United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Military Readiness, Committee on

National Security, House of

Representatives

November 1996 NATIONAL DEFENSE

STOCKPILE

Disposal of Excess

Zinc

G O A

years

1921 - 1996

GAO/NSIAD-97-30

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-270963 

November 7, 1996

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military

 Readiness

Committee on National Security

House of Representatives

Dear Mr. Chairman:

This report responds to your request that we review issues surrounding a

dispute between the American Zinc Association1

 (AZA) and the federal

government about the Department of Defense’s (DOD) sale of excess zinc

from the National Defense Stockpile. AZA believes that the amount of zinc

DOD plans to sell annually is too high and will cause undue disruption of

the usual markets for zinc. This report assesses (1) the government’s basis

for its interpretation of the statutory phrase “usual markets” as applied to

the zinc sales program and (2) DOD’s efforts to not unduly disrupt the zinc

market.

Background The National Defense Stockpile is a reserve of strategic and critical

materials that may be unavailable in the United States in sufficient

quantities to meet unanticipated national security requirements. The

Defense Logistics Agency’s Defense National Stockpile Center (DNSC) has

managed the stockpile since 1988. Zinc is one of 92 strategic and critical

materials stored in the stockpile. It is commonly used for galvanizing,

die-casting, manufacturing brass and bronze, and making the U.S. penny. It

is produced in various grades—special high grade, high grade, continuous

galvanizing, controlled lead, and prime western—that are distinguishable

by the amount of impurities they contain, such as lead, cadmium, and iron.

Special high grade is the most pure, prime western the least. As of

March 30, 1996, DNSC has nearly 300,000 tons2

 of slab zinc, valued at

$300 million, stored at 15 facilities in 9 states. (See app. I.) About

91 percent is either high grade (48 percent) or prime western grade

(43 percent).

The Strategic and Critical Materials Stock Piling Act, 50 U.S.C. 98 et seq.,

as amended, prohibits the sale of any stockpile material unless the

1

AZA’s membership consists of 18 domestic and foreign firms that produce zinc concentrate, metal,

oxide, and dust for U.S. consumption.

2

As used in this report, “tons” are short tons of 2,000 pounds each.

Page 1 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

disposal, and the quantity of the material to be disposed of, is authorized

by law. The act also states that

“to the maximum extent feasible . . . efforts shall be made . . . to avoid undue disruption of

the usual markets of producers, processors, and consumers of such materials and to

protect the United States against avoidable loss.” [Emphasis added.]

DNSC has been authorized to sell up to 50,000 tons of zinc in fiscal year

1996 and 50,000 tons in fiscal year 1997. It is conducting monthly sales

using sealed bidding procedures. Bids for a minimum of 20 tons are

accepted from producers, processors, traders, and consumers on an “as-is,

where-is” basis.3

 Between 1993 and March 1996, DNSC sold approximately

77,000 tons4

 of zinc for about $60 million. DNSC’s plans, as provided to the

Congress, indicate that, if authorized, it intends to sell up to 50,000 tons

annually until the inventory is depleted. Money generated from sales is put

into the National Defense Stockpile Transaction Fund and used for

stockpile operations or, as authorized and appropriated by the Congress,

for other defense purposes.

Results in Brief The statute that governs sales from the stockpile does not define the usual

markets for stockpile materials. Accordingly, executive branch officials

have discretion in identifying the relevant market for particular sales. DNSC

and the Market Impact Committee,5 the intergovernmental group that is

statutorily required to advise DNSC on the U.S. and foreign effects of sales

from the stockpile, have concluded that for stockpile sales of zinc, the

usual market is the total U.S. market for all grades of zinc, not just the

grades being sold from the stockpile. AZA considers the usual market to be

the U.S. market for only the particular grades being sold from the

stockpile. We believe the government’s determination has a sound basis. It

is based on practices that exist in the zinc industry, and it is consistent

with the views of zinc market participants with whom we discussed this

matter.

DNSC has policies and procedures for selling zinc without unduly disrupting

the zinc market. Specifically, it has publicized its policy on timing of sales,

3

The term “as is, where is” means DNSC does not guarantee the quality of the zinc and the buyer is

responsible for transportation from the storage site.

4

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

5

The Market Impact Committee is made up of representatives of the Departments of Agriculture,

Commerce, Defense, Energy, the Interior, State, and the Treasury; the Federal Emergency

Management Agency; and such other persons as the President considers appropriate. The

representatives from the Departments of Commerce and State are the cochairs.

Page 2 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

amounts to be sold, and relation of sales prices to market prices; provided

plans to the appropriate congressional committees for approval; sold less

zinc than it was authorized to sell; and given increased emphasis to selling

at prices close to commercial market prices.

The government recognizes that stockpile sales can affect some sellers

more than others, despite its attempts to minimize disruption. The sales

may, for example, have a greater impact on the sellers of the grades being

sold from the stockpile, and a seller of one grade could be more affected

than a seller of several grades. The increase in zinc supplies can lower

prices and cause particular producers or processors to lose business.

