur dioxide released into the environment

are more likely to be reduced by adoption of new technologies.

In addition to the residuals that are the direct result of producing commodities,

there are residuals that enter the environment from use and final disposal of goods

manufactured from the commodity. An increase in recycling could reduce the magnitude of these residuals.

To summarize, Mr. Chairman, our study concluded that although the world has

abundant resources of copper, rapid increases in copper consumption can lead to

temporary shortages of copper. Reasons for these temporary shortages may include:

reduced investment in mineral exploration; a decline in the number of exploration

geologists, mining engineers, and mineral economists; increased restriction on mineral extraction; increased environmental costs from mineral extraction and use; and

increased costs of discovering new copper resources.

Thank you for the opportunity to discuss the growing demand for global mineral

resources, such as copper. I am pleased to respond to any questions that you and

Members of the Subcommittee may have.

Mr. GIBBONS. Thank you very much, Mr. Menzie. We appreciate

your testimony and your presence here as well. Very helpful information for our committee.

I turn now to Ms. Robyn Storer from Westhouse Securities. We

welcome you to the committee. The floor is yours. We look forward

to your testimony.

15

STATEMENT OF ROBYN M. STORER, CONSULTING MINING

ANALYST, WESTHOUSE SECURITIES, LLP

Ms. STORER. Thank you. Mr. Chairman and Members of the com- mittee, I am Robyn Storer, Consultant Mining Analyst for

Westhouse Securities in London. I am pleased to have the opportunity to speak to you today regarding the challenges that the copper mining industry faces to meet the growth in world demand. Demand for copper is growing worldwide as the emerging econo- mies of China, India, Russia, Brazil, and elsewhere work toward

bringing a North American standard of living to their families. To

realize the dream of urbanization, industrialization, and consumerism, these economies will need to consume mountains, or, in

the mining context, large pits of metals. However, the growth for demand in copper is not restricted to these fast-growing, emerging economies. The electrical characteristics of copper make it an essential component of our modern world.

For example, the modern family car today contains 50 pounds of copper and over a mile of copper wiring. However, this is not solely

the result of the introduction of power windows, GPS systems, and

the like. A significant proportion of the increase in copper in

vehicles has been in under-the-hood applications, where electrical

motors have replaced moving mechanical parts, boosting efficiency

and lowering fuel consumption. In this respect, the move to hybrid

cars, vehicles containing some 100 pounds of copper, is just an extension of this trend.

Thus, projected growth in demand for copper mine production of some 3.7 percent per annum over the next decade translates into

a growth of some 7 million tons per year. Allowing for the inevitable mine closures, this means that within a decade less than half

of world demand for copper mine supply can be met from existing

mines. The balance will largely need to come from new mine developments.

On current projections, there will not be sufficient new mines in

production by the middle of the next decade to meet this projected

demand. The world needs the equivalent of 30 new major mines to

meet the projected growth in demand. However, new greenfields

mining projects are few, following a period of prolonged underinvestment in base metal exploration which has restricted the

number of new discoveries to below what is needed to even replace

mine production.

The shortage of new projects in the pipeline is a major issue for

the industry. The rule-of-thumb is that it takes eight years from

discovery to mine development. However, lead times can be significantly longer than this, aggravated by the increased level of regulation and longer permitting times. In addition, the concentration in

the mining industry means that major mine development decisions

are now in the hands of companies who, by their very nature, tend

to be more conservative decision takers. Only nine companies now

produce half of the world’s copper mine production.

Concentration is not all bad. Given that major mine development

costs are in the order of one to $2 billion, only large companies can

finance such projects. However, the concentration in the industry

is certainly a contributing factor to Chinese concern over future

supply and the Chinese moves to acquire international mining

16

companies and invest in new project development in exchange for

off-take rights. Another challenge facing the industry is that it will need to de- velop mines in new regions of the world. The occurrence of copper

deposits is controlled by geology, with large deposits predominantly

confined to modern or ancient continental margins. The USA has a number of known but yet undeveloped major cop- per deposits, the two largest being Resolution in Arizona and the

Pebble copper-gold deposit in Alaska. However, the Safford mine

development, still awaiting final permitting, will be the first new,

major copper mine in the USA in over 30 years. This lack of new

mine development in the U.S. means that today the U.S. produces

only half of the copper it consumes.

However, with the difficulties of permitting and the ‘‘not in my

back yard’’ approach to new mine development in North America,

then the back yards from which future copper mine supply will

come increasingly are from Chile, which already produces half of

the world’s mined copper; Peru; Kazakhstan; China, Tibet, and

Mongolia; the Philippines, Pakistan, and the Congo. Exploration

will then need to search wider in the lies of the Far East of Russia,

Angola, Iran, and Turkey.

In conclusion, there is no easy answer to where the next and subsequent generations of copper mine supply will come from to supply

an increasingly copper hungry world. Thank you.

[The prepared statement of Ms. Storer follows:]

Statement of Robyn Storer, Consultant Mining Analyst,

Westhouse Securities

Mr. Chairman, members of the Committee, I am Robyn Storer, Consultant Mining

Analyst for Westhouse Securities in London.

I am pleased to have the opportunity to speak with you today regarding the

Daunting Challenge the Copper Mining Industry Faces to Meet the Growth in

World Demand.

DEMAND DRIVERS

Demand for copper, and metals in general, is growing worldwide.

GDP and investment are rising in the emerging economies of China, India, Russia

Brazil and elsewhere, and will continue to rise, as people in these countries work

towards bringing a North American standard of living to their families. There are

over 2.3 billion Chinese and Indians today, nearly 40% of the world’s population;

by 2050 this figure is forecast to rise to 3.2 billion. (Fig. 1)

This demand for housing, automobiles, telephones, white goods and electronics—

and in turn for the commodities that are the building blocks of these products

means that these economies will need to consume mountains or, in the mining context, great pits of metals, to realize the dream of urbanization, industrialization and

consumerism. (Fig. 2)

However, the growth in demand for copper is not restricted to these fast growing

emerging economies.

Copper is what I like to term a ‘‘modern metal’’, a metal with a long past, but

a bright future.

The electrical characteristics of copper make it an essential component of modern

electronics. Whilst it seems obvious that copper helps runs our televisions and computers, less obvious are some other electrical applications. A modern family car

today contains some 50lbs of copper and over a mile of copper wiring. However, it

would be a mistake to assume that this is solely the result of the introduction of

power windows, GPS systems and video monitors to entertain the children.

A significant proportion of the increase in copper in vehicles has been under the

hood applications, where electrical motors have replaced moving mechanical parts,

boosting fuel efficiency and lowering fuel consumption. In this respect, the move to

hybrid cars, vehicles containing on average 100 lbs of copper, is just an extension

of this trend.

17

MAJOR NEW MINE DEVELOPMENTS NEEDED

Thus projected growth in demand for copper mine production of some 3.7% per

annum (Fig. 3) over the next decade, translates into a growth from the current, just

under 13 million tonnes per year of mined copper production to a number close to

20 million tonnes per year.

Allowing for the inevitable closure of some mines through reserve depletion, this

means that by 2016 less than half of world demand for copper mine supply can be

met from production from existing mines. (Fig. 4).

Brownfields expansions at existing operations can meet only a small part of the

projected increase in demand.

The balance will need to come from new mine developments.

WILL THERE BE SUFFICIENT NEW MINE DEVELOPMENT TO MEET

DEMAND?

Will there be sufficient new mines in production by the middle of the next decade

to meet demand?

On current projections, the answer to this is question, is NO.

The world needs the equivalent of 30 new major mines by 2016 to meet the projected growth in demand.

However, new green fields mining projects few.

The reasons for this are: firstly, a period of prolonged underinvestment in exploration which has restricted the number of discoveries. Secondly, the poor allocation

of those exploration dollars which, for example, saw almost two thirds of the world’s

mineral exploration budget in 2004 spent on the search for gold and diamonds.

Not only has the mining industry not kept pace with the growth in demand, it

is struggling to hold its ground. Worldwide, significant copper discoveries between

1998 and 2004 fell well short of what was needed to replace mine production. The

growth in demand has meant that whilst 10 years ago the Industry needed to find

2.4 Mt of mineable copper to replace daily production; by 2005 this figure had risen

to 4 Mt per day. This means that rate of discoveries to replenish daily production

needed to increase by about 66%, in reality; it rose by only 25%.

SHORTAGE OF NEW PROJECTS IN THE PIPELINE

This shortage on new projects in the pipeline is a major issue for the Industry.

The rule of thumb is that it takes eight years from discovery to mine development. However, lead times can be significantly longer than this.

Aggravating the speed of new mine development is the increasing concentration

in the mining industry, with fewer and larger companies.

This means major mine development decisions are now, by and large, in the

hands companies who, by their very nature, tend to be more conservative decision

takers. In the case of copper, only nine companies now produce half of the world’s

copper mine production.

Concentration is not all bad; given that major mine development costs usually run

in the order of 1.5 to 2 billion dollars, only large companies can finance such

projects.

However, the concentration in the industry is certainly a contributing factor to

Chinese concern over future supply, and the consequent Chinese push to acquire

companies, for example, MinMetals unsuccessful bid for Noranda last year, and to

the growing investments by Chinese companies in new project development, in exchange for off-take rights.

Lead times for mine developments have also increased with the increased level

of regulation and time taken over permitting.

INCREASINGLY COPPER MINE PRODUCTION WILL COME FROM NEW

MINING AREAS

Another challenge facing the Industry is that it will need to develop mines in new

regions of the world.

The occurrence of copper deposits is controlled by geology—with large deposits

predominantly confined to modern or ancient continental margins (Fig. 5).

1. The USA has a number of known but a yet undeveloped major copper deposits:

the two largest by far being: Resolution in Arizona (which is planned to replace

copper mined from Bingham Canyon when that mines begins to runs out of ore

resources in 2017) and the large Pebble copper-gold deposit in Alaska.

However, Phelps Dodge’s Safford mine development, still contingent on certain

permit approvals, will be the first new major copper mine to be opened in the USA

in over 30 years.

This lack of new mine development in the USA means that today the USA produces only half of the copper it consumes, a shortfall of 1 million tonnes per year.

18

2. B.C. in Canada has a number of large, but low grade copper deposits which

can be brought on stream

However, with the difficulties and delays of permitting and the worrying trend to

a ’not in my backyard’ approach to new mine development in North America, then

the backyards in which the major copper mine supply growth of the future will increasingly come from are:

1. Expansions of existing operations and some new mine developments in Chile—

but to some extent this is only compensate for mine closures and the drop in ore

grades;

2. The development of known deposits and yet to be discovered copper deposits

in Peru. However, worrying is the recent political rhetoric of nationalization in Peru,

coming hard on the heals of the nationalization policies emerging in Venezuela and

Bolivia;

3. China, Tibet and Mongolia—the large, slowly developing Oyu Tolgoi copper deposit in Mongolia and the development if a number of mid-sized to large copper deposits in Tibet; will go to help feed the hungry Chinese copper market;

4. The Philippines, although the political situation in the Philippines has been a

major source of development delays;

5. Pakistan, with the major Reko Diq copper deposit recently purchased by a consortium of Antofagasta and Barrick; but questions exist about security and stability

in this region;

6. And of course the DRC, the Congo where a number of major and junior companies are looking to develop mining operations. However, political considerations, the

long, 1500 km transportation distances to the coast and lack of infrastructure such

as power generation—will not see the Congo reach anything like its mineral production potential in under several decades, at least.

After these areas, my pick of exploration areas for the next major discoveries are:

the Far East of Russia—in similar geological terrain to Nth America, Angola, part

of the central African copper belt and across the border from Pakistan, in Iran and

along the same belt into Turkey.

CONCLUSION

So, in conclusion, there is no easy answer to where the next and subsequent generations of copper mine supply will come from, to supply an increasingly copper

hungry world.

Thank you.

