Rare Earth Materials: Developing a Comprehensive Approach Could Help DOD Better Manage National Security Risks in the Supply Chain
Published: 2016-02-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD depends on rare earths that contain one or more of 17 similar metals which have unique properties, such as magnetism at high temperatures, to provide functionality in weapon system components. Many steps in the rare earths supply chain, such as mining, are conducted in China, a situation that may pose risks to the continued availability of these materials. The Joint Explanatory Statement accompanying the Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for 2015 included a provision for GAO to review DOD efforts to identify and mitigate risks in its rare earths supply chain.
This report assesses the extent that DOD (1) determined which rare earths, if any, are critical to national security; and (2) has identified and mitigated risks associated with rare earths, including the effects of a potential supply disruption. GAO reviewed DOD reports from 2011-2015 and relevant legislation; and collected information from DOD, the military departments, and industry organizations.
section_title: What GAO Found
paragraphs: Three Department of Defense (DOD) offices have identified certain rare earth materials (rare earths) as critical for some defense applications, such as lasers, but DOD has not taken a comprehensive, department-wide approach to identifying which rare earths, if any, are critical to national security. Specifically, DOD offices have not yet agreed on what constitutes “critical” rare earths. Using different statutorily-based definitions, these offices have identified 15 of the 17 rare earths as critical over the last 5 years (see table).
DOD's current approach to identifying and mitigating risks associated with rare earths is fragmented. With different interpretations of which rare earths are critical, establishing priorities to analyze supply risk becomes difficult. For example, the Defense Logistics Agency-Strategic Materials office methodically analyzes risks for all materials, but its focus is a four-year timeframe with stockpiling as its mitigation tool. The Manufacturing and Industrial Base Policy office relies on other DOD organizations to identify and elevate risks, relies primarily on the market to resolve supply disruptions, and has not put in place measures to evaluate the success of its mitigating actions. According to DOD, supply disruptions in rare earths have not occurred over the last several years. Regardless, the Strategic Materials Protection Board has not developed a comprehensive approach for ensuring a sufficient supply of rare earths for national security needs—one that can establish criticality, assess supply risks, and identify mitigating actions. Such an approach would better position DOD to help ensure continued functionality in weapon system components should a disruption occur.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD designate which rare earths are critical to national security, and develop a comprehensive approach to help ensure a secure supply by identifying risk metrics, among other activities. DOD concurred with all the recommendations in this report and provided timeframes for action.

section_title: Letter
paragraphs: The Department of Defense (DOD) depends on rare earth materials (rare  earths) to provide functionality in weapon systems components. Many  steps in the rare earths supply chain, such as mining and refining the ore,  are primarily conducted outside the United States, which may pose risks  to continued availability of these materials to DOD. For example, in our  prior work conducted in 2010, we found that much of the rare earths  processing is performed in China, giving it a dominant position that could  affect worldwide supply and prices. U.S. industry previously performed  all steps in the rare earths supply chain and produced the majority of the  global supply but no longer has the capability. DOD reported in 2014 that  there have been no availability issues and expects none in the near term.  DOD has been generally directed by law since at least 2011 to take  actions concerning supply chain vulnerabilities for materials, such as rare  earths. The Defense Logistics Agency-Strategic Materials (DLA-Strategic  Materials) has had management responsibility since 1988 to store select  materials—which may include rare earths—in the National Defense  Stockpile to mitigate potential shortages.
The Joint Explanatory Statement accompanying the Carl Levin and  Howard P. “Buck” McKeon National Defense Authorization Act (NDAA)  for Fiscal Year 2015 included a provision for GAO to review DOD efforts  to manage risks in its rare earths supply chain, including DLA-Strategic  Materials’ stockpiling efforts. We assessed the extent that DOD (1)  determined which rare earths, if any, are critical to national security; and  (2) has identified and mitigated risks associated with rare earths,  including the effects of a potential supply disruption.
To determine the extent DOD identified which rare earths, if any, were  critical to national security, we reviewed DOD reports from 2011 to 2015  to understand the analyses and criteria that DOD conducted and used to  determine critical rare earths. We also reviewed the actions of DOD  components—Air Force, Army, and Navy—to determine if they had  identified critical rare earths. In addition, we interviewed DOD and other  agencies' officials, such as at the United States Geological Survey, with  defense-related industrial base knowledge.