However, the Market Impact Committee contends that this is normal

commercial activity, not an undue disruption. DNSC plans to continue to

closely monitor prices when accepting bids to ensure that the market is

not unduly disrupted.

Government’s View of

Usual Market for Zinc

Has a Sound Basis

When evaluating the potential for undue market disruption, DNSC and the

Market Impact Committee consider the usual market for zinc to be the

total U.S. market for all grades of the commodity. AZA contends, however,

that the statute requires an evaluation based only on the markets for the

grades of zinc the stockpile plans to sell. We find that the statute does not

specify the market the government is to examine and that the

government’s determination to consider the entire zinc market has a sound

basis.

Statute Does Not Specify

the Market the

Government Is to Examine

The Stock Piling Act authorizes the acquisition, management, and disposal

of “strategic and critical materials” and requires efforts by the stockpile

managers, to the maximum extent feasible, “to avoid undue disruption of

the usual markets of producers, processors, and consumers of such

materials.” AZA argues that the phrase “such materials” refers only to the

specific grades of zinc being disposed of from the stockpile and that the

phrase “usual markets” refers only to producers, processors, and

consumers of those specific grades. The government, on the other hand,

believes that “material” refers to the commodity of zinc, regardless of

grades; therefore, the usual markets to which the statute refers means the

total market for the commodity, not just the markets for the specific

grades being sold from the stockpile.

Although it is clear from the Stock Piling Act that the phrase such

materials refers to the strategic and critical materials disposed of under

Page 3 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

the act, the statute does not require a market analysis based on specific

grades of stockpile commodities. In addition, while the act requires efforts

to avoid undue disruption of the usual markets for materials sold from the

stockpile, it does not define the phrase usual markets or otherwise specify

what markets the government is to examine to determine whether

stockpile sales could be unduly disruptive. Furthermore, while it is clear

from the act’s legislative history that the Congress was concerned with the

market effects of stockpile sales, there is no indication that the Congress

envisioned an evaluation at any particular market level. Generally, without

a statutory definition or clear indication of congressional intent, an agency

charged with implementing a statute has the discretion to define a phrase

such as usual markets. The courts have said that an agency’s

determination in such circumstances will not be overturned, provided it

has a reasonable basis.6

Government’s Position Has

a Sound Basis

We believe the determination by DNSC and the Market Impact Committee

concerning the usual markets for zinc has a sound basis. According to

DNSC officials, their determinations are based on the practices for each

industry and commodity. Some commodities consist of grades that have

separate industry uses and generally cannot be substituted for one

another, according to DNSC. For example, the mineral fluorspar,7

 another

stockpile material being disposed of, is divided into grades having distinct

end uses—a metallurgical grade used in the manufacture of certain metals

and an acid grade used by the glass industry. In contrast, in some cases,

different grades of zinc may be used for the same purpose, such as certain

types of galvanizing. Annual legislation authorizing sales from the

stockpile reflect these differences between commodities. Disposals of

certain commodities, such as zinc and lead, are authorized on a generic

basis; authorization for disposing of other commodities, such as fluorspar,

is given by separate grades and amounts.8

DNSC and the Market Impact Committee’s view of the zinc market as an

entire market is a long-standing one shared by previous managers of the

stockpile. Specifically, the General Services Administration and the

Federal Emergency Management Agency, both prior managers of the

stockpile, have defined the usual market for zinc as the entire market.

6

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

7

Fluorspar is the commercial name of the mineral fluorite. It is necessary in most steel and aluminum

production processes and is used in making glass and enamel.

8

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

Page 4 GAO/NSIAD-97-30 Disposal of Excess Zinc
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Our discussions with zinc market participants—that is, companies

producing or processing zinc, those buying and selling zinc as traders or

brokers, those that consume zinc in their manufacturing processes, and

individuals who study or report on the zinc markets—support this view of

the larger market. Some of these discussions were with AZA members. The

consensus was that some zinc consumers adjust their purchases of

different grades of zinc according to changing market factors. Some

producers adjust their production of different grades according to supply

and demand for each grade. According to the participants, the impact of

market events, such as an increased supply because of stockpile sales,

could affect not only the market of the particular grade sold, but also the

overall market because a significant decline in the price of one grade

would be expected to depress the prices of other grades. Pricing data we

reviewed show that prices of different grades tend to follow similar

patterns.

Although some zinc consumers may not purchase materials sold from the

stockpile, we do not believe that the Stock Piling Act requires the

government to limit its review of the usual markets to only those

consumers likely to buy zinc from the stockpile. According to DNSC, a

company may not buy stockpile zinc for a number of reasons. For

example, even if a company could use the grade of zinc being sold, the

material may not be available in sufficient quantity or quality, or at low

enough prices, to justify changing suppliers. Even though such a company

may not buy zinc from the stockpile, that company could be affected by

the increase in supply resulting from stockpile sales.

The government recognizes that sales from the stockpile can affect some

participants in the market more than others. Stockpile sales increase

supplies that can drive down prices and cause a particular producer or

processor to lose business. The stockpile is in effect an additional zinc

producer. One major U.S. zinc producer, for example, produces only one

grade of zinc, which is one of those DNSC has offered for sale. This

producer stated that it had lost sales because of the stockpile sales.