19

Copper in Construction

• An average family home contains more than 90 kg of copper

Æ 88 lbs of electrical wire

Æ 66 lbs of plumbing

Æ 33 lbs of builders hardware

Æ 20 lbs inside electrical appliances-11 lbs of brass goods

• An example of Longevity in Construction Uses

Æ The Statue of Liberty contains more than 37,000 tonnes (81.5 million lbs) of

copper

Copper in Transportation

• Vehicles, the Average family sedan contains:

Æ on average 50 lbs of Copper

Æ over 1 mile of copper wiring:

• 50% electrical distribution systems and wiring harnesses,

• 20% generators, starter motors and other electromechanical components

• Hybrid Cars contain 100 lbs of copper

• A Boeing 747-200 jet plane contains:

Æ approximately 1.8 tonnes of copper

Copper — Environmentally Friendly

• Copper is environmentally friendly and recyclable

Æ over 80 % of copper ever mined is still in use

Æ alloyed with tin = bronze

Æ alloyed with zinc = brass

• Copper is essential to the metabolism of all living things

• Copper is vital to humans

Æ Adults need 2-3 mg in their diet daily

20

Impact of Industry Consolidation

• Fewer players

Æ Nine companies now control over half the world’s copper production

Æ Increasing number of possible developments now held in fewer hands

• Larger companies tend to be:

Æ Better capitalized

Æ More cautious investors

Æ More focused on projects with a material impact on the overall company

Æ Sequential Developers—Not Simultaneous

21

Mr. GIBBONS. Well, as they always say, on every committee,

there is a woman who always sets the pace. You have done a remarkable job in giving your five-minute speech within the fiveminute timeframe, and I think the other guys ought to learn from

your experience as well. Thank you very much. The committee

truly appreciates the fact that you have flown from England all the

way here to meet with this committee, and thank you for the trouble and effort that you went to get here. We are very pleased.

Before I turn to Mr. Frank, let me explain that the ugly buzzers

that you heard in the middle of your testimony is an indication

that we have a series of votes on the Floor of the House. The first

vote is 15 minutes, and that was about three and a half minutes

ago, so I believe I can get the testimony of Mr. Frank in before I

have to leave to go vote. We will take a brief recess at that point

in time, come back, and we will continue. I do apologize for this

interruption, but it is something that I have no control over, and

I certainly hope you will understand and forgive us for the fact that

we do have other things going on, including votes on the Floor.

Mr. Frank, welcome, Marathon PGM Corporation. We look forward to your testimony. The floor is yours.

STATEMENT OF JAMES D. FRANK, CHAIRMAN,

MARATHON PGM CORPORATION

Mr. FRANK. Mr. Chairman, Members of the Subcommittee, thank

you for the opportunity to appear before you today to discuss the

status of future mine development in the U.S.

My name is James D. Frank, and I am the Chairman of Marathon PGM Corporation, a Canadian company. I was born and

raised in Kellogg, Idaho, in the Silver Valley mining district. I

worked my way through college by working at the Bunker Hill lead

smelter. After graduating from the University of Idaho, I went to

work in the mining industry in Idaho. In 1996, I went to work for

Summo Minerals Corporation in Denver, Colorado. In 2001, I was

laid off from Summo and started to work on my own. In September

of 2003, I founded Marathon, a small, exploration/development

company in Canada, although I still live and work in Centennial,

Colorado.

Marathon has a mining property in northern Ontario with a resource containing 1.5 million ounces of palladium, 400,000 ounces

of platinum, and 348 million pounds of copper. In the last three

years, I also helped form a copper company with properties in the

Philippines, which now also has two additional properties in Africa.

I have been involved in mining in the United States all of my life

until 2003. Actually, my father started mining in Idaho in 1932,

and I started to work at the Bunker Hill smelter in 1966.

Why am I now running a Canadian company with a Canadian

mining property? The answer is risk. This is a picture that I keep

in my office. This was the 19th century ‘‘mine finder.’’ He was an

opportunist. He had to assess his risks, not unlike today. He had

to get his first ‘‘grub stake.’’ In other words, he had to convince

other people he could find a mine so he could get enough supplies

to search for the mine. His odds of success were something on the

order of 10,000 to one, not unlike today.

22

If he was lucky enough to find mineralization, he or someone else

came back for a second grub stake, more financing to develop the

property further. Now his odds were maybe 1,000 to one, not unlike

today.

Then he or someone else would come back and get a third grub

stake to develop the mine. He also had to hope that the price of

the commodity did not drop, or everything he was working for was

for naught. His odds now were probably something on the order of

10 to one, not unlike today.

An added risk we have today is permitting. With all of the risks,

this risk has made it almost impossible to find financing for early

stage projects in the United States.

The last risk of permitting is not ‘‘can you get a mine permitted

with good environmental standards,’’ but ‘‘can you get it permitted

at all?’’

No one wants to go back to what we had before 1972. I remember

growing up in Kellogg, where the air was filled with smelter smoke

so thick you could cut it with a knife, and the South Fork of the

Coeur d’Alene River was gray from mine tailings being dumped directly into the mine. These are unacceptable practices today, but

the current permitting process is also unacceptable.

To illustrate this additional risk, I would like to explain my experience at Summo. Schedule A here shows the line of permitting

events for Summo’s Lisbon Valley Copper Project in Moab, Utah.

Summo’s permitting started in January 1991. By February of 1996,

when I joined Summo, they had already filed their preliminary

draft EIS. One year later, in 1997, Summo had a record of decision

from the BLM approving the construction of the project.

By March of 1997, Greg Hahn, the President of Summo, and I

had put together $62 million in financing to construct the project.

This financing consisted of bank loans, supplier loans, and common

stock sales. Summo started construction in April 1997. In May

1997, an environmental group organized by the National Wildlife

Federation and the Mineral Policy Center filed an appeal and petition for stay. In June 1997, the Interior Board of Land Appeals

granted a stay. Summo was told it could build the mine, but it

could not mine it until the stay was removed.

Under the stay, of course, Summo could not complete the bank

loan and, therefore, could not build the facility. Finally, in March

1999, the IBLA ruled entirely in Summo’s favor, the stay was removed, and Summo could proceed. However, the price of copper

had dropped from $1.20 to less than 60 cents. Summo stock had

dropped from over $1.50 to only a few pennies.

Greg Hahn was forced in 2001 to lay off most of this employees,

including me, and hold on as best he could. Finally, in 2003, as

metals prices started to recover, Greg was able to finally build Lisbon Valley is now operating. But the capital cost to build the

project had increased by more than 50 percent. Lisbon Valley

Project is today a success story, with over 130 people employed and

producing at a rate of 60 million pounds a year. However, the original investors lost most of their investment because it took almost

10 years from the record of decision to a producing mine. There

were no good arguments against building the mine in 1997.

23

The two environmental groups routinely challenge every significant new mining project in the U.S. They have very competent lawyers, and their strategy is simply to delay each project as long as

they can and hope that the investors will throw in the towel.

This is a personal story, but it has been repeated hundreds of

times over the last 15 years. It is now very difficult, if not impossible, to raise money for exploration/development projects in the

U.S. Canada has a very strong, environmental permitting process,

but the problem in the U.S. is that anyone can slow or stop the

process for the price of a stamp, even if they have no valid concerns.

This is why I can get a grub stake for projects in the Philippines

and Canada but not in most places in the U.S. Nevada is one of

the exceptions to this rule. We hope to be able to start construction

on Marathon’s PGM project in the next few years, a timeframe that

is very difficult to match in the U.S.

As others today have explained, we need minerals—copper,

PGMs—in order to produce fuel cells and smog-free cars. We have

to be able to mine these minerals—platinum, palladium, and copper—in the U.S. as well as other places. Thank you, Mr. Chairman.

[The prepared statement of Mr. Frank follows:]

Statement of James D. Frank, Chairman, Marathon PGM Corporation

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to

appear before you today to discuss the status of future mine development in the US.

My name is James D. Frank and I am the Chairman of Marathon PGM Corporation (Marathon), a Canadian company. I was born and raised in Kellogg Idaho in

the Silver Valley mining district. I worked my way though college by working at

the Bunker Hill Lead Smelter. After graduating from the University of Idaho, I

went to work in mining industry in Idaho. In 1996, I went to work for Summo Minerals Corp (now Constellation Copper Corp.) in Denver, Colorado. In 2001, I was

laid off from Summo and started to work on my own. In September of 2003 I founded Marathon, a small exploration/development company in Canada, although I still

live and work in Centennial, Colorado.

Marathon has a mining project in northern Ontario with a resource containing 1.5

million ounces of palladium, 400,000 ounces of platinum and 348 million pounds of

copper. In the last three years I also helped form a copper company with a property

in the Philippines, which now also has two additional projects in Africa.

I have been involved in mining in the United States all of my life, until 2003.

Actually, my father started mining in Idaho in 1932, and I started work at the

Bunker Hill Smelter in 1966.

Why am I now running a Canadian company with a Canadian mining property?

The answer is RISK.

This is a picture that I keep in office. This was the 19th century ‘‘mine finder’’,

he was an opportunist. He had to assess his many ‘‘RISKS’’, not unlike today:

1. He had to get his 1st ‘‘grub stake’’. In other words, he had to convince others

that he could find a mine so that he could get enough supplies to search for

a mine. His odds of success were something in the order of 10,000 to 1, not

unlike today.

2. If he was lucky enough to find mineralization, he, or someone else, would come

back to get a 2nd ‘‘grub stake’’, more financing to develop the property. Now

his odds were reduced to maybe 1 in 1,000, not unlike today.

3. Then he (or someone else) would get a 3rd ‘‘grub stake’’ to develop the mine.

He also had to hope the price of his commodity did not drop, or everything he

had worked for was for ‘‘not’’. His odds were now in the order of 10 to 1, not

unlike today.

4. The added ‘‘RISK’’ we have today, is permitting. With all of the other ‘‘RISKS’’,

this risk has made it almost impossible to find financing for early stage

projects in the US.

This last ‘‘RISK’’ of permitting is not ‘‘can you get a mine permitted with good

environmental standards’’ but ‘‘can you get it permitted at ALL’’.

24

No one wants to go back to what it was before 1972. I remember growing up in

Kellogg where the air was filled with smelter smoke so thick at times ‘‘you could

cut it with a knife’’ and the South Fork of the Coeur d’Alene River was gray from

mine tailings being dumped directly into it. These are unacceptable practices today,

but the current permitting process is also unacceptable.

To illustrate this additional risk, I would like to explain my experience at Summo.

Schedule A shows a time line of permitting events for Summo’s Lisbon Valley Copper Project out of Moab, Utah. Summo’s permitting started in January 1991. By

February 1996, when I joint Summo, they had already filed their Preliminary Draft

EIS. One year later in March 1997, Summo had a Record of Decision from the BLM

approving the construction of the project.

By March of 1997, Greg Hahn, the President of Summo, and I had put together

a $62 million financing (‘‘3rd Grub Stake’’) to construct the project. This financing

consisted of; bank loans, supplier loans and common stock sales. Summo started

construction of the mine in April 1997. In May 1997 an environmental group organized by the National Wildlife Federation and the Mineral Policy Center filed an

Appeal and Petition for Stay. In June 1997 the Interior Board of Land Appeals

(IBLA) granted a stay on ‘‘mining’’. Summo was told it could ‘‘build the mine’’ but

it could ‘‘not mine it’’ until the stay was removed.

Under the ‘‘stay’’, Summo could not complete the bank loan and Summo eventually lost the bank loan facility. Finally in March 1999, the IBLA ruled entirely in

Summo’s favor, the stay was removed, and Summo could proceed. However, the

price of copper had dropped from over $1.20/ lb to less than $0.60, and Summo stock

had dropped from over Cd$1.50/share to only a few pennies (see price chart).

Greg Hahn was forced in 2001 lay off most of his remaining employees, including

me, and hold on as best he could. Finally in 2003, metal prices started to recover

and Greg has been able to finally build Lisbon Valley and is now operating. But,

the capital cost to build the project had increased by more than 50%. Lisbon Valley

Project is a success story today with over 130 people employed and producing copper

at a rate of 60 million pounds a year However, the original investors lost most of

their investment because it took almost ten years from the Record of Decision to

a producing mine. There were no good arguments against building the mine in 1997.

The two environmental organizations routinely challenge nearly every significant

new mining project that is proposed in the US. They use very competent lawyers,

and their strategy is simply to delay each project for as long as they can in hope

that the investors will give up and ‘‘throw in the towel’’.

This is a personal story but it has been repeated 100’s of times over the last 15

years. It is now very difficult, if not impossible, to raise money for exploration/develVerDate 11-MAY-2000 14:34 Sep 08, 2006 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 S:\DOCS\27720.TXT HRESOUR1 PsN: HRESOUR1
25

opment projects in the US. Canada has a very strong environmental permitting

process. The problem in the U.S. is that anyone can slow or stop the process for

the price of a stamp, even if they have no valid concern. This is why I can get ‘‘grub staked’’ for projects in the Philippines and in Canada but not in most places in the US. Nevada is one exception to this rule. We hope

to be able to start construction on the Marathon PGM project in the next few years,

a time frame that would be very difficult to match in most of the US. As others have explain today, if we want fuel cell cars and smog free cars, we have to be able to mine the platinum, palladium and even copper to make them.