To assess the extent to which DOD has identified risks and taken action  to mitigate the risks associated with rare earths, including the effects of a  potential supply disruption, we reviewed DOD reports from 2011 to 2015  to understand the analyses conducted, risks identified, and mitigating  actions. We also reviewed the actions of DOD components to determine if  they had identified any risks in the rare earths supply chain. In addition,  we interviewed DOD and other agencies' officials with knowledge of the  defense industrial base and management of the National Defense  Stockpile.
We conducted interviews and collected information for a non- generalizable sample of 20 cases selected for illustrative purposes based  on rare earths and risk management processes, including three DOD  offices with purview over weapon systems, three defense contractors,  and seven companies. We reviewed DOD’s sources of data for its  analytical processes. We determined that the information that we  collected were sufficiently reliable for our report. We assessed DOD’s  policies, procedures, and practices against criteria in applicable statutes,  Standards for Internal Control in the Federal Government, and GAO’s  framework for risk assessment. A more detailed discussion of our scope  and methodology is provided in appendix I.
We conducted this performance audit from February 2015 to February  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Rare earths contain one or more of the following 17 elements in the  periodic table: the lanthanides that begin with lanthanum (atomic number  57) through lutetium (atomic number 71) and two non-lanthanides that  have similar properties, yttrium and scandium (see figure 1).
These elements are referred to as rare because they appear in low  concentrations in the ground—though relatively abundant overall—and  are difficult and costly to mine and process. Rare earth elements are  often classified as either heavy or light based, in part, on their chemical  properties. According to the United States Geological Survey, heavy rare  earth elements are generally less abundant and more expensive due to  their scarcity, more unique characteristics, and strong demand relative to  the light rare earth elements. DOD has a particular interest in two heavy  rare earth elements, yttrium and dysprosium.
Rare earth elements are generally found in mined ore, separated and  converted into intermediary forms, such as oxides, and further processing  depends on the application. For example, the intermediary form can be  turned into a metal, and added to other materials to form an alloy for use  in semi-finished metal components that are incorporated into end  products. The United States was the leader in global production of rare  earth oxides, metals, and alloys from the 1960s through the 1980s but  currently has limited capability. According to a 2013 Congressional  Research Service report, global production is prevalent outside the United  States due, in part, to lower labor costs and more lenient environmental  standards. At present, the United States generally relies on imports from  global manufacturers of rare earths, such as metals, alloys, and magnets.  See figure 2 for a representative rare earth metals supply chain that is  generally outside the United States.
The United States is a major consumer of defense and commercial end  products containing rare earths, however, its demand for rare earths is  approximately nine percent of the global demand, according to DOD  estimates. Also, DOD demand is approximately only one percent of the  United States demand. Recent studies have shown that rare earths are  essential to the production, sustainment, and operation of U.S. military  equipment. Reliable access to the necessary material, regardless of the  overall level of defense demand, is a bedrock requirement for DOD.  Some defense applications with rare earths are coatings for jet engines,  missile guidance systems, antimissile defense systems, satellites, and  communication systems. Examples of commercial products with rare  earths are automotive catalytic converters, petroleum refining chemicals,  flat panel displays, permanent magnets, and rechargeable batteries for  hybrid vehicles.
Since 2010, DOD has conducted studies and published reports on  various rare earths issues in response to congressional mandates (see  table 1 below).
DOD also periodically issues two reports on the defense industrial base  and on “critical” and “strategic and critical” materials. The Annual  Industrial Capabilities Report to Congress provides analyses of sectors of  the defense industrial base such as aircraft and ground vehicles and  summarizes the department’s efforts to identify the availability of  materials, such as rare earths. The biennial Strategic and Critical  Materials Report on Stockpile Requirements summarizes DLA-Strategic  Materials’ analyses of materials for the National Defense Stockpile.
In addition, in July 2014 the DOD Inspector General issued a report  assessing whether DOD effectively planned for life-cycle sustainment of  rare earth elements for the defense industrial base. The DOD Inspector  General found that DLA-Strategic Materials lacked procedures to validate  supply and demand data for its stockpiling model. Further, the Inspector  General identified internal control weaknesses related to the assessment  of rare earth element supply and demand for defense applications.  Specifically, the Inspector General found that DOD lacked a  comprehensive and reliable approach to assess rare earth element  supply and demand. The DOD Inspector General recommended that  DLA-Strategic Materials have a plan for using verified and validated data  to improve forecasts for the stockpile. DLA-Strategic Materials generally  agreed, noting that its model is being reviewed and will be accredited.