However, the Market Impact Committee stated that the loss of business by

one producer, in and of itself, does not necessarily unduly disrupt the

overall market. Some customers taking advantage of lower prices from a

new supplier is a normal commercial activity.

One factor that may limit the impact of stockpile sales on U.S. zinc

producers is the international character of the zinc market. Zinc is an

internationally traded commodity. In 1994, the latest year for which data

Page 5 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

were available, U.S. zinc consumption (all grades) was about 17 percent of

the world’s consumption, and the United States had to rely on imports for

about 67 percent of the 1.2 million tons of slab zinc consumed. According

to zinc market participants and analysts, although prices and market

conditions for zinc can differ by country, international trade tends to

spread the effects of changing market conditions across countries. For

example, if U.S. prices fell, then suppliers would decrease their sales to the

U.S. market and increase their sales to other markets, thus distributing the

price effects to those other markets.

DNSC Has Policies

and Procedures to

Avoid Unduly

Disrupting the Zinc

Markets

DNSC has established policies and procedures to avoid unduly disrupting

the zinc markets. Specifically, it has publicized its sales and price policy

and solicited public comments; sold less zinc than it was authorized to sell;

and tried to sell zinc close to market prices.

DNSC’s Policy Is

Publicized

DNSC’s policy for disposing of zinc is to (1) dispose of those quantities of

materials as authorized by the Congress; (2) maximize revenues, though

not necessarily maximize sales; and (3) be responsive to industry and

congressional concerns. In addition, a policy statement was published in

the October 17, 1994, Federal Register.

9

DNSC also works closely with the Market Impact Committee. The

Committee reviews a range of data and analysis compiled by DNSC and

other agencies, and it may also review DNSC’s proposed sales methods. It is

the Committee’s policy to solicit industry views concerning the proposed

disposals. The Committee is particularly interested in any information that

would indicate a potential market disruption if DNSC sold any zinc. Based

on this evidence, the Committee can recommend reductions in the

proposed commodity disposal levels. If DNSC refuses to accept the

Committee’s recommendations, it must provide written justification with

its submission of the annual materials plan to the Congress. According to

the Committee, a steady, well-publicized disposal program helps increase

market certainty, whereas irregular sales contributes to market

uncertainty.

9

59 Fed. Reg. 52,284 (1994).

Page 6 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

DNSC Has Sold Less Than

It Was Authorized

DNSC must submit an annual materials plan to the Congress to show the

quantity of materials to be disposed of, the views of the Market Impact

Committee on the projected domestic and foreign economic effects of

such disposals, the recommendations submitted by the Committee relative

to the disposals, and justification for the disposal. Table 1 provides a

summary of the amounts requested and approved.

Table 1: Zinc Disposal Amounts

Requested and Approved

Fiscal year

Tons in thousands

1993 1994 1995 1996

As originally proposed to the Congress 50 50 75 50

As subsequently revised by DNSC and

submitted to the Congress for the next

annual materials plan cycle 75 50 34 50

As approved by the Congress 75 50 34 50

Source: DNSC.

The most recent plan, submitted on February 15, 1996, requested authority

to dispose of up to 50,000 tons for fiscal year 1997. The plan also included

DNSC’s proposal to sell up to 50,000 tons annually until the inventory is

depleted.

DNSC has sold less zinc than it was authorized over the last several years.

Between March 1993, when DNSC began selling zinc, and March 1996, DNSC

has sold approximately 77,000 tons, although it was authorized to sell

209,000 tons. Figure 1 provides a yearly comparison of the amounts sold

and amounts authorized.

Page 7 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

Figure 1: Comparison of Amounts of

Zinc Sold with Amounts Authorized

(fiscal year 1993 through March 1996) 

1993 1994 1995 1996

0

20,000

40,000

60,000

80,000

100,000

12,400

41,008

21,777

1,785

75,000

50,000

34,000

50,000

Fiscal year

Tons

Amounts sold Amounts authorized

Note: Preliminary data provided by DNSC shows that the total amount sold in fiscal year 1996 was

about 15,000 tons.

Source: DNSC.

DNSC Has Shown Concern

for Selling Closer to

Market Prices

Industry members and metals analysts told us that the stockpile’s sales

prices are as important as quantity when it comes to market disruption.

AZA officials stated that DNSC was selling stockpile zinc at fire-sale prices,

well below the London Metal Exchange10 and other market prices. Even

though DNSC’s policy is that all excess materials will be sold as close to

market prices as possible, its sales of zinc in 1993 and part of 1994 were at

prices below the London Metal Exchange. Both the Market Impact

10The London Metal Exchange is the major open zinc trading market and sets the official daily

reference price for the top grade (special high grade) of zinc. The official daily price is used by buyers

and sellers as a reference point for all grades of zinc for the next 24 hours.

Page 8 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

Committee and AZA urged DNSC to raise its minimum price level, which it

did, beginning in late 1994. Since 1994, the prices DNSC has accepted for

zinc have been above the London Metal Exchange’s prices.