Thank you

Mr. GIBBONS. Thank you very much, Mr. Frank. Again, I apolo- gize for the delay here that is going to take place. We have a series

of three votes. There are about five minutes remaining on the first

one, so I have about enough time to run over there and make that

vote. There will be a second series, two five-minute votes, so give

me about 20 minutes to complete this process, and then we will

come back. So as that goes, this committee is now in recess. [Recess.]

Mrs. DRAKE [presiding]. Thank you for your patience with us while we are voting. Chairman Gibbons sends his apologies, that

he has another conflict.

I am Thelma Drake from Virginia, and I welcome you here. Sorry that I was unable to hear your testimony, but I know we are going

to move into questions now for you. The first question that Chairman Gibbons and I both have for any of you who would like to answer it is, always in the past, there seems to have been discussion

about the technology, the need for the resource versus the environment, and with the changes in technology today, do you see a way

where those two things could be brought together and that we can

stop having the debate that pits one side against the other and develop a way that technology could accomplish the protection of the

environment, like we all want, along with being able to use the resource? I would like to ask all of you that question, if you would

like to weigh in on it.

Mr. FRANK. Well, I will start a little bit. One thing we need to do is maybe have some realism. Mining, the nature of the business

is to dig into the dirt, take out rocks, crush them up, and stack

them. So we are always going to have some scarring on the earth.

It is not unlike what we do when we build a housing development.

We tear up the trees, put in roads and put in houses. Those houses

may only last 40 years or 60 years, and then they become an

eyesore.

In mining, we do somewhat the same. We dig it up, we process

the ore. So what we can do, and have done, for someone that has

been in the mining business all of my life and have seen the really

bad and where we have come to, it is remarkably different now

where we do use technology and do not put mine tailings directly

into the rivers, which we used to do. By the way, automobile industry and furniture manufacturers did the same thing, but we have

not stopped those industries as we have in mining. We, for some

reason, have really focused on mining. Even though they have

stopped doing these things, we will go back because the old mine

tailings are on the hillside or something.

So we have made big strides. We take the tailings ponds that are

left and cover them with soil and plant trees on them. Now, does

26

it look just like the mountains? No, it is different, but that is where

we are. The same thing in a housing development: When a housing

development stops being useful, you can tear it down, but it will

never go back to the same state it was in.

Mrs. DRAKE. But, still, it can be very nice in the end. I have seen

it in Pennsylvania where they have reclaimed mine land, and a

phenomenal difference over the pictures of what had been there

before.

Mr. FRANK. Absolutely. One problem we have is that there are

mines that that did not happen to, and so they are still there as

an eyesore, and people look at those that may have been shut down

for 40 years, and they are still there. They are still an eyesore.

Mrs. DRAKE. Thank you.

Ms. STORER. Speaking as a geologist, and often talking with

other geologists, we are the people at the forefront. We are out in

the environment. We are out in these remote places. We consider

ourselves to be environmentalists. We appreciate the remote areas

we are working in, but, again, conceding the need for mine development, I think technology today does provide the ability to protect

the environment, to return the water quality, to not pollute the

local environment. But, as pointed out, if you dig something out,

you are going to make a mark on the landscape, but I think we all

in the industry are conscious that we want to minimize that impact, both for our own benefit as environmentalists and for the future generations.

Mrs. DRAKE. Thank you.

Mr. MENZIE. I think, a lot of times when we talk about the environmental problems, we focus on the production end of the cycle,

and I think we also have to be mindful of the use of the manufactured products and the environmental problems that those cause

when they reach end of use cycle and have to go into landfills.

One of the ways that we could limit that part of the environmental impact of minerals use is through increased recycling. The

biggest problem with recycling is the cost of collection. It is possible

that information technology in the form of things like radio chips,

which could be applied to parts of manufactured goods, could reduce the cost of recycling by allowing automated separation of

parts. So I think there are things that could be done that would

address that part of the materials cycle as well.

Mr. STEWART. I think I am the only nongeologist sitting at this

table. I would just tell you, from the supply side end, that, you

know, the environment is very important to us, and we have taken

to making sure that everything we do in our plants and our factories are in favor of the environment, recycling as much as we can,

particularly copper. We try to make sure we use it as efficiently as

possible because the supply piece of it is not very good for us. So

from that standpoint, on the other side, we are trying to do our

best around managing it from an environmental standpoint.

Mrs. DRAKE. Well, thank you for that. I do agree with you. I

think that even though we see the need to take the resources from

the ground that we would all consider ourselves conservationists

and that we want it done in the best manner possible. I appreciate

your answers.

27

I have read all of your testimony, just before we go to questions,

and I truly had not thought about the tremendous pressure that

is going to be put on platinum and copper now as we move into

these new alternative methods of transportation, so it was an eye

opener for me.

Mr. Stewart, do you think that the activities of hedge funds

should be subject to increased levels of regulation by the Federal

government or, as the Chairman of the Federal Reserve has

suggested, by the banks?

Mr. STEWART. I can tell you, and I commented on it in my statement, that we believe that hedge funds are impacting the price of

copper. So if that is the case, and they need to have some oversight, I think the answer is yes. I am not educated enough on the

subject to really articulate whether they are going to continue to

drive the cost up, but right now someone needs to pay attention to

them because they are impacting our prices significantly, which, by

the way, end up in the cost to the consumer.

Mrs. DRAKE. Thank you. That was an interesting sideline on

that, that we may need to look at that as well as the environmental issues.

Dr. Menzie, your title says you are the Chief of International

Minerals Section of the Minerals Information Team. What role do

you and the employees in your section play within the minerals information team?

Mr. MENZIE. Madam Chairman, our group of about 16 employees

collects information on production and use of minerals worldwide,

so in about 180 countries for about 90 mineral commodities, we collect the information, publish it, analyze it, and report on it for both

the public and for private interests.

We also act as specialists on different issues to other parts of the

government. For example, we provide expertise to the State Department with regard to production and trade in diamonds in support of the Kimberly process.

Mrs. DRAKE. And, Dr. Menzie, this may be a little bit of an uncomfortable question for you, but I think it is very important that

we get the answer, and that is, would you and your section be able

to continue to perform your current duties and functions if the

President’s Fiscal Year 2007 budget were to be enacted by the Congress? What would the minerals team be able to tell us about foreign mineral markets, consumption, production, and all of that?

Mr. MENZIE. My understanding of the 2007 budget is that it

would eliminate minerals reporting by the section, so that function

would not be available in the future.

Mrs. DRAKE. And you would not be able to do your job properly.

Mr. MENZIE. I would not be able to do it at all.

Mrs. DRAKE. Right. Thank you very, very much. Thank you for

an honest answer.

Ms. Storer, are the recent copper prices above $3 per pound copper justified, in your view, and where do you see the long-term

prices of copper going?

Ms. STORER. I think we in the industry see above $3 copper

prices as a bit of a speculative bubble. However, the copper prices

needed to maintain all existing mines in production today are

something on the order of $1.50 a pound of copper. This increase

28

has come as wages have risen and, in particular, the price of

energy has risen. Energy is used both to mine the rock, to crush

it, to grind it, to process it, and then to transport it to the markets.

In addition, the long-term price is going to have to stay at a reasonable level to provide a return to investors if we are going to see

new investment in new mine production. As I have pointed out, the

new mines are likely to come from areas that carry political risk.

It is all about risk and reward. If we are going to make an investment, we are going to have to see a reasonable return on our

investment, and that means long-term higher copper prices than

we have seen historically.

Mrs. DRAKE. Thank you. I also wanted to ask you, because you

have pointed out the need to ramp up the levels of exploration, but

one thing we always talk about here in Congress is our workforce,

and I wondered if the companies have access to a sufficient number

of trained geologists to succeed in a ramp up. Where are we as far

as workforce goes?

Ms. STORER. I think there is a critical shortage of trained and

skilled geoscientists worldwide. We have lost a lot of mining

schools. In the years when metal prices were low, companies cut

their exploration budgets, people left the industry, and we just

have not seen the younger generation coming through to replace

those geoscientists.

Mrs. DRAKE. When they left, we lost them. We lost the workforce.

Ms. STORER. When they left, we lost them, and they are certainly

not coming back.

Mrs. DRAKE. Thank you. Do you think that state-owned companies have a material or financial advantage over privately held

companies, and do you see any evidence that state-owned companies are increasing their participation in exploration? Have you

thought about that?

Ms. STORER. Well, historically, state-owned companies have not

been successful. Where we have seen the success in a lot of countries around the world is in the privatization, which has revitalized

their mineral sectors. So, no, I do not think state-run companies

are the way to run exploration in the future. No, I do not see them

going in to exploration, nor do I see the major private companies

ramping up to the extent that I think that we need to see to make

the discoveries needed to find mines for the future.

Mrs. DRAKE. Thank you.

And, Mr. Frank, in your testimony, you present a rather stark

tale of a junior company being severely damaged by an attack by

national-level interest groups, leading to the near bankruptcy of

your employer. During the permitting process, what was the attitude of the local population about the development of the mine, and

were they supportive of the development?

Mr. FRANK. Yes. The local communities typically, and this is very

typical, welcome this type of activity because the wages tend to be

four to six times higher than the average wage in the community,

so they were quite supportive. We did have several town hall meetings in different cities, so I think we had a total—it is back 10

years, so it has been a while, but in the order of 12 different local

meetings, very supportive. But we did receive letters from places

like Florida—these are meetings in Utah—and New York,

29

et cetera, complaining about the activities that we were going to

have in the district, but the local people were very supportive and

still are. There are 150 jobs there now that are very highly paid,

and the mining company becomes a very active part of the communities.

Mrs. DRAKE. Thank you. I would like to thank the witnesses for

your valuable testimony and also for the extra time you had to take

for us and for the questions that you have answered. Members may

have additional questions for the witnesses, and we will ask you to

respond to these in writing if some of our colleagues who could not

be here today may have questions that they would like to present

to you based on the testimony.

The hearing record will be held open for 10 days for these responses, and I would like to thank you very much and recognize

the second panel. So thank you.

[Pause.]

Mrs. DRAKE. If I could ask the panel to please stand and raise

your right hand and then respond after I read the oath.

[Witnesses sworn.]

Mrs. DRAKE. Thank you very much. I would like to recognize our

second panel: Chris Guzy with Ballard Power Systems, Robert Rose

with U.S. Fuel Cell Council, Eric Carlson, TIAX; and Milt Copulos,

National Defense Council Foundation.

The Chairman now recognizes Chris Guzy to testify for five minutes. You probably saw that the timing lights on the table will indicate when your time has concluded. All witness statements will be

submitted in the hearing record. Mr. Guzy, welcome. Thank you.

STATEMENT OF CHRIS GUZY, CHIEF TECHNOLOGY OFFICER,

BALLARD POWER SYSTEMS

Mr. GUZY. Madam Chairman, Members of the Subcommittee, my

name is Chris Guzy, and I am the Chief Technology Officer of

Ballard Power Systems. Thank you for the opportunity to speak to

you today on the subjects of platinum and fuel cell commercialization.

The purpose of my testimony is to provide the Subcommittee

with an understanding of the use of platinum in fuel cells, outline

Ballard’s Technology Road Map for achieving key technical targets

that underpin the commercialization of automotive fuel cells, and

to review the important role that platinum plays within that

framework. I will also offer a set of steps the government can take

to support fuel cell commercialization in the context of the technology’s platinum use.

Ballard is recognized as a world leader in developing and manufacturing proton exchange membrane, or PEM, fuel cells. We have

been developing PEM fuel cells since 1983 and hold nearly 1,000

patents, issued and pending, on some of the most fundamental fuel

cell intellectual property.

We are the exclusive supplier to Ford and DaimlerChrysler and

have supplied fuel cells to many of the world’s other major automotive manufacturers. Today, Ballard powers more customer demonstration vehicles than all other fuel cell developers combined.

In addition to automotive applications, Ballard is actively working with partners and lead customers to develop fuel cell-powered

30

products for residential cogeneration, forklifts, and backup power.