Three organizations in the department have related statutory  requirements to manage risks from DOD’s use of “critical” and “strategic  and critical” materials, such as rare earths. The three organizations are  DLA-Strategic Materials and the Office of the Deputy Assistant Secretary  of Defense for Manufacturing and Industrial Base Policy (MIBP), both in  the Office of the Undersecretary of Defense for Acquisition, Technology  and Logistics (OUSD(AT&L)), and the Strategic Materials Protection  Board (SMPB). Their select responsibilities are shown in table 2 below.
In addition to MIBP and DLA-Strategic Materials representation, the  SMPB membership is department-wide and includes designees of the  Assistant Secretary of the Army for Acquisition, Logistics and Technology  and the Assistant Secretary of the Navy for Research, Development, and  Acquisition.
section_title: DOD Has Identified Certain Materials as Critical but Approach Not Comprehensive
paragraphs: From 2011 to 2015, DOD identified certain materials, including rare  earths, as critical to meet its individual statutory responsibilities, but has  not taken a comprehensive approach to identify which of these materials  are critical to national security. Based on GAO’s prior work, the Office of  the Deputy Under Secretary of Defense for Industrial Policy, the  predecessor of MIBP, stated that it was collaborating with the Defense  Logistics Agency’s National Defense Stockpile Center to create  department-wide criteria for the terms “critical” and “strategic,” and  expected to report the results of this effort at the end of calendar year  2008. As of November 2015, there were no department-wide criteria for  these terms, but DOD officials said that they were considering discussing  the definitions and possibly proposing a group of materials that meet the  SMPB’s definition of critical to national security. SMPB and OUSD(AT&L)  and two of its offices—MIBP and DLA-Strategic Materials—have  separate, existing statutory definitions for critical materials. See table 3 for  the varying definitions of critical materials by organization.
The DOD organizations, generally using their respective definitions and  analyses for their individual responsibilities, identified between three and  eight of the rare earths as having met the definitions at least once from  2011 to 2015. Overall, 15 of the 17 rare earths were identified as critical  at some point in the last 5 years. None of the organizations identified  cerium or promethium as having met the definitions during that time  period. See table 4 for the rare earths that each DOD organization  separately identified as critical in defense applications, critical to national  security, or as strategic and critical in different reports.
DOD’s identification of which rare earths, if any, are critical to national  security is fragmented. Three DOD organizations separately identified  five different lists of rare earths during this time frame using their  respective definitions of critical to national security. According to GAO’s  risk management framework, comprehensive management of risk is a  necessary step for agencies, like DOD, to manage and assess risk to  help make informed decisions and prioritize resource investments. The  SMPB, with the duty of designating specific materials as critical to  national security, has reported to Congress in 2007, 2008, and 2011 that  its focus is to assess the criticality of materials and to identify which  materials are critical to national security, but has not done so. The  SMPB acknowledged that identifying the materials critical to national  security is necessary to ensure consistency among the DOD offices.  However, in a February 2014 letter from MIBP to DLA-Strategic Materials,  the respective offices of the chair and vice-chair of the SMPB, that  discusses cooperation concerning the SMPB, the designation of materials  critical to national security was not one of the areas outlined for proposed  coordination. DOD officials told us that they are generally working toward  coordinating MIBP’s sector analyses of the defense industrial base—such  as aircraft and ground vehicles—with DLA-Strategic Materials’ analyses  that support recommendations for materials to stockpile in order to have a  more comprehensive understanding of supply chains.
DLA-Strategic Materials’ responsibility for determining materials to  stockpile under certain scenarios has been considered by some within  DOD as a means to ensure materials critical to national security are  available. For example, MIBP officials told us that they rely on DLA- Strategic Materials’ analyses and expertise for other responsibilities such  as MIBP’s Title 10 responsibilities of ensuring reliable sources of  materials critical to national security. However, DLA-Strategic Materials  officials caveat their analyses as being valid for a single point in time and  for decisions related to their title 50 responsibilities for the National  Defense Stockpile, and not for other statutory responsibilities such as  identification of materials critical to national security in the Title 10  definitions. To demonstrate that its analyses are valid for a specific point  in time, DLA-Strategic Materials officials indicated that the identification of  rare earths that meet the definition for strategic and critical may differ over  time, unlike OUSD(AT&L)’s and MIBP’s lists, which have not changed. In  addition, the DOD-created emergency scenarios may change for each  biennial analysis, which affects DLA-Strategic Materials identification of  which materials meet the definition for strategic and critical. Moreover,  DLA-Strategic Materials officials told us that they are not responsible for  designating if a material is strategic and critical but are tasked with  determining if a material is estimated to have a shortfall in a given year  based upon DOD emergency scenarios.