The London Metal Exchange sets the world price for special high grade

zinc daily. Producers add an additional charge, referred to as a premium,

to the Exchange price to set their selling prices. A premium can vary by

producer, sales contract, and customer, and covers such things as

transportation, quality guarantees, and financing terms. As figure 2 shows,

through the second quarter of fiscal year 1994, the stockpile made all sales

at prices below the London Metal Exchange prices. From the fourth

quarter of fiscal year 1994 to the present, all sales prices have been above

the London Metal Exchange price.

Page 9 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

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

London Metal

Exchange Base

3Q93 4Q93 1Q94 2Q94 3Q94 4Q94 1Q95 2Q95 3Q95 4Q95 1Q96 2Q96

-10

-5

0

5

10

15

Fiscal year quarter

Percent Above or Below the London Metal Exchange

Highest sales price

Lowest sales price

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

Source: DNSC.

The relation of DNSC’s sales prices to the London Metal Exchange prices is

only one measure of how closely DNSC is selling to market prices. Figure 3

compares the DNSC sales prices to both the London Metal Exchange and

spot market prices from April 1995 to August 1996. The data shows that

the prices for high grade and prime western grades sold by DNSC and those

for spot sales in the commercial market are roughly 2 to 3 cents apart, a

difference which DNSC and the Market Impact Committee believe is

reasonable given that the government does not provide transportation,

financing, or certification of product quality. DNSC’s terms require buyers to

pay for transportation, pay for the product prior to delivery, and accept

the product on an “as is” (quality not certified) basis. Commercial terms

Page 10 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

typically require the seller or producer to pay for transportation, provide

for financing (often 30 to 40 days), and certify the quality of the product.

The DNSC data in figure 3 represent the average sales prices for high grade

and prime western zinc sold at the regular DNSC sales on the third Tuesday

of every month. The spot market prices are the commercial prices,

averaged, for high grade and prime western zinc, as reported by the

American Metal Market for the date of each DNSC sale. The London Metal

Exchange data are the prices set by the London Metal Exchange for

special high grade zinc on the same day as the DNSC sales. Although the

London Metal Exchange price is based on special high grade, the premium

for other grades is typically marked against the special high grade price.

Page 11 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

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

Apr. 18, 1995

May 16, 1995

June 20, 1995

July 18, 1995

Aug. 15, 1995

Sept. 19, 1995

(no DNSC sale)

Nov. 21, 1995

Dec. 19, 1995

Jan. 16, 1996

Feb. 20, 1996

Mar. 19, 1996

Apr. 16, 1996

May 21, 1996

June 18, 1996

July 17, 1996

Aug. 20, 1996

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

Date of DNSC Sale

Price in dollars per pound

DNSC Sales Price London Metal Exchange Price Spot Market Price

Source: DNSC and metals trade publications.

DNSC receives bids within a wide range of prices, both above and below the

London Metal Exchange. Sometimes, it receives multiple bids from a

single bidder at prices above, at, and below the London Metal Exchange.

DNSC must decide which ones to accept and which ones to reject. DNSC has

rejected more bids than it has accepted in every year it has offered zinc for

Page 12 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

sale. (See fig. 4.) In fiscal year 1996, for example, it accepted only one of

every four bids received. (App. III lists DNSC’s sales activities, including the

bids accepted and bids rejected.)

Figure 4: Comparison of Bids

Accepted and Rejected (fiscal year

1993 through March 1996) 

1993 1994 1995 1996

0

200

400

600

800

1,000

1,200

141

398

104

25

335

1,022

184

99

Fiscal year

Number of bids

Bids accepted Bids received 

Source: DNSC.

DNSC plans to continue to closely monitor prices when accepting bids to

ensure that the market is not unduly disrupted. DNSC’s actions, we believe,

demonstrate that it is paying attention to the market and is committed to

Page 13 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

avoiding an undue disruption. It is important that DNSC accept prices for its

zinc that are as close to market prices as possible.

Agency Comments

and Our Evaluation

We asked DOD, the Market Impact Committee, AZA, U.S.-based AZA

members, and a number of other companies and organizations with whom

we discussed this matter to comment on a draft of this report. DOD and the

Market Impact Committee fully concurred with the report. Their

comments are included as appendix IV.

AZA disagreed with the report’s conclusions, stating that we reached those

conclusions based on our accepting certain inaccurate government data,

avoiding certain AZA facts, and introducing irrelevant material. First, while

AZA agreed that the phrase “usual markets” is not defined in the act, it said

that we did not properly consider congressional intent in reviewing the

government’s interpretation of the phrase “usual markets.” It stated that

because the legislative history indicates that the Congress was particularly

concerned about the effect on the markets that stockpile sales might have,

those charged with construing the phrase must choose the construction

that results in the minimum amount of market impact.

It is our view, however, that the legislative history does not require such

an interpretation of the statute. In this regard, the legislative history,

including the Senate report cited by AZA (S. Rpt. No. 804, 79th Cong., 

1st Sess. 1945) shows that while the Congress was concerned about

market impact, the concern was that “sudden disposals” of stockpile

materials “might break the market,” not that all market disruption must be

avoided. Some additional language was included in the body of the report

to clarify our position.