Each of the applications presents less challenging cost requirements than automotive and are on a nearer term path to commercialization. These early markets will help facilitate the transition

to fuel cell vehicles by, among other contributions, growing the

PEM supply base and establishing early hydrogen infrastructure.

It is interesting to note that the relative contribution of platinum

to cost in these applications is less significant than in automotive,

a function of the fact that lower production volumes generate

higher costs in other areas, such as stack assembly. However, given

that the largest potential fuel cell application is the automotive

market and that the relative contribution of platinum to cost is

higher in automotive fuel cell applications, that is where I will

focus my remarks today.

In 2004, we began publishing a Technology Road Map, a public

commitment to demonstrate commercially viable automotive fuel

cell technology by 2010. This Technology Road Map is aligned with

the DOE’s commercial targets for automotive fuel cells and

addresses the key factors of durability, freeze-start, and power

density.

My comments here center on the interplay of platinum with cost

and durability. However, for the record, our submitted testimony

discusses progress toward each of the four goals.

Meeting the DOE’s 2010 high-volume stack cost target of $30 per

kilowatt is required for fuel cells to compete with today’s internal

combustion engines. Over the past four years, we have consistently

achieved significant cost-reduction targets and are confident we

will meet this important goal. Between 2002 and 2005, the projected high-volume cost of Ballard’s automotive stack technology

has been reduced from $125 per kilowatt down to $73 per kilowatt.

In 2006, our target is to reduce the cost to less than $65 per kilowatt.

The impact of platinum catalyst on overall fuel cell stack cost is

significant. A fuel cell consists of bipolar plates that carry the

reactant gases, an electrolyte membrane, and two catalyst-coated

electrodes. Platinum is required on both electrodes and is core to

achieving the required levels of fuel cell performance.

A major thrust of our cost-reduction strategy has been to lower

the platinum loading. Between 1994 and 1999, Ballard achieved a

tenfold reduction by switching from non-supported pure platinum

catalysts to carbon-supported catalysts with increased platinum

surface area to provide more accessible sites for the fuel cell electrochemical reactions. We improved fuel cell performance over this

same period, despite the lower amounts of platinum, through improved catalyst utilization, optimized cell design, and implementation of better materials.

Since 1999, we have achieved a further 40 percent reduction in

catalyst loading while continuing to improve fuel cell performance.

The path to meeting 2010 cost targets requires an additional 50

percent reduction in catalyst loading from where we are today.

Early laboratory demonstrations give us confidence that we will

achieve this goal.

To get a sense of the relative contribution of platinum to the

overall cost of the fuel cell, we should note that even with low

31

catalyst loadings targeted for 2010, a fuel cell capable of delivering

the required power will contain on the order of $1,000 of platinum

at today’s prices, or about 30 percent of the total stack high-volume

cost. This is five to ten times higher than the amount of catalyst

found in conventional gasoline or diesel catalytic converters today. Last year, while aggressively pursuing lower platinum loadings, we were able to achieve automotive fuel cell stack lifetimes of 2,000

hours and are confident that by 2010 we will deliver to the DOE

target. To put this in perspective, our cogeneration system for

residential use in Japan operates under less rigorous duty cycles

and achieved more than 10,000 hours of operation.

To summarize, we know what the technical challenges are, we are pursuing multiple paths to resolution, and we are confident we

will demonstrate commercially viable technology by 2010. Platinum

will continue to play a pivotal role in the commercialization of fuel

cell technology. That said, we agree with our colleagues at TIAX

that the availability of platinum at a stable price should not be a

barrier to fuel cell vehicle commercialization.

In closing, I would like to recommend three important steps Con- gress can take to support fuel cell commercialization as it relates

to platinum.

First, Congress should provide fuel cell R&D funding at levels authorized in the Energy Policy Act of 2005 to increase public and

private research efforts to reduce platinum loadings and investigate nonprecious metal catalysts that may someday replace platinum.

Second, Congress should investigate whether and what govern- ment actions may be necessary to ensure a proper platinum recycling framework is in place. Third, Congress should legislate a meaningful set of tax credits for fuel cell vehicles for a 10-year period beginning early in the

next decade. These tax credits, which should be phased, will help

mitigate the short-term increase in platinum prices that can be expected to occur as supply adjusts to the new demand.

Thank you for the opportunity to appear before you today. I look

forward to any questions you may have.

[The prepared statement of Mr. Guzy follows:]

Statement of Dr. Chris Guzy, Chief Technology Officer,

Ballard Power Systems

Mr. Chairman, Members of the Committee, my name is Chris Guzy and I am the

Chief Technology Officer of Ballard Power Systems. Thank you for the opportunity

to speak to you today on the subjects of platinum and fuel cell commercialization.

The purpose of my testimony is to provide the Committee with an understanding

of the use of platinum in fuel cells; outline Ballard’s Technology Road Map for

achieving key technical targets that underpin the commercialization of automotive

fuel cell technology; and review the important role that platinum plays within this

framework. I will also offer a set of steps the government can take to support fuel

cell commercialization in the context of the technology’s platinum use.

Ballard is recognized as a world leader in developing and manufacturing proton

exchange membrane or PEM fuel cells. We’ve been developing PEM fuel cells since

1983 and hold nearly 1,000 patents, issued and pending, on some of the most fundamental fuel cell intellectual property.

We are the exclusive supplier to Ford and DaimlerChrysler and have supplied fuel

cells to many of the world’s other major automotive manufacturers. Today, Ballard

fuel cells power more customer demonstration vehicles than all other fuel cell developers combined. As well, our state of the art manufacturing facility provides volume

production capability that is unmatched in the industry.

32

1Defined as 500,000 units.

It is from this leading position that we join with many others in the firm belief that hydrogen fuel cells will be the powertrain of the 21st Century. Fuel cells have

the power to transform our world because they offer a comprehensive solution to

some of the most pressing problems of our time: energy security, global climate

change, urban air quality, and long-term energy supply. In addition to automotive applications, Ballard is actively working with partners and lead customers to develop fuel cell powered products for residential cogeneration, forklifts, and back-up power. Each of the applications present less challenging

cost requirements than automotive and are on a nearer term path to commercialization. These early markets will help facilitate the transition to fuel cell vehicles by,

among other contributions, growing the PEM supply base and establishing early

hydrogen infrastructure. It is interesting to note that the relative contribution of

platinum to cost in these applications is less significant than in automotive—a

function of the fact that lower production volumes generate higher costs in other

areas, such as stack assembly. However, given that the largest potential fuel cell

application is the automotive market, and that the relative contribution of platinum

to cost is higher in automotive fuel cell applications, that is where I will focus my

remarks today. To help guide and communicate our progress toward the demonstration of com- mercially viable automotive fuel cell technology by 2010, two years ago Ballard

began publishing a Technology Road Map. This Technology Road Map is fully

aligned with the Department of Energy’s (DOE) published commercial targets for

automotive fuel cells and focuses on the key factors of cost, durability, freeze-start,

and power density. Let me first address cost. Meeting the DOE’s 2010 high volume1 stack cost target of $30 per kW is required for fuel cells to compete with today’s internal combustion

engines. Over the past 4 years, we’ve consistently achieved significant cost-reduction

targets and are confident we will meet this important goal. Between 2002 and 2005,

the projected high volume cost of Ballard’s automotive stack technology has been reduced from $125/kW down to $73/kW. In 2006, our target is to reduce the cost to

<$65/kW.

The impact of the platinum catalyst on overall fuel cell stack cost is significant. A fuel cell consists of bipolar plates to carry the reactant gases, an electrolyte membrane, and two catalyst-coated electrodes. Platinum is required on both electrodes,

and is core to achieving the required levels of fuel cell performance. Accordingly, a major thrust of our cost reduction strategy has been to lower the platinum loading in our fuel cells. Between 1994 and 1999, Ballard achieved a tenfold reduction in platinum loading. We did so by switching from non-supported pure

platinum catalysts to carbon-supported catalysts with increased platinum surface

area to provide more accessible active sites for the fuel cell electrochemical reaction.

We improved fuel cell performance over this same period, despite the lower amounts

of platinum, through improved catalyst utilization, optimized cell design, and implementation of better materials.

Since 1999, we’ve achieved a further 40% reduction in catalyst loading while con- tinuing to improve fuel cell performance. The path to meeting the 2010 cost target

requires an additional 50% reduction in catalyst loading from where we are today.

Early laboratory demonstrations give us confidence that we will achieve this goal. To get a sense of the relative contribution of platinum to the overall cost of the fuel cell, one should note that even with the low catalyst loadings targeted for

2010—about 30 grams—a fuel cell capable of delivering 100 kW gross power (or

roughly 130 horsepower) will still contain up to $1,000 of platinum at today’s prices,

representing approximately 30% of the total stack high volume cost. This is 5-10

times higher than the amount of catalyst that is found in a conventional

autocatalyst today. As we work to lower platinum catalyst loadings, we must be careful to balance this objective against durability requirements, another key commercialization parameter. Last year, while aggressively pursuing lower platinum loadings, we were

still able to achieve an automotive fuel cell stack lifetime of 2,100 hours and are

confident that by 2010 we will deliver on the DOE target of 5,000 hours—which is

equivalent to the lifetime of today’s internal combustion engine. To put this goal in

perspective, our cogeneration system for residential use in Japan—while operating

under less rigorous duty cycles than the automotive application—has achieved more

than 10,000 hours of lifetime.

In addition to our progress toward cost and durability objectives, we are improv- ing the ability of our fuel cells to start in freezing temperatures and are on track

to exceed the DOE target for 2010. The electrochemical reaction within a fuel cell

33

produces water and heat. Managing that water in sub-zero temperatures is essential

to a successful start-up. Last year, we demonstrated technology that was able to

start at -25° Celsius, reaching 50% of the rated power within 90 seconds, which rep- resented a much faster time than our 2005 goal of 150 seconds. Our goal for 2010—

which is more stringent than the DOE target—is to demonstrate start-up from -30° Celsius, reaching 50% of the rated power in 30 seconds. Lastly, power density is an important criterion to ensure that fuel cells can be packaged within the limited vehicle space available. Last year, we demonstrated

fuel cell technology at 1470 watts net per litre. The DOE’s 2010 commercial target

is 2000 watts net per litre. As with freeze-start capability, Ballard has set a more

stringent target based on our customers’ requirements of 2500 watts net per litre

and we’re confident we can achieve this target through improved stack polarization

performance and advanced cell designs. To summarize: we know what the technical challenges are, we have multiple tech- nology paths that we are pursuing, and we are confident that we will demonstrate

commercially-viable automotive fuel cell technology by 2010. As discussed, platinum

will continue to play a pivotal role in the commercialization of automotive fuel cell

technology. That said, we are in agreement with the conclusion that our colleagues

at TIAX have reached in their DOE-commissioned analysis ‘‘Platinum Availability

and Economics for August 4, 2006 PEMFC Commercialization’’—the availability of

platinum at a stable price should not be a barrier to fuel cell vehicle commercialization.

In closing, I’d like to recommend three important steps Congress can take to sup- port fuel cell commercialization as it relates to platinum.

First, Congress should provide fuel cell R&D funding at levels authorized in the Energy Policy Act of 2005 to: (a) increase public-private research efforts to reduce

platinum loadings while simultaneously improving fuel cell performance; and (b) increase public-private research efforts aimed at the development of non-precious

metal catalysts to replace platinum. With respect to the latter, many of the alternative catalysts being investigated today are cobalt based, which offer a lower cost

catalyst, but to date require a tradeoff of reduced performance and durability. Accordingly, we believe that while the substitution strategy is a good approach for the

long-term, we do not see non-precious metal catalysts offering a viable alternative

at the point when fuel cells begin the transition to market. Second, Congress should investigate whether and what government actions may be necessary to ensure a proper platinum recycling framework is in place to support

fuel cell vehicle commercialization.

Third, Congress should legislate a meaningful set of tax credits for fuel cell vehi- cles for a 10-year period beginning early in the next decade. These tax credits—

which should be phased (decreasing in value over time—will help to mitigate the

short-term increase in platinum prices that can be expected to occur as supply adjusts to new demand. Thank you for the opportunity to appear before you today. I look forward to any questions you may have.

Mrs. DRAKE. Thank you, Mr. Guzy. Next is Mr. Rose.