In addition to DOD’s differing lists of critical rare earths, weapon system  officials at the military departments that we spoke with also have  identified what they consider as critical rare earths in their systems, but  this information is not reported consistently or department-wide. These  officials do not have a definition for critical materials nor do they have an  agreed upon department-wide list of critical rare earths, but they know  which rare earths provide enabling functionality in the weapon systems.  For example, a subject matter expert on lasers at Naval Surface Warfare– Crane told us that the rare earth component in certain defense lasers is  what creates and focuses the light beam. In another example, officials at  the Army Program Executive Office for Ammunition told us that rare earth  magnets enable guided artillery ammunition to move in flight to the target.  Further, Army Research Laboratory officials told us that they could better  focus their work on specific rare earths if there was a department-wide list  of rare earths critical to national security.
Implementation of controls consistent with federal internal control  standards provides management with some added confidence regarding  the achievement of objectives, provides feedback on how effectively an  entity is operating, and helps reduce risks affecting the achievement of  the entity’s objectives. In particular, these standards state that  management is to use data to create quality information that is  appropriate, current, complete, accurate, accessible, and provided on a  timely basis; and internally communicate the necessary quality  information. Information and communication are necessary to create an  effective internal control system that informs the allocation of resources in  relation to the areas of greatest risk relevant to achieving the entity’s  objectives, such as efficient operations.
From an industry perspective, we spoke with five defense and petroleum  corporations that took steps to assess risk to help make informed  decisions and prioritize resource investments. Company officials we  spoke with generally said that they determine what materials are critical  by obtaining data and communicating across product lines. Officials from  three corporations stated that they have a process to gather data  throughout the company and decide what materials may be critical to the  company as a whole. For example, an official from one company stated  that it regularly collects data from manufacturing divisions across the  company and differentiates critical materials by their ability to create a  production line stoppage. For potential material shortages that can stop  production, for example, company officials may have regular meetings  with the suppliers, forecast supplies 6 months into the future, adjust  contracting arrangements, and have mitigation actions in place.
Given the differing interpretations of what rare earths are critical  according to the individual responsibilities of each organization, DOD has  not taken the next step to identify an appropriate, complete, timely list of  department-wide rare earths critical to national security. Without taking a  comprehensive department-wide approach to determine which rare  earths, if any, are critical to national security, DOD is not in the best  position to communicate and effectively focus resources across the  department and align efforts to ensure the supply of rare earths critical to  national security.
section_title: DOD Identifies Supply Disruption Risk in a Limited Manner and Has Not Proactively Analyzed the Impact of Rare Earths Unavailability
paragraphs: Rare earths risk assessment is, in part, a function of the probability of a  supply disruption and the vulnerability of a weapon system or supply  chain to the disruption. Although DOD regularly identifies supply  disruption risks, it has not taken a comprehensive approach to assess  and mitigate those risks, including analyzing the effect of unavailability of  rare earths designated as critical to national security which is statutorily  required. Fortunately, these types of supply disruptions have not  materialized over the last several years, but DOD’s current ability to  respond may not be sufficient should they materialize in the future.  Specifically, DLA-Strategic Materials estimates the risk of supply  shortfalls through a biennial assessment process and makes  recommendations for acquiring certain materials for the National Defense  Stockpile. MIBP also has taken some action to identify supply disruption  risks, but its mitigating strategy is reactive in nature. However, the SMPB,  chaired and vice-chaired by officials of MIBP and DLA-Strategic Materials  respectively, with the responsibility for analyzing the effect of  unavailability of materials such as rare earths critical to national security  may have on national defense, has not done so. Moreover, DOD has not  established internal controls to measure risk and the effectiveness of its  mitigating actions. Rather, DOD has taken actions without knowing the  extent of the underlying risks that the unavailability of rare earths would  have on its weapon systems specifically and national defense generally.
subsections: section_title: DLA-Strategic Materials Estimates the Risk of Supply Shortfalls Using National Emergency Scenarios and Recommends Materials to Stockpile
paragraphs: DOD identifies potential supply disruption risks and takes some mitigating  actions through DLA-Strategic Materials’ biennial process of assessing  material shortfall risks and making recommendations to acquire certain  materials for the National Defense Stockpile. The assessments are not  designed to be comprehensive but are limited to a four-year time frame  related to DOD defined national emergencies. The resulting shortfall risks  are an estimated deficiency of materials for essential civilian and defense  needs during a period of recovery after accounting for existing mitigating  options, such as substitution of other materials to fill the deficiency. In  each of its 2011, 2013, and 2015 assessments, DLA-Strategic Materials  considered between three and seven specific rare earths at risk for a  shortfall—15 in all.