Next, AZA stated that certain materials we cited in the report were not

relevant as justification for the government’s action to avoid unduly

disrupting the usual zinc market. We believe the materials are relevant, but

have added a figure and text comparing DNSC sales prices to spot market

prices to clarify our position.

Finally, AZA stated that we had not reported certain facts it believed were

relevant to the dispute between the government and itself about the size of

what AZA views as the usual market for high grade and prime western zinc.

We have provided additional information for clarification in appendix II.

The complete response of AZA and our specific comments to the points

raised are included as appendix V.

Page 14 GAO/NSIAD-97-30 Disposal of Excess Zinc
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Of the AZA members commenting on our draft report, one fully agreed with

our conclusions and another generally agreed but believed certain

statements relating to uses of different grades of zinc and market factors

were misleading. We have clarified the discussion on this in the final

report to address these concerns. A third member said it was disappointed

with our interpretation that the government’s view of the usual market has

a sound basis. The members’ comments are included as appendix VI.

Four other respondents—an association of zinc consumers, a zinc broker,

a zinc trader, and a metals trade publication official—concurred with our

findings and conclusions. Their comments are included in appendix VII.

Scope and

Methodology

The focus of our work was on the dispute between the government and

AZA as it related to the government’s interpretation of the statutory phrase

“usual markets” as applied to the zinc sales program, and DOD’s efforts to

not unduly disrupt the zinc market. To assess the merits of each side’s

position on the government’s interpretation and its efforts not to disrupt

the zinc market, we met with the Executive Director of AZA and reviewed

data AZA provided us. We met with the Administrator, Deputy

Administrator, General Counsel, and zinc commodity specialists at DNSC

and reviewed the data they provided us. We also met with the cochairs of

the Market Impact Committee and each of the Committee members and

reviewed the minutes of each meeting where zinc disposals were

considered during the last 3 years. And, we met with industry and metals

analysts for the Department of Commerce and the Bureau of Mines (now

part of the U.S. Geological Survey) to determine how they calculated the

size of the zinc markets.

We reviewed the applicable statute, its legislative history, and relevant

court cases. We discussed the statute and its interpretation with DNSC’s

counsel and with the executive director of AZA.

To complement our discussions with AZA and to obtain the views on the

government’s interpretation of usual markets and its efforts not to disrupt

the markets, we met with each of the various groups represented in the

zinc market—that is, companies producing or processing zinc, those

buying and selling zinc as traders or brokers, those that consume zinc in

their manufacturing processes, and individuals who study or report on the

zinc markets—we reviewed various documents these companies and

organizations had submitted to DNSC or the Market Impact Committee and

contacted them about the government/AZA dispute and/or their particular

Page 15 GAO/NSIAD-97-30 Disposal of Excess Zinc
B-270963 

operations. We also asked each company or organization whose

correspondence we reviewed or we contacted to comment on a draft of

this report. We have included copies of the responses in the appendixes.

The list of companies and organizations we contacted or whose

documents we reviewed were the following:

• producers or processors

• Big River Zinc Corp., Sauget, Illinois

• Huron Valley Steel, Belleville, Michigan

• Savage Zinc, Inc., Clarksville, Tennessee

• Zinc Corporation of America, Monaca, Pennsylvania

• brokers or traders

• Parks-Pioneer Metals Co., Milwaukee, Wisconsin

• Trademet, Inc., Scarsdale, New York

• zinc consumers or their associations

• American Galvanizers Association, Aurora, Colorado

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

• Galvan Industries, Inc., Harrisburg, North Carolina

• Independent Zinc Alloyers Association, Washington, D.C.

• Rogers Galvanizing Company, Tulsa, Oklahoma

• Tennessee Galvanizing, Jasper, Tennessee

• U.S. Zinc, Houston, Texas

• metals analysts and others

• CRU International Ltd., London, United Kingdom

• International Lead/Zinc Study Group, London, United Kingdom

• Ryan’s Notes, Pelham, New York

We visited the DNSC storage site at Letterkenny Army Depot, near

Chambersburg, Pennsylvania, to examine how DNSC stores zinc and

prepares it for sale. We did not assess DNSC’s sales methods—that is, its

selling on the “spot” market, as opposed to selling under long-term

contracts—or the impact of congressionally imposed sales price

constraints. The fiscal years 1995, 1996, and 1997 DOD appropriations acts

have prohibited DNSC from accepting prices from prospective bidders if

zinc prices decline more than 5 percent below the London Metals

Exchange market price reported on the date the act was enacted.11

We performed our review from December 1995 to August 1996 in

accordance with generally accepted government auditing standards.

11The most recent version is found in section 8101, Department of Defense Appropriations Act for

Fiscal Year 1997, as found in the Omnibus Consolidated Appropriations Act for Fiscal Year 1997 

(P.L. 104-208, Sept. 30, 1996).