STATEMENT OF ROBERT ROSE, EXECUTIVE DIRECTOR,

U.S. FUEL CELL COUNCIL

Mr. ROSE. Thank you, Madam Chairman. My name is Bob Rose. I am the founding Executive Director of the U.S. Fuel Cell Council,

the 120-member trade association of the fuel cell industry. Today’s

comments are my own, although I think they are fully consistent

with the USFCC’s policies, and, indeed, I hope they are. Fuel cells generate electricity electrochemistry without combus- tion. They typically harness the attraction that hydrogen or a hydrogen-rich fuel has for oxygen. In effect, they redirect a stream of

electrons during the course of a chemical reaction, thus producing

a current that can be put to work. This process is inherently clean

and inherently efficient, so fuel cells have inherent advantages over

conventional systems.

Fuel cells are a family of technologies, and in the context of this

hearing, it is important to recognize that different technologies use

34

different materials. Generally speaking, the lower-temperature fuel

cells use platinum group metals; fuel cells that operate at higher

temperatures tend to use other materials.

Fuel cells are being developed for virtually every power need,

from consumer electronics and defense to power generation systems, industrial equipment, off-road vehicles, cars, trucks, buses,

and so on.

They do require high-tech materials, fuel cells do, and some materials are common to virtually all fuel cells, but there are significant differences. Chart 1 lists the key fuel cell materials other than

platinum group metals, which are being addressed separately at

the hearing. Some of the fuel cells use platinum group metals,

some use base metal catalysts, and others rely primarily on heat.

Materials on this list often are used in combination. Thus, molten

carbonate fuel cells use lithiated aluminum oxide, and certain other

solid oxide fuel cells use yttria stabilized Zirconia, but given my

technical depth, I just say ‘‘ceramics and rare earths.’’

The fuel cell industry does face substantial materials challenges,

but these relate to characteristics like expansion and contraction,

heat resistance, purity, their suitability for mass manufacture, the

close tolerances to which they must be manufactured, their resistance to contamination, and so on. The industry is working hard on

these issues, and an incredible variety of materials are under active review, ranging from metals to microbes.

Any concern over supply in fuel cells generally has focused on

the platinum group metals, and I think the PGM concern personally has been answered, but we will wait until the next witness as

well.

The U.S. does rely on imports at present for several materials on

the list, but I think there are several reasons to be optimistic that

materials demand will not be a barrier to commercialization.

Firstly, we do not need the supply all at once. We will need significant material infrastructure eventually, but the market ought

to have time to adjust, assuming that resource markets are functioning normally.

Second, materials costs are such an important part of the system

cost, as Mr. Guzy mentioned, that there is going to be relentless

pressure to use as little as possible of these materials.

Third, fuel cells are highly recyclable.

Fourthly, fuel cell developers and researchers are evaluating new

materials, driven largely by cost reduction, although also by performance. The list today may not be the list we will see in 20 or

30 years.

Use of more benign fuels may also provide some relief on the materials front. Research to date has already allowed a substantial reduction in the anticipated volume cost of fuel cells, and that translates into smaller, lighter, better systems, and that also means

more efficient use of component materials.

I would like to echo Mr. Guzy’s recommendations on behalf of the

Fuel Cell Council. Congress took a significant step to assist our industry in the Energy Policy Act of 2005. Fully funding it would

bring more resources to bear on the search for materials.

Second, Congress approved an installation tax credit for fuel

cells, but it is scheduled to expire at the end of next year. We

35

support the pending legislation to extend the credit for an additional eight years.

Third, I think this Subcommittee may wish to examine materials

recycling a little more closely, with emphasis on platinum group

metals certainly in the short term, to identify areas where Federal

intervention might be helpful or appropriate. An estimated 2,000

tons of platinum group metals are on the road worldwide on

vehicles. That is more than 50 million ounces, according to International Platinum Association. Governments in Asia and Europe

have implemented various recycling requirements and incentives

that may be worth examining here in the United States.

The U.S. Fuel Cell Council has established a sustainability working group and is examining recycling issues on its own.

I would be happy to answer questions at the appropriate time,

and I thank you for the opportunity to testify.

[The prepared statement of Mr. Rose follows:]

Statement of Robert Rose, Executive Director,

U.S. Fuel Cell Council

My name is Robert Rose. I am founding Executive Director of the U.S. Fuel Cell

Council, the 120-member trade association of the fuel cell industry. I began my work

in fuel cells in 1991, and in 1993 established the nonprofit Fuel Cells 2000 education program at the Breakthrough Technologies Institute. The U.S. Fuel Cell

Council followed in 1998. Thank you for this opportunity to participate in the discussion of materials and fuel cells.

I must say at the outset that I am presenting my personal views today, although

I am confident that nothing in my remarks runs counter to the Council’s stated positions.

Fuel cells generate electricity electrochemically, without combustion. Fuel cells

have inherent advantages over conventional energy production systems, including

greater efficiency, lower environmental impact, and enhanced design flexibility. The

only byproducts of using a fuel cell fueled by hydrogen generally are water and heat;

both can serve useful purposes in particular fuel cell applications.

Fuel cells are being developed for virtually every power need, including remote

sensors; consumer electronics; defense applications; emergency and backup power

systems; heat and electricity for homes, businesses and factories; industrial equipment; locomotives and other off-road vehicles; trucks, buses and the family car.

The primary public excitement—and the largest potential market—lies in fuel cell

passenger vehicles. Fuel cells offer the greatest potential to reduce and ultimately

eliminate our reliance upon foreign oil, enhance our national security, and reduce

the environmental impact of fossil fuel combustion. Fuel cells are fuel flexible. They

use conventional fuels efficiently, and can bring solar, wind power and other forms

of renewable energy to the transportation sector.

Fuel cell vehicles can even serve as electricity generators. It is literally possible

for a fuel cell car parked in the driveway to generate enough power for the home,

and to supply a significant amount of additional energy to the grid.

Charts 1 and 2 list fuel cell types and explain their operation.

The subcommittee is evaluating whether an adequate supply of raw materials will

be available to produce fuel cells and hydrogen in a cost-effective manner. To answer that question we must look inside the box.

While some materials are common to virtually all fuel cells, there are significant

differences. Some fuel cells, for example, use platinum group metals (PGM) to stimulate the electrochemical activity. Others use base metal catalysts. Still others rely

primarily on heat. Other speakers will address the PGM. Chart 3 lists the key fuel

cell materials other than platinum group metals. These materials often are used in

combination. Thus molten carbonate fuel cells use lithiated aluminum oxide. Some

solid oxide cells contain Yttria stabilized Zirconia; given my technical depth I just

say, ‘‘ceramics and rare earths.’’

The fuel cell industry faces substantial materials challenges. But these challenges

relate to characteristics such as expansion and contraction, heat resistance, their

purity, their suitability for mass manufacture, the close tolerances to which they

must be manufactured, their resistance to contamination and so on. The industry

36

is working hard on these issues, and a wide variety of materials are under active

review, ranging from metals to microbes.

All these issues occupy the attention of the fuel cell industry; to date, any concern

over supply of the materials has focused on the Platinum Group Metals, even

though the U.S. relies on imports at present for most or all the supply of several

materials on the list. There are a number of reasons for this confidence, I believe.

1. We will need a significant materials infrastructure eventually, but not right

away and not all at once. Suppliers ought to have time to adjust to demand,

assuming the resource markets are functioning normally. In the case of some

materials there are plentiful supplies already.

2. Anticipated worldwide economic expansion will require additional materials of

all kinds, and there is nothing exceptional about fuel cell materials that suggests they should be treated as a special case. The auto industry, for example,

anticipates that the total number of vehicles on the road worldwide may reach

3.5 billion units by 2050—compared to fewer than a billion today. That suggests expanding demand for everything.

3. Fuel cells are highly recyclable. Whether motivated by economics or sustainability principles, recycling will play an increasing role in the economy in general. Here, there may be a role for government in helping stimulate recycling;

governments in Japan and Europe have implemented various recycling requirements and incentives. The U.S. Fuel Cell Council has established a Sustainability Working Group, and recycling issues are high on its agenda. On the

PGM front, the U.S. Geological Survey estimates that 70 tons of PGM is recycled annually in the US, primarily from auto catalysts.

4. Fuel cell developers and researchers all over the world are evaluating new materials, and searching for ways to use critical materials more efficiently; they

are driven by cost reduction. Thus, the list we put together today may not be—

indeed, likely will not be—the critical list in 20 or 30 years. It also means that

today’s catalyst formulations will certainly be replaced by supported catalysts

and catalyst alloys that work better, and cheaper.

5. Research achievements to date have already allowed a substantial reduction in

anticipated volume cost for fuel cells. And that translates into smaller, lighter,

better systems and more efficient use of component materials.

The fuel cell industry is investing heavily in this research because, while fuel cells

are meeting customer needs in some niche markets today, full commercialization depends on cost reduction. And thus, harvesting the benefits that fuel cells can bring

to our energy and environmental priorities also depends on it.

Congress has already taken significant steps to assure a strong public-private

partnership toward this end. The Energy Policy Act of 2005 commits us to a 15 year

development effort that covers not only research, but also demonstration, technology

validation, federal purchases and market entry support. Building on this beginning,

I would suggest the following.

1. The Administration’s budget request for 2007 does not fully reflect the Congressional will as expressed by the authorizations in EPACT. Fully funding

EPACT, including the fuel cell purchase programs, will be a significant boost

for the industry, although I should emphasize that even at these levels the industry’s own investment is far larger than the federal share, as it should be.

2. Congress approved an installation tax credit for fuel cells, but with a two-year

time line. We support legislation proposed in both House and Senate to extend

the credit for an additional eight years.

3. This Subcommittee may also wish to examine the issues related to materials

recycling, with particular emphasis on platinum group metals, to identify any

areas where federal intervention might improve the process or stimulate additional recycling activity. An estimated 2000 tons are ‘‘on the road’’ worldwide,

according to the International Platinum Association.

I want to thank the Subcommittee, and you, Mr. Chairman, for this opportunity

to testify. I would be happy to answer any questions, to the best of my ability.

37

Mrs. DRAKE. Thank you, Mr. Rose. Mr. Carlson?

STATEMENT OF ERIC J. CARLSON, PRINCIPAL, TIAX, LLC

Mr. CARLSON. Thank you, Madam Chairman, Members of the

Subcommittee, and guests. I want to thank you for the opportunity

to appear here today to discuss with you the study that TIAX conducted for the Department of Energy in 2003, and the purpose was

to understand the potential impact of fuel cell vehicle commercialization on the availability and price of platinum.

38

TIAX LLC is a technology development company founded in 2002

by Dr. Kenan Sahin when it acquired the R&D laboratories of the

former Arthur D. Little Company, which was founded in 1886.

TIAX is located in Cambridge, Mass., has a broad range of technology expertise and experience in various end-use markets, particularly those associated with energy and power, including portable, stationary, and transportation markets.

The use of fuel cells in transportation could play a critical role

in developing a hydrogen economy, which could, in turn, lead to a

greatly reduced reliance on foreign oil. Platinum is an essential element in fuel cell performance as it catalyzes the electrode reactions

and consequently determines the power density and efficiency of

the fuel cell. It is also the largest cost component of the fuel cell

system, accounting for approximately 50 percent of the fuel cell

system. We have estimated this at a high-volume cost projected out

in the future. For this reason, the DOE has invested significantly

in R&D to reduce platinum loadings, increase activity of platinum

catalysts, and develop platinum-free catalysts in the long term. The

DOE commissioned our investigation as part of this effort.

We agree that the committee’s question concerning platinum

availability is a timely one, given the recent highs in platinum

price, China’s commodity needs, higher platinum requirements in

fuel cell vehicles than today’s cars, and the critical role that platinum plays in PEM fuel cell technology. Even though this study

was conducted in 2003, we believe that the findings are still very

relevant to the committee’s inquiry.

Before discussing the project findings, I would like to summarize

the scope of the assessment. The timeframe of the projection which

we made in the study went from 2005 to 2050, a long time for a

projection. Platinum markets considered included jewelry, transportation, industrial, and stationary fuel cells. Vehicle projections

were done for five regions, including North America, Western Europe, Japan, India, and China, and the price behavior of platinum,

we looked back retrospectively to 1880. Market penetration scenarios for fuel cell vehicles by 2050, we considered 50 percent and

80 percent market penetration.

In developing our findings, we could not account for the impact

of political instability in major platinum-producing countries, control of platinum production by a limited number of companies in

the major producing countries, future growth or decline in the

world economy, or significant increases in platinum demand from

new applications other than fuel cells.