The assessment process is limited to DOD-created national emergency  scenarios. These scenarios cover a four-year time frame in which the first  year is assumed to be a period of conflict, and years two through four are  assumed to be a period of recovery. The one year period of conflict takes  into consideration the following conditions: (1) a catastrophic attack on a  U.S. city by a foreign terrorist organization or rogue state, (2) two near  simultaneous major combat operations, (3) conflict damage from a highly  capable enemy, and (4) ongoing military operations such as a military  presence in a foreign country. According to DOD officials, rare earths  from the National Defense Stockpile have not been used.
DLA-Strategic Materials’ process to assess material shortfalls, in order to  meet select statutory requirements, is methodical and has many steps.  Among the ongoing data collection and analysis efforts, first, DLA- Strategic Materials includes materials of concern on a “watch list” based  on input from other DOD organizations. Second, it conducts initial  research to determine which materials on the watch list to further analyze  based on the potential for a supply disruption of the materials that may  lead to a shortfall deficiency. This initial research is, in part, based on  demand and supply data from industry and public sources. Third, DLA- Strategic Materials uses estimating models to assess shortfall risks.  Fourth, to address mitigating actions, DLA-Strategic Materials uses its  judgment to determine which materials with shortfall risks that it will  recommend for stockpiling to the Congress. See figure 3 for materials that  DLA-Strategic Materials assessed in 2015, including rare earths.
DLA-Strategic Materials may conduct additional research, referred to as  “deep dives,” on select materials or products to inform its decision on  materials to recommend for stockpiling. See table 5 for a list of additional  research conducted on rare earths from 2011 through 2015.
To mitigate shortfall risks, DLA-Strategic Materials recommended  stockpiling dysprosium and yttrium in 2013, and europium in 2015. See  figure 4 below for the rare earths DLA-Strategic Materials identified with  shortfall risks and recommended for stockpiling.
DLA-Strategic Materials may identify a shortfall risk but not take mitigating  actions for various reasons. For example, erbium and thulium had  shortfall risks in 2013, but DLA-Strategic Materials did not recommend  stockpiling them due to limited defense applications; limited data; and  prioritization of more important materials, such as yttrium. In another  instance, lanthanum had a shortfall risk in 2015, but DLA-Strategic  Materials did not recommend it for stockpiling due to the availability of the  material from companies in Australia, with which the United States has an  agreement for priority delivery for defense needs.
section_title: MIBP Identified Some Risks Related to Ensuring a Secure Supply of Rare Earths but Its Mitigation Strategy Is Reactive
paragraphs: MIBP also took actions to address supply disruption risks by identifying  the risk of unavailability of heavy rare earths—those that are generally  less abundant and more expensive due to their scarcity—used in defense  applications. Heavy rare earths are at risk for a supply disruption due to  the concentration of production outside the United States, which MIBP  described in OUSD(AT&L)’s 2013 Annual Industrial Capabilities Report to  Congress, the last one completed at the time of our review. MIBP based  its analysis, in part, on public and industry supply and demand forecasts  for rare earths and interviews with federal officials, subject matter experts,  military service officials, and industry representatives, among other  sources, according to officials.
To mitigate the risk, MIBP’s strategy relies on the market: (1) to find new  sources of rare earths driven by increasing demand, (2) to discover  substitutes for rare earths, and (3) to support initiatives for recycling rare  earths from waste products. MIBP’s strategy is reactive, that is waiting for  a supply disruption to occur and relying on the market to respond.  Moreover, it may not be realistic. First, industry experts said that new  mines and processing facilities are not economically viable as prices for  rare earths have decreased and remain low. Second, Army officials,  weapon systems subject matter experts, and industry representatives  said that substitutes for some rare earths are not preferred or do not exist  at this time. Third, while stating in 2012 that recycling initiatives could  mitigate some supply risks, DOD determined that recycling is not  economically feasible in 2014.
In addition, MIBP does not have internal controls necessary to implement  and monitor its strategy. Specifically, it has not established metrics to  assess the extent to which its strategy could have mitigated the risk for a  potential supply disruption of heavy rare earths. Nor has it defined the  terms “reliable sources” and “secure supply” that are necessary to  establish such metrics according to internal controls that call for  identifying acceptable risk tolerances for what is reliable and secure.  According to DOD officials, potential measures could be past  performance history, including timeliness of delivery, or the financial  health of companies in the rare earths supply chain. Further, MIBP has