Page 16 GAO/NSIAD-97-30 Disposal of Excess Zinc
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We are providing copies of this report to the Chairmen and Ranking

Minority Members of the Senate Committee on Appropriations,

Subcommittee on Defense; Senate Committee on Armed Services; House

Committee on Appropriations, Subcommittee on National Security; House

Committee on National Security; the Director, Office of Management and

Budget; the Secretary of Defense; the Director, Defense Logistics Agency;

the Administrator, DNSC; the cochairs of the Market Impact Committee;

AZA; and all parties that assisted us in this review. We will also make copies

available to other interested parties upon request.

Please contact me on (202) 512-8412 if you or your staff have any

questions concerning this report. Major contributors to this report are

listed in appendix VIII.

Sincerely yours,

David R. Warren, Director

Defense Management Issues

Page 17 GAO/NSIAD-97-30 Disposal of Excess Zinc
Contents

Letter 1

Appendix I 

Defense National

Stockpile Center Zinc

Stockpile Storage

Sites and Inventory

20

Appendix II 

Information on the

Dispute Between the

Government and the

American Zinc

Association

Concerning Market

Size

22

Appendix III 

Summary of DNSC’s

Sales Activities

24

Appendix IV 

Comments From

Governmental

Organizations

25

Appendix V 

Comments From the

American Zinc

Association

28

Page 18 GAO/NSIAD-97-30 Disposal of Excess Zinc
Contents

Appendix VI 

Comments From

Individual Members of

the American Zinc

Association

41

Appendix VII 

Comments From

Other Interested

Parties

48

Appendix VIII 

Major Contributors to

This Report

52

Tables Table 1: Zinc Disposal Amounts Requested and Approved 7

Table I.1: Zinc Inventory by Storage Site 21

Figures Figure 1: Comparison of Amounts of Zinc Sold with Amounts

Authorized

8

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

Metal Exchange

10

Figure 3: Comparison of DNSC Monthly Zinc Sales Prices With

London Metal Exchange and Commercial Market Prices

12

Figure 4: Comparison of Bids Accepted and Rejected 13

Figure I.1: DNSC Zinc Storage Sites 20

Abbreviations

AZA American Zinc Association

DNSC Defense National Stockpile Center

DOD Department of Defense

Page 19 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix I 

Defense National Stockpile Center Zinc

Stockpile Storage Sites and Inventory

Figure I.1: DNSC Zinc Storage Sites

Somerville, N.J.


Savanna, Ill.


Granite City, Ill.


Sharonville, Ohio


New Haven, Ind.


Seneca, N.Y.


Warren, Ohio

Huntsville, Ala.

Scotia, N.Y.


Voorheesville, N.Y.

Stockton, Calif. Marietta, Pa.


Mechanicsburg, Pa.


Chambersburg, Pa.


Point Pleasant, W.Va.

Source: Defense National Stockpile Center (DNSC).

Page 20 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix I 

Defense National Stockpile Center Zinc

Stockpile Storage Sites and Inventory

Table I.1: Zinc Inventory by Storage Site

Grade of zinc

Weight in tons

Storage site location

Special

high grade

High

grade Intermediate

Brass

special

Prime

western Total

Huntsville, Ala. 10,414.36 10,414.36

Stockton, Calif. 5.29 3.34 35.11 43.74

Granite City, Ill. 2,320.49 5,176.02 10,391.24 17,887.75

Savanna, Ill. 9,607.20 25,163.12 4,269.79 13,004.61 52,044.72

New Haven, Ind. 31,995.78 247.87 32,243.65

Somerville, N.J. 14,183.29 14,183.29

Scotia, N.Y. 1,880.83 4,268.91 6,149.74

Seneca, N.Y. 2,195.16 2,195.16

Voorheesville, N.Y. 57,585.33 1,539.16 59,124.49

Sharonville, Ohio 43.60 246.19 13,051.52 13,341.31

Warren, Ohio 483.15 483.15

Chambersburg, Pa. 8,517.53 30,128.56 38,646.09

Marietta, Pa. 18,021.99 8,549.34 26,571.33

Mechanicsburg, Pa. 4,594.04 4,594.04

Point Pleasant, W.Va. 78.08 241.32 20,638.44 20,957.84

Total 11,932.98 143,167.92 121.68 14,450.10 129,207.98 298,880.66

Source: DNSC.

Page 21 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix II 

Information on the Dispute Between the

Government and the American Zinc

Association Concerning Market Size

The American Zinc Association (AZA) and the government have long

disputed the size of the usual market for high grade and prime western

zinc. According to AZA’s definition of the usual markets for high grade and

prime western grade slab zinc, using 1994 data, the usual market is 250,000

tons of actual consumption a year. Officials of the Department of

Commerce—members of the Market Impact Committee—estimate the

market of these grades to be about 350,000 tons a year, counting both slab

and hot metal.1

AZA’s estimates are based on high grade and prime western consumption,

as reported by its members, and U.S. Bureau of the Census data on

imports from all countries not represented in AZA and adjusted to include

stockpile sales and changes in stocks. Commerce’s estimates are based on

Bureau of Mines survey data, Commerce and Census import data, and

discussions with zinc importers—many of whom are AZA members.