Because of the complexity of this topic, our primary objectives

were to develop insights into key factors and interactions that

would influence platinum price and availability, identify what factors might limit adoption of fuel cell powertrains for transportation.

The study focused on answering whether the successful introduction of fuel cells in transportation could be threatened by platinum

price increases and limitations in platinum supply in the long

term. Specifically, can long-term primary platinum resources accommodate the new demand from fuel cell markets, including

transportation, stationary, and portable? How will supply operations [mining and refining] respond to increases in market demand, and what role will recycling play in the supply chain as fuel

39

cell markets develop? Will the relationship between supply, demand, and price of platinum change as fuel cell markets develop? Key findings of the study were fundamental availability of plat- inum resources, in of itself, should not be a barrier to mass commercialization of fuel cell vehicles. However, efficient recycling of

platinum from fuel cell stacks will be necessary to minimize the demands on primary platinum production. The platinum industry indicated that it could ramp up produc- tion rates to approximately 14 megagrams per year. This would

allow market penetrations of 50 percent but not the 80 percent scenario. Consequently, the ability to ramp up production capacity

could limit fuel cell commercialization, depending on the rate of

fuel cell vehicle adoption. For comparison, during the introduction

of catalytic converters, production capacity increased at a rate of

three and a half megagrams per year, or about one-third the rate

of fuel cell vehicle adoption.

Analysis of historical price data showed a constant mean real

price of $550 per troy ounce in 2003 dollars. Since 1880, the price

of platinum has shown periods of volatility, but it has always returned to a long-term mean, indicating a stationary price. Interviews with the platinum industry confirmed this observation of a

stationary, real platinum price driven by the desire of the industry

to keep end users from substituting other metals for platinum.

Mass commercialization of fuel cell vehicles could dramatically

change the balance of platinum markets from today’s roughly 40/

40/20 split between transportation, jewelry, and industrial applications to a market dominated by transportation.

Those are the key findings, and I would like to thank Madam

Chairman for the opportunity to discuss this important subject.

This concludes my testimony, and I would be happy to answer any

questions. Thank you.

[The prepared statement of Mr. Carlson follows:]

Statement of Eric J. Carlson, Principal, TIAX LLC

Mr. Chairman, Members of the Subcommittee, and guests, thank you for the opportunity to appear here today to discuss with you the study that TIAX conducted

for the DOE in 2003 to understand the potential impact of fuel cell vehicle commercialization on the availability and price of platinum.

TIAX LLC is a technology development company founded in 2002 by Dr. Kenan

Sahin, when it acquired the R&D laboratories of the former Arthur D. Little, Inc.,

which was founded in 1886. TIAX, located in Cambridge, MA, has a broad range

of technology expertise and experience in various end-use markets, particularly

those associated with energy and power (portable, stationary, and transportation).

The use of fuel cells in transportation could play a critical role in developing a

hydrogen economy, which could in turn lead to a greatly reduced reliance on foreign

oil. Platinum is an essential element in fuel cell performance as it catalyzes the electrode reactions and consequently determines the power density and efficiency of the

fuel cell. It is also the largest cost component of the fuel cell system, accounting for

approximately 50% to the projected high volume manufacturing cost for systems

with today’s performance. For this reason, the DOE has invested significantly in

R&D to reduce platinum loadings, increase activity of platinum catalysts, and develop platinum-free catalysts in the long term. The DOE commissioned our investigation as part of this effort.

We agree that the Committee’s question concerning platinum availability is a

timely one given the recent highs in platinum price, China’s commodity needs, higher platinum requirements in fuel cell vehicles than today’s cars, and the critical role

that platinum plays in PEM fuel cell technology. Even though this study was conducted in 2003, we believe the findings are still very relevant to the committee’s

enquiry.

40

Scope of Platinum Project

Before beginning the discussion of the project findings, I’d like to summarize the scope of the assessment: • Timeframe of the projection—2005 to 2050 • Platinum markets—jewelry, transportation, industrial, and stationary fuel cells • Vehicle projections for five regions—North America, Western Europe, Japan,

India, and China • Price behavior of platinum—1880 to 2002 • Market penetration scenarios of fuel cell vehicles by 2050—50% and 80% In developing our findings, we could not account for the impact of:

• Political instability in major platinum producing countries • Control of platinum production by a limited number of companies in the major

producing countries • Future growth/decline in the world economy • Significant increases in platinum demand from new applications other than fuel

cells

Because of the complexity of this topic, our primary objectives were to:

• Develop insights into key factors and interactions that would influence platinum price and availability • Identify what factors might limit adoption of fuel cell powertrains for transportation.

The study focused on answering whether the successful introduction of fuel cells in transportation could be threatened by platinum price increases and limitations

in platinum supply in the long term. Specifically: • Can long-term, primary platinum resources accommodate the new demand from

fuel cell markets (transportation, stationary, and portable)? • How will supply operations (mining and refining) respond to increases in market demand? • What role will recycling play in the supply chain as fuel cell markets develop? • Will the relationship between supply, demand, and price of platinum change as

fuel cell markets develop?

Key Findings

• Fundamental availability of platinum resources in of itself should not be a barrier to mass commercialization of fuel cell vehicles. However, efficient recycling

of platinum from the fuel cell stacks will be necessary to minimize the demands

on primary platinum production. • The platinum industry indicated that it could ramp up production rates to approximately 14 Mg/year. This would allow a market penetration scenario of 50%

(11 Mg/year) but not the 80% scenario. Consequently, the ability to ramp up

production capacity could limit fuel cell commercialization depending on the

rate of fuel cell vehicle adoption. For comparison, during the introduction of

catalytic converters, production capacity increased at a rate of 3.5 Mg/year. • Analysis of historical price data showed a constant mean real price of $550/

tr.oz. in 2003 dollars. Since 1880, the price of platinum has shown periods of

volatility, but it has always returned to its long-term mean, indicating a stationary price. Interviews with the platinum industry confirmed this observation

of a stationary real platinum price driven by the desire of the industry to keep

end-users from substituting other metals for platinum. • Mass commercialization of fuel cell vehicles would dramatically change the balance of platinum markets from today’s rough 40/40/20 split between transportation, jewelry, and industrial applications to a market dominated by transportation (e.g., 75-90%).

Basis for the Study

Platinum Supply and Markets

As part of the study we delved into the background of platinum and PGM mate- rials. Aside from their unique chemical properties, platinum group metals (PGMs)

have their own geology, supply, and markets. Due to the unique geology of the

Bushveld Complex, South Africa dominates the supply and projected resource of

platinum, accounting for roughly 70-80% of both. Russia is the next major supplier

of platinum, with about 10-20%. The rest of the world, including the U.S. accounts

for the balance, about 10%. The geographic concentration of supply and resources

naturally raises concerns.

In 2003, markets were largely driven by the demand for autocatalysts and jewelry

(40% each). Industrial (glass, chemical, petroleum) and electrical applications consumed the remaining 20%. However, since the study was conducted, several factors

have led to steadily increasing demand from the transportation sector: increasingly

41

stringent auto emissions regulations on both gasoline and diesel vehicles, the unique

ability of PGMs to catalyze auto exhaust clean-up, and rising auto markets in

China.

Project Methodology

In addition to the technology capabilities within TIAX (e.g., fuel cells, catalysis,

and automotive powertrains) we retained two university professors to assist with

economic modeling (Professor Walter Thurman, Department of Agriculture and Resource Economics, North Carolina University) and PGM mineralogy (Professor

Grant Cawthorn, Platinum Industry’s Professor of Igneous Petrology, University of

the Witwatersrand, South Africa). During the project, we obtained inputs and feedback from the car companies and the platinum industry.

To develop projections of platinum demand arising from fuel cell vehicle introduction, we had to:

• Estimate how much platinum would be required per vehicle and created a

timeline for the technology evolution (amount of platinum per kilowatt of stack

power)

• Estimate vehicle sales in the considered regions

• Define scenarios for fuel cell vehicle market introduction and penetration with

assumptions for vehicle life and platinum recovery rates

• Assess the sufficiency of platinum resources. The primary platinum production

over the period of the projection was integrated and compared with available

resource projections

For the purposes of this study we assumed a 75 kW fuel cell power plant

hybridized with batteries would be representative of a mid-size vehicle. Starting in

2005, we assumed that platinum requirements would decrease from 60 grams per

vehicle to15 grams per vehicle in 2025 and then remain constant until 2050.

We based our vehicle projections on estimates of population growth and vehicles

per capita in the five regions. In the mature automotive markets in the United

States, Western Europe, and Japan, we assumed high per capita vehicle populations

(i.e., 0.7 to 0.84) in 2050. For China and India, with values on the order of 0.01 vehicles per capita today, we considered future scenarios ranging from 0.1 to as high

as 0.25 vehicles per capita. With these assumptions, the world vehicle fleet was projected to approximately double by 2050 driven by markets in the U.S., India, and

China. In 2050, our assumptions led to annual vehicle sales of 72 million for the

five regions. For comparison, in 2000, 41 million vehicles were sold worldwide with

the five regions representing 75% of this value.

The next step in projecting platinum demand was the definition of fuel cell vehicle

market penetration scenarios. Two scenarios were defined with market penetrations

of 50% and 80% by 2050. For the 50% scenario, the production of vehicles for the

selected regions was projected to be 72 million in 2050. In the Developed Countries,

fuel cell production volumes were projected to be 20 million per year in 2050 for

this scenario with annual increases of 1 million vehicles per year during the ramp

up to 50% market penetration.

Based on the 50% scenario, we then integrated the cumulative primary platinum

production over the time of the projection for all applications. The cumulative primary production (20,000 Mg) was less than the platinum resource base of 76,000

Mg projected by experts in the field.

Our conclusion that prices will return to historic mean prices depends on demand

staying in balance with supply. Recycling will be critical to limiting the increases

in primary platinum production.

Thank you, Mr. Chairman, for the opportunity to discuss this important subject.

This concludes my testimony. I would be happy to answer any questions you may

have.

42

43

44

Mrs. DRAKE. Thank you, Mr. Carlson. And, Mr. Copulos, you

made an impression on me a few weeks ago when you made your

45

comment about we face economic collapse or a resource war. So

welcome back.

STATEMENT OF MILTON R. COPULOS, PRESIDENT,

NATIONAL DEFENSE COUNCIL FOUNDATION

Mr. COPULOS. Thank you, Madam Chairman, and like Yogi

Berra, it is sort of deja vu all over again. Two weeks ago, as you

noted, when I was here we said that we face this potential for a

Hobson’s choice between economic collapse and a global resource

war, and it is just as true about minerals as it is about energy, the

major difference being, I think, that you go up to a gasoline pump

periodically and fill your tank, so you are aware of what has been

happening with energy prices, but people do not do the same with

copper or platinum or any of the other host of minerals that we

rely on. Yet if you take a look at what the numbers show, the increase, in some cases, has been even higher.

We are looking at a platinum price, I was just informed this

morning, of $3.80 a pound. That is over a fivefold increase since

2001. We are looking at platinum running about 1315. We are looking at the price per ton of nickel increasing almost three times the

last four years. All of these things are having an impact on us and

on our economy and bode ill for the future.

But what makes this even more of a sort of deja vu experience

for me was that in the late 1980s I had the great privilege of serving in the Reagan White House, at their request, to author the

first, and what, unfortunately, was the last, National Critical Materials Report, and in that report, our Chairman, in introducing it,

Don Hodel, who was interior Secretary at the time and also served

as chairman of the council, said something that I think is quite important for us to bear in mind. He said, Perhaps one way to visualize the U.S. economy is it is a pyramid in which service and

commercial sectors are at the apex, the high tech sector is the next

layer down, and those sectors are followed by light industrial and

heavy industrial sectors, and I will submit, at the very bottom of

the period, its foundation, if you will, are energy and minerals extraction and processing industries and agriculture.

He continued to say, Our economic strength is vital to our ability

to defend ourselves against foreign attack upon the United States

and its allies. Our capability to defend this nation is weakened if

there is peril to the foundation of the economic pyramid, which is

integral to our national strength. In other words, if our energy and

minerals production is jeopardized, or if our supplies are short, our

nation’s security is threatened, and I think no truer words could be

spoken.

You know, we have talked a lot over at the Department of Defense about the new battlefield, the electronic battlefield. Excuse

me. One of the signs of old age is the barber spends more time

trimming the hair on your ears and on the top of your head. The

other is you need two pairs of glasses.

At any rate, as we take a look at the electronic battlefield of the

future where there all of these different things, in the end they get

down, in a large degree, to communications, and for communications we need things like copper, we need platinum, we need rare

46

earth, things that are in short supply and, in some cases, that we

do not produce here.

One of the things that strikes me: We are concerned about im- porting 65.3 percent of our oil supplies, and yet there are 33 minerals, important minerals, which we are more dependent upon for

imports than oil. We import more than 65 percent of them, and

they do include things like platinum and chromium and cobalt and

things that are absolutely essential defense commodities. Indeed,

there are 16 minerals we have to support 100 percent of. We are

completely dependent on imports, and what is worse, in some of

the cases, one reason we are as dependent as we are is that we are

unable to access supplies that are right here in our own borders

that we could be using.

One other point that I do want to make as well is the importance

of information. It was mentioned earlier, and I will tell you that

in the experience of doing the National Critical Materials Report

and in doing some classified work in the area of minerals at the

behest of the Director of Central Intelligence, one of the things that

I found absolutely essential was the ability to obtain information

from people at the then-Bureau of Mines, Minerals Management

Service. It was absolutely essential to have that, and one of the

other things I witnessed was how easily conclusions get skewed by

internal agendas, misconceptions, or people that refuse to face the

facts.

So I would say that in addition to focusing on the very, very

great importance of utilizing our domestic minerals, recycling, and

so on, we also need to focus very, very much on the importance of

having good information because without good information, you

cannot make good decisions, and, quite frankly, this is an area so

vital to our national security, we cannot afford to make bad decisions.

[The prepared statement of Mr. Copulos follows:]

Statement of Milton R. Copulos, President,

National Defense Council Foundation

Good Morning

My name is Milton R. Copulos and I am President of the National Defense Council Foundation.

Two weeks ago I appeared before this Subcommittee to address the grave danger

oil imports pose to our economy and our nation’s security. This issue has been a

dominant topic in the news over the past two years, gaining renewed attention with

each increase in the pump price of gasoline. Yet, I am here to say today, that we

face an even greater danger from our dependence on imported nonfuel minerals.

Consider this, if you will.

We are deeply concerned about the fact that we currently depend on foreign

sources of supply for 65.3% of our crude oil and refined petroleum product supplies.

Yet, we rely on an even greater proportion of imports for 33 different minerals and

100% dependent on foreign supplies for 16 mineral commodities. Included among

those we upon which we are entirely import-dependent are such critical commodities

as columbium which is essential to the manufacture of jet engines and rocket subassemblies; manganese, which is essential to iron and steel production; yttrium,

which is essential to the manufacture of microwave communications equipment, rubidium which is essential to the manufacture of vacuum tubes and photocells, and

vanadium which is essential to the manufacture of superconductors.

We also rely on imports for 91% of our platinum and tantalum, 78% of our palladium and 70% of our tungsten.

The vulnerability this dependence creates cannot be overstated, and, like the vulnerability that has accompanied our dependence on imported oil, it is a problem

that has persisted over time.

47

Indeed, the problem first came prominently to my attention nearly two decades

ago when I had the great privilege of serving in the Reagan White House as a consultant to the National Critical Materials Council. I had been brought in to author

the nation’s first, and unfortunately last, National Critical Materials Report. That

report included a quote from congressional testimony presented on March 31, 1987,

by the Council’s Chairman, Interior Secretary Donald P. Hodel in which he stated:

‘‘Perhaps one way to visualize the U.S. economy is as a pyramid in which

the service and commercial sectors are at the apex, the ‘high-tech’ sector

is the next layer down, and those sectors are followed by the light industrial and heavy industrial sectors. And, I will submit, at the very bottom

of the pyramid—its foundation if you will—are our energy and minerals extraction and processing industries and agriculture.’’

What Secretary Hodel said nineteen years ago is just as valid today. Our energy

and minerals extraction and processing industries are, indeed, an essential element

of the foundation upon which all other economic activity rests. If these sectors are

in any way threatened, then our entire economic well being is threatened as well.

Secretary Hodel made another point in his statement that also has relevance to

our present condition. He said:

‘‘...our economic strength is vital to our ability to defend ourselves against

foreign attack upon the United States and its allies. Our capability to defend this Nation is weakened if there is peril to the foundation of the economic pyramid, which is integral to our national strength.’’

Despite the fundamental truth of the warning contained in Secretary Hodel’s

statement, it has been ignored over the ensuing years. Indeed, over the past fiftyodd years, we have witnessed a dramatic reversal of the our nation’s long-standing

tradition of encouraging development of domestic energy and minerals resources, to

the point that such development has become close to impossible in many cases. In

so doing we ignored the lessons of recent history. But perhaps this was inevitable.

In a letter President Dwight D. Eisenhower sent to Senator Clifford P. Case in

1963, three years after leaving office the former Supreme Allied Commander described the difficulties mineral shortages posed in World War II, and how the lessons of those shortages remained unlearned in the period that immediately followed:

‘‘You will recall that when we became involved in World War II our lack of an

adequate stockpile of strategic and critical materials gravely impeded our military

operations. We were therefore forced into costly and disruptive expansion programs.

The Nation was compelled to divert, at the most critical time, scarce equipment and

machinery and manpower to obtain such necessary materials. However, the need for

such a program was recognized and theoretical objective established on a predicted

5-year war.’’

‘‘But even after this experience we had not fully learned our lesson. After

World War II stockpiling was confined too much to mere talk, it neglected

implementation. After we became involved in Korea, we went through experiences almost identical with those of World War II—only then did realistic

stockpiling begin.’’

What makes today’s import dependence an even more serious threat than it was

in the last century is the dramatic change that has taken place on the world economic stage. The exploding economies of China, India and parts of Eastern Europe

have created unprecedented competition for scarce mineral supplies. As a consequence, although largely unnoticed by the public, these prices for these commodities have experienced price increases similar to those that have shaken the world

oil market.

For example, in 2001, a pound of copper sold for $0.76 cents. Today it costs $3.19.

In that year a pound of aluminum sold for $0.68. Today it costs $1.31. In 2001 an

ounce of platinum cost $533, today it costs $1,315. Since 2001, Nickel has gone from

$5,945 per ton, to $17,921—an increase that matches that of crude oil.

But it is not just the increase in price that is a concern—there is also grave cause

for concern over availability. This concern is even greater in relation to certain strategic and critical materials. This month, it was reported that shortages of U.S.

stocks of specialty metals was jeopardizing our ability to keep helicopters flying in

Iraq. The shortages included such things as titanium and specialty steel used in the

aircraft’s bearings.

But the concern over mineral shortages should not be limited to exotic or specialty

materials. One of the most important defense commodities is copper. In fact, during

World War II, copper shortages led to the minting of zinc-coated steel pennies so

that the copper otherwise used for coinage could be diverted to war production.

Today, copper is even more important to defense production than it was in the

1940s.

48

For example, in addition to its use as a jacket for small arms ammunition and as a component of the brass used for cartridge and artillery casings, copper also is

used for the core of shaped anti-armor charges. Moreover, with the advent of the

electronic battlefield, the need for copper wire for a whole range of electronic equipment has grown exponentially. What is perhaps most disturbing about our growing mineral dependence is that, like our dependence on imported oil, it is largely unnecessary. In all too many instances, our dependence is at least in part, the consequence of restrictions on access

to federal lands where domestic sources of the minerals so important to our economy

and national security can be found. Platinum, cobalt and chromium provide useful examples.

We currently import 91% of our platinum requirements, with the balance pri- marily obtained through recycling. We import 69% of our chromium requirements,

with the balance obtained through recycling. Yet, the Absaroka-Beartooth Wilderness in Montana contains reserves of both chromium and platinum-palladium ores.

As a consequence we cannot access these critical resources. In the case of cobalt,

we rely on imports for 78% of our needs with the balance coming from so-called secondary production such as recycling scrap and some releases from strategic stockpiles. As with chromium and the platinum group metals, we have domestic deposits

near the Blackbird mine in Idaho, but they extend into the River of No Return Wilderness, and therefore cannot be accessed.

In other words, as in the case of domestic energy production, we suffer more from a lack of will than of resources.

This is not to say, however, that we can be self-sufficient in terms of mineral re- sources. There are some minerals that do not naturally occur within our borders and

others that are not available in quantities sufficient to meet domestic needs. This

is why it is necessary to maintain strategic stockpiles. Here again, however, we are

falling short of the mark. Unfortunately, our strategic stockpiles have too often been

viewed as sources of quick cash for federal coffers. As a consequence, there is continual pressure to sell them off, or to fail to maintain them at adequate levels. Failing to maintain adequate strategic stockpiles, however, may seem to offer some

short term economic gains, but in the long run will only lead to enormous economic

penalties.

In the process of writing the National Strategic Minerals Report, as well as de- signing the Advanced Materials Program Plan for the National Critical Materials

Council, we examined the costs of not stockpiling essential minerals and materials.

We determined that it cost eight times as much to obtain them after the fact than

it did to stockpile them in advance. In short, failure to make adequate preparations

was a classic case of being penny wise and pound foolish. Moreover, our mineral dependence also threatens efforts to become energy inde- pendent.

Take the hybrid electric vehicle as an example.

A conventional automobile contains around 50 pounds of copper. A Toyota Prius

contains 100 pounds, and larger hybrids can contain 150 or even 200 pounds. If we

are to expand the fleet of these fuel-efficient automobiles and trucks, we are going

to need a lot more copper.

What about fuel cells?

At present fuel cells require platinum group metal catalysts—about 3 and a half

ounces for each unit. If we are to greatly expand the use of fuel cells, we are going

to need a lot of these minerals. But we will not be the only nation seeking them.

China has indicated it plans to add 120 million new vehicles to its fleet, all of which

will use western-style pollution control technology—that is catalytic converters.

Biofuels and Ethanol are also mineral dependent.

The fueling system modifications needed to make vehicles capable of using high

concentrations of ethanol such as E-85 require brass and chrome fittings due to the

corrosive nature of the fuel. Moreover, if we are to significantly expand our production of alternative fuels, we will need conventional minerals and materials such as

steel, concrete and aluminum to build their manufacturing facilities.

Given our perilous dependence on nonfuel minerals, the logical question is what

must we do? Where is our greatest deficiency?

The answer is simple: our greatest deficiency is leadership. It is time for someone

to sound an urgent alarm about our mineral dependency and the threat it poses to

our nation. I believe that this committee can provide that leadership.

The members of this committee have been at the forefront of attempts to expand

access to our domestic mineral resources and to bring some sanity to the regulation

that has so hindered the ability of mineral producers to operate within our borders.

It is more urgent than ever for that message to be communicated to the public and

to your colleagues in the halls of Congress.

49

Two weeks ago I told this committee that our nation faces a Hobson’s choice between economic collapse and global resource war if nothing is done about our dependence on foreign oil supplies. The same statement could as easily be made about

our dependence on imported supplies of minerals. The same nations that are competing with us for energy are competing for minerals as well, and the consequences

of that competition are just as potentially explosive.

Therefore, I urge the committee to voice its concern in the strongest possible way,

and to make every effort to educate their colleagues about the dangers inherent in

our current dependence.

Mrs. DRAKE. Thank you very much. That is very important: We

cannot afford to make bad decisions. Thank you for being here with

your testimony and your information.

Mr. Guzy, I am going to start with you. When do you see fuel

cell vehicles being commercially available, and when do you expect

them to represent a sizable percentage of the market?

Mr. GUZY. Most OEMs have announced first commercial launch

for fuel cell vehicles in the 2014-to-2016 timeframe, and in that

timeframe there would be tens of thousands of vehicles available.

Many of them are planning more than one demonstration fleet generation of products between now and then.

In terms of significant amounts of vehicles, in 2014 to 2015, we

expect at Ballard about 50,000 vehicles to be deployed worldwide.

We agree with TIAX’s conclusion that in the 2050 timeframe, somewhere between 50 to 80 percent of vehicles worldwide will be fuel

cell powered.

Mrs. DRAKE. Now, this next question, all of you may want to

weigh in, but I will start with Mr. Guzy. I did hear we do need to

fully fund and extend tax credits. What do you think would be the

most effective measures that government could do today to support

fuel cell commercialization?