The government has revised its estimate of this market from over 600,000

tons to 446,000 tons to its current estimate of 350,000 tons. The latest

revision was due primarily to revised estimates of large steel mill

consumption of high grade and prime western grade and in the amount of

high grade and prime western grade tonnage imported.

A major factor underlying the remaining 100,000-ton difference between

the two estimates is the treatment of internal hot prime western metal

produced by one prime western processor and used in its zinc oxide

production facility (about 62,000 tons). AZA did not include this amount in

its estimate of the production of slab prime western grade zinc, stating

that this is hot metal, not slab. The government agreed that this tonnage

should not be reported as slab and revised the reporting of it under the

heading of “zinc metal.” The government nevertheless maintains that

although this prime western zinc is not converted to slab, it should be

included in the estimates of the size of the high grade and prime western

zinc market because prime western zinc is being consumed.

An additional difference (38,000 tons) between AZA and the government is

that the government’s estimates of potential domestic consumption of high

grade and prime western zinc includes tonnage that “hot-dip” galvanizers2

use, but that is currently being supplied by special high grade zinc. The

government believes that high grade or prime western can be used for this

purpose and should be used in the market size estimates. AZA, however,

1

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

2

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

Page 22 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix II 

Information on the Dispute Between the

Government and the American Zinc

Association Concerning Market Size

stated that “potential” consumption should not be considered in any

discussion of usual markets.

In summary, the two sides now agree with each other’s numbers, but not

how those numbers are to be used. In any event, the government’s

determination of undue disruption of the usual market does not depend on

the specific size of the high grade and prime western market alone, but

rather on the larger market for all grades of zinc.

Page 23 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix III 

Summary of DNSC’s Sales Activities

Sales dates

Sales

held

Bids

received

Bids

accepted

Bids

rejected Tons sold

Prices accepted as measured

against the London

Metal Exchange price

(range in percent)

Quarterly sales summary

March-June 1993 7 172 57 115 4,812 –7.67 to –5.28

July-September 1993 6 163 84 79 7,588 –6.20 to –2.52

October-December 1993 6 192 96 96 8,496 –5.02 to –2.47

January-March 1994 6 285 103 182 8,961 –4.06 to –1.93

April-June 1994 6 300 95 205 9,668 –0.51 to +1.64

July-September 1994 6 245 104 141 13,883 +1.05 to +4.77

October-December 1994 No sales authorized

January-March 1995 No sales authorized

April-June 1995 3 115 59 56 4,150 +6.25 to +10.51

July-September 1995 3 69 45 24 4,892 +5.43 to +7.23

October-December 1995 2 39 6 33 542 +5.18 to +7.16

January-March 1996 3 60 19 41 1,243 +2.84 to +5.10

Yearly sales summary

Fiscal year 1993 13 335 141 194 12,400 –7.67 to –2.52

Fiscal year 1994 24 1,022 398 624 41,008 –5.02 to +4.77

Fiscal year 1995 6 184 104 80 9,042 +5.43 to +10.51

Fiscal year 1996 (first half) 5 99 25 74 1,785 +2.84 to +7.16

Total 48 1,640 668 972 64,235

Note: Figures do not include sales to the U.S. Mint.

Source: DNSC.

Page 24 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix IV 

Comments From Governmental

Organizations

Page 25 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix IV 

Comments From Governmental

Organizations

Now on p. 2.

Now on p. 16.

Page 26 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix IV 

Comments From Governmental

Organizations

Page 27 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

Now GAO/NSIAD-97-30.

Page 28 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 1.

Now on p. 22.

Now on p. 22.

Now on p. 22.

Page 29 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 2.

Now on p. 22.

See comment 3.

Now on p. 22.

See comment 4.

Now on p. 22.

Page 30 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

Now on p. 22.

Now on p. 22.

See comment 5.

Now on p. 22.

Page 31 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 6.

Now on p. 12.

See comment 7.

Now on p. 9.

Page 32 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 8.

Now on p. 5.

See comment 9.

Now on p. 5.

Page 33 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 10.

Now on p. 4.

Page 34 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

See comment 11.

Now on p. 5.

Now on p. 5.

Page 35 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

Now on p. 22.

Page 36 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

Page 37 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

The following are GAO’s comments on the American Zinc Association’s

letter dated September 6, 1996.

GAO Comments 1. The final report (app. II) reflects the numbers used by the Market

Impact Committee.

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

reporting.

3. Neither we nor the Market Impact Committee has asserted that the

stockpile slab could substitute for the hot metal in the particular

company’s production of zinc oxide. Zinc oxide producers use slab zinc or

zinc recovered from recycled materials as their feed. This particular

company, as AZA pointed out, does not use slab as its feed. It uses hot

metal that has not been converted into slab. Whether the prime western

zinc refined by this company is first converted into slab or is kept as hot

metal is not relevant to whether it is part of the high grade/prime western

zinc market.

4. The final report (app. II) reflects that while the two sides now agree

with each other’s numbers, they do not agree on how those numbers are to

be used. In any event, the government’s determination of undue disruption

of the usual market does not depend on the specific size of the high grade

and prime western market alone, but rather on the larger market for all

grades of zinc. Also, we revised the text to clarify the source of the

numbers.