Mr. GUZY. In addition to the tax credits, they recognize that full

funding on the R&D side, in particular, is important. Also, it would

be useful in the industry if government became a purchaser of fuel

cell products. The procurement side of things could help drive early

volume and early adoption.

Mrs. DRAKE. Very good. Thank you. Did anyone else want to

comment on that question? Mr. Rose?

Mr. ROSE. I would agree with that. The Energy Policy Act recognized that commercializing this technology is a process. It is a process that really has already begun because there are some fuel cell

units in customer hands today in specialty applications in areas

where the current cost of the fuel cell is not a barrier to the market. This industry needs to find ways to reduce its costs. Volume

is certainly one piece of it, and a design based on the experience

of initial customers is another.

So not just the research, which is extremely important, but also

that early market experience is extremely important.

The Defense Department loves fuel cells, loves the potential of

fuel cells, because they have the potential to save soldiers’ lives.

They operate very quietly and with a low heat signature typically.

That is another area where I think there is an opportunity to get

units, providing customer needs and building those volumes that

we need.

Mrs. DRAKE. Mr. Carlson?

50

Mr. CARLSON. As a technology development company, one thing

we would say is that in terms of encouraging young people to enter

into these fields and provide that knowledge base and that experience base to develop the technologies would be important going forward also.

Mrs. DRAKE. Thank you. Mr. Copulos, did you want to weigh in?

OK.

Mr. Rose, obviously, recycling facilities will need to be developed

to foster reuse of fuel cell materials. Do you think that our Federal

recycling policies need to be reviewed? Is there work we need to do

on that and make them more recycling friendly?

Mr. ROSE. Recognizing that this is not my field, I certainly would

not object to that, and it may well provide some useful information

and experience. I think if you look around the world, Europe and

Japan have, in particular, taken pretty aggressive steps to, in some

cases, require the recycling of major consumer goods. Now, in this

country, we do not tend to do that, but I think perhaps we can

learn something from the experience of those countries in how the

industry responded to those mandates and perhaps in some way,

either by stimulating interest or developing voluntary programs

perhaps short of regulation, we might be able to do some things in

the short term.

There is a worldwide interest that is both economic and also, I

think, a sense around the world that sustainable systems are what

we are going to need in the long term. So I think there is some

work that could be done there, and there are people and experiences that we can learn from.

Mrs. DRAKE. Thank you, and I would also like to ask you, and

the rest of the panel may also want to jump in on this one, and

that is, if the fuel cells are commercialized, what changes in the

infrastructure of transportation systems will be required? In particular, how do you get it? What happens to your corner gas station?

Mr. ROSE. I am going to resist a flippant answer.

Mrs. DRAKE. You can do flippant. It is OK.

Mr. ROSE. We would like to have these problems. That would

mean that there were sufficient products on the street and sufficient demand so that we would need to concern ourselves with a

substantial uptick in infrastructure investment.

I would like to make a couple of observations, if I could, on this

issue. As is the case with the materials that go into the fuel cell,

the supporting infrastructure is going to be necessary, but it is not

going to be needed all at once. The figure of perhaps 50 percent

penetration in 2050 implies a great deal of vehicles, but it also is

a 45-year ramp-up period. So we are going to have some time, and

my view is that the fuels industry and perhaps some competitors,

when they see an opportunity to make money supplying fuel and

the supporting infrastructure for fuel cells, they will come in, and

they will do that. That is the way our system works. There is no

reason, neither technical nor practical, why one could not convert

gas stations into fuel stations. Several oil industry members of the

Fuel Cell Council who are actually pursuing this marketplace are

hoping that the marketplace will develop, keeping an eye on it, if

you will.

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Finally, you know, the gasoline infrastructure is not free. It has

been estimated that meeting a new gasoline demand worldwide is

going to cost something like three trillion dollars over the next couple of decades, and, to some extent, it is just an allocation of resources, that some of that, in my view, ought to be going to fuel

cell fuels, hydrogen-rich fuels. You may have to pay a little bit of

a premium in the short term. The concern for kind of the need for

an instantaneous national infrastructure, I think, may be a little

bit overblown.

Mrs. DRAKE. Did anyone else want to weigh in?

Mr. COPULOS. I think one of the other things we have to bear in

mind is when we talk about a fuel cell infrastructure, we are really

talking about a fueling infrastructure, and it begins with determining what is your source material. What is a fuel cell going to

use as a power source? Is there going to be an onboard converter

to turn something into hydrogen? Are you going to be using methanol pumped in that then gets turned into it? Are you going to use

natural gas that you convert at the gas station?

There is a whole host of questions, but just to give some perspective, we have something on the order of 1.5 to 1.6 trillion dollars

already invested in the existing infrastructure, and, over time, if

we do make this transition to fuel cells, that is the kind of money

we are looking at spending. And, again, it kind of gets back to information. We need to know as soon as is practical, and I do not

think that will be within the next decade, frankly, what our source

of fuel for the fuel cells is going to be. Are we going to be mining

coal, digging natural gas? What are we going to do, and then how

are we going to convert it? Until you have those questions, you cannot really get started on the infrastructure, and that could prove

to be a bottleneck.

Mrs. DRAKE. Mr. Rose?

Mr. ROSE. May I respond briefly to that?

Mrs. DRAKE. Absolutely.

Mr. ROSE. Thanks. In the short term, there is not an absolute

consensus, but there is a virtual consensus that gaseous hydrogen

will be the choice of fuel for fuel cell vehicles. The derivation of the

hydrogen will depend on local resources, kind of like we generate

electricity today from a variety of fuels, depending on what is available locally.

The third is that it will take us a while to get to kind of a tipping

point where we choose to utilize large-scale systems to supply the

hydrogen. In the short term, there are a number of options, utilizing everything from electrolysis of water to the use of natural

gas that is already at perhaps a third of the gas stations in the

United States and so on.

So, again, I think these are important questions, and it is good

to be visiting them, but I do not think they will be show stoppers,

and I do not think that the oil or auto industry sees them as show

stoppers either, not anymore.

Mrs. DRAKE. Thank you. Mr. Carlson, would you comment on the

degree of success that the industry has had in recycling platinum

for the automotive catalytic converters?

Mr. CARLSON. As part of the study, we did talk to the platinum

industry, and we also talked to the car companies, and they did not

52

provide exact numbers, but in talking to the car companies, our

sense was that recycling on catalytic converters is greater than 90

percent, maybe even higher, and that is driven by the fact that

platinum group metals are a valuable material, and so a value

chain, collection chain, has been set up because of that value, and

it has been established.

Earlier, you asked a question about whether there might be regulations that encourage recycling, and I think that would be very

important because when you look at a fuel cell vehicle, not only

will there be the platinum metal, but you will have batteries, and

you will have the electric motors, and there will be a lot of other

metals that would be very valuable in terms of being recovered.

Mrs. DRAKE. Thank you. Mr. Copulos, are you familiar with the

Land Warrior system and the Future Force Warrior system currently being developed by the Defense Department, and would you

comment on the metal and materials that are going to be needed

to achieve success in these systems, which, of course, will keep our

65,000 infantrymen safer on the battlefield? Are you familiar with

that?

Mr. COPULOS. Yes, ma’am. It is the result of a progression that

has taken us from the Vietnam War to today. In World War II, the

only protection you had was a steel helmet, which was sort of questionable. By Vietnam, you had flak vests, which most of us would

discard sooner or later because they were hot and uncomfortable,

as well as the old steel pot. But now we have flak vests and body

armor and so on.

During that period, we have also seen an evolution in communications. Where we had the old PRC-25 radios in the field, which

worked most of the time if we were lucky, and that was the extent

of our communications really other than the occasional flare, now

you have a much more sophisticated, what they call the ‘‘electronic

battlefield,’’ which will become even more so with the introduction

of the Stryker Brigade combat teams, which is the model of the future.

I think one other point that is important to understand is that

with the modern armed forces, yes, we have 65,000 infantrymen,

and ultimately it is the man with the rifle who holds the territory.

The ultimate goal of everything else is to get the infantryman

there. But with the changing nature of the battlefield, everybody,

at one point or another, is going to want to essentially function as

an infantryman because you do not have defined lines.

So just as used to happen in special operations, where we would

see a piece of equipment adopted or introduced, eventually it expanded out to where everybody had it. MREs are an example of

that. You are going to see that happen with these new innovations

for the Land Warrior system, which basically is built around a couple of things. It is built around communications. It is built around

interoperability. Whereas we had one radio for a squad if we were

lucky, now everybody has their own radio that ultimately links into

the Stryker combat vehicle and will not only provide you with communications, but then you have night vision systems. You have all

of these very sophisticated electronic elements. You also have the

X-8 personal weapon, a new weapon which has a higher rate of fire

and is much more accurate with its sites.

53

But in the end, what do you need to make all of these things?

Well, one of the things you are going to need is a whole lot of copper because guess what, they have wires. That is not the only military application of copper. Ammunition is copper jacketed, and the

cases are brass. The antitank weapons we use that are shape

charged, the armor-piercing shells, have a copper core because

what basically happens is the explosive heats the copper up, super

heats it really, so you get a jet of hot copper that burns through

the armor. You are going to have copper and brass in all of the

components of almost everything you are using in the Land Warrior system, and you are going to need platinum as a catalyst.

They are looking at fuel cells in military vehicles not just to

power the vehicle, but one of the other things they are looking to

use the fuel cell for is to power a lot of the electronic equipment

within the vehicle when it is at rest so you do not have to run the

engine. Well, that means you are going to use platinum for that.

You need yttrium. You need a whole bunch of rare earths in order

to make the night vision goggles, to make the electronic sights and

components.

So the bottom line to it is we are going to have a huge requirement for minerals, many sophisticated minerals, especially platinum group metals, copper, and rare earths.

Mrs. DRAKE. Thank you for that because we certainly want to

make sure they are as safe as possible and that we move into the

use of these fuel cells rather than all of these batteries, and you

have covered that.

But, Mr. Copulos, also, and this may be an uncomfortable question, or you may not mind because you have been very straightforward about the risk to our nation, but do you believe that the

proposed Department of the Interior budget for 2007, which cuts

the mineral commodity information that we just talked about, virtually eliminates the collection of international mineral commodity

information, is a wise public policy that enhances the nation’s security?

Mr. COPULOS. Well, Congresswoman, you will excuse me if I am

extremely blunt——

Mrs. DRAKE. Be blunt.

Mr. COPULOS.—but the third idiot from the left could have figured out that we need these people, so apparently the policy was

put together by the fourth. It is obscenely stupid, and I can tell you

from personal experience, as I noted earlier, I authored the White

House Critical Materials Report in 1988. At the time, I was doing

classified work at the direct request of the Director of Central Intelligence in these areas, and I learned two things, one of which

was the most reliable source of information on mineral commodities

there was in Washington, D.C., were these people working at then

the Bureau of Mines. Now they are over at the U.S. Geological Survey. They were absolutely world-class experts who knew their stuff

and could be relied on to give you the accurate information you

needed to make very important decisions.

The other thing that I discovered was that every time we tried

to use them, individual political agendas, pet projects, and just

plain misconceptions entered into the process and tried to influence

their conclusions. Now, these people withstood it pretty vigorously.

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In fact, Secretary Hodel had me go around to each of the commodity specialists, explain what was going on, and elicit answers,

to the point where I was visiting one of them who I had not seen

before who said, ‘‘Are you the shrink the Secretary is sending

around?’’ They thought that things had gotten so bad that they required a counselor to go out and talk to the people about why they

were not being believed.

We cannot afford to have that kind of stuff go on. We need independent sources of information. One of the things that happened as

a result of my work being second guessed in one of the classified

reports is that we missed by two years a warning that the Soviet

Union was going to collapse, which would have been quite evident

had those conclusions been acted on and not been dismissed because of someone else’s biases and prejudices.

I would hate to see us make similar, very important strategic

mistakes or have bad decisions made because we did not have information on an area that is as important as energy and, quite

frankly, needs this even more because it does not get the attention

that energy gets.

Mrs. DRAKE. Thank you. I would like to thank all of our witnesses for their valuable testimony, and as I said before, we may

have additional questions from other Subcommittee members that

we would ask you to respond to in writing. Our hearing record will

be held open for 10 days for these responses, and if there is no further business before the Subcommittee, the Chairman, again,

thanks the members and the witnesses, and the Subcommittee

stands adjourned.

[Whereupon, at 1:15 p.m., the Subcommittee was adjourned.]

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