5. It is not our position that all zinc is the same, that all grades have the

same uses, or that there is perfect substitution among the grades. Rather,

our position is that the different grades of zinc can be considered to be in

the same market because most producers can switch from one grade to

another, some consumers (galvanizers) can use different grades for the

same purpose, and prices of the different grades of zinc move in similar

patterns.

6. As AZA points out, bids are rejected for many reasons. Some bids are

“low-ball” and are rejected. However, we disagree with AZA’s comment that

DNSC rejects bids because there are sometimes more bids than tonnage

available for sale. Under DNSC’s current sales arrangements, there is no

monthly limit as to the amount that can be sold, except as dictated by the

yearly limit set forth in the annual congressional authorization. At the start

Page 38 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

of the current sales program for zinc, DNSC’s solicitation publicized that the

government was soliciting bids for approximately 8 million pounds, or

4,000 tons, a month. In October 1995, the amount per month was raised to

100 million pounds, or 50,000 tons, which was the entire authorization for

the year. Despite AZA’s assertion, DNSC said that it had not rejected bids

because it had received more bids than the amount available for sale. DNSC

indicated that the primary reason bids were rejected was because the

price offered was too low and would not have maximized revenue for the

government.

7. To clarify our point that DNSC is showing concern for the prices at which

it sells zinc, we added figure 3 comparing DNSC’s selling prices with those

for spot market transactions in the commercial market. It shows that for

the period cited, DNSC’s sales prices were within 2 to 3 cents of the

commercial market. Both DNSC and the Market Impact Committee believe

that the difference is reasonable considering the different terms of sale for

DNSC and commercial transactions. Comments from producers, consumers,

and others on our draft report also support this position. DNSC’s sales

require the buyer to pay for transportation from the government depot,

pay for the zinc before delivery, and accept the zinc on an “as-is” basis.

Commercial transactions are made on a delivered price basis, provide for

30- to 40-day financing, and have the zinc’s quality certified.

8. (See comment 5.) We have not concluded that all zinc is the same, but

rather that different grades of zinc can be in the same market. Most

producers can switch production from one grade of zinc to another. If a

producer who is currently selling prime western or high grade zinc can get

a better return on its investment by selling another grade, it may do so

(after factoring in customer relationships that the producer may want to

maintain). Thus, that producer’s ability to switch production to another

grade means that the price decrease required to absorb additional supply,

such as stockpile sales, is less than it would be if all sellers of high grade

or prime western had no alternative but to continue to supply high grade

or prime western zinc.

9. (See comment 8.) As stated, we did not conclude that zinc itself is

fungible in all, or even most, uses, at least not given the range of price

differences in the market. There are, however, some substitution

possibilities for some zinc consumers, and most zinc suppliers. This limits

the degree that the price of one grade of zinc will rise or fall without

affecting the prices of other grades.

Page 39 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix V 

Comments From the American Zinc

Association

10. We agree that where a statutory term is undefined, the interpretation

that best reflects the intent of the Congress should generally be adopted.

However, contrary to the AZA statement, nothing in the act’s legislative

history requires DNSC to adopt AZA’s view of usual markets. Our final report

reflects this position.

11. (See comments 8 and 9.) We did not state that consumers switch from

higher to lower grades of zinc. However, in commenting on our draft

report, one consumer (U.S. Zinc) that uses slab zinc to produce zinc oxide

indicated that it could substitute stockpile high grade for imported special

high grade for most of its needs. We did say that some consumers can

switch from one grade of zinc to another and this is one reason for

including different grades of zinc in the same market. The 38,000 tons of

high grade or prime western zinc that some hot-dip galvanizers can use,

and is currently being supplied by special high grade zinc, is an example of

potential consumption substitution.

Page 40 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Now on p. 22.

See comment 1.

Now on p. 4.

See comment 2.

Now on p. 4.

Page 41 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Page 42 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Now GAO/NSIAD-97-30.

Page 43 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Page 44 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Page 45 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

Page 46 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VI 

Comments From Individual Members of the

American Zinc Association

The following are GAO’s comments on letters from individual members of

AZA.

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

2. We did not conclude that zinc itself is fungible in all, or even most uses,

at least not given the range of price differences in the market. There are,

however, some substitution possibilities for some zinc consumers and

most zinc suppliers. This limits the degree that the price of one grade of

zinc will rise or fall without affecting the prices of other grades.

Page 47 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VII 

Comments From Other Interested Parties

Page 48 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VII 

Comments From Other Interested Parties

Now on p. 3.

Page 49 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VII 

Comments From Other Interested Parties

Page 50 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VII 

Comments From Other Interested Parties

Page 51 GAO/NSIAD-97-30 Disposal of Excess Zinc
Appendix VIII 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Brad H. Hathaway, Associate Director

Reginald L. Furr, Assistant Director

J. Kenneth Brubaker, Evaluator-in-Charge

Barbara L. Wooten, Evaluator

Celia J. Thomas, Economist

Carolyn S. Blocker, Communications Analyst

(709178) Page 52 GAO/NSIAD-97-30 Disposal of Excess Zinc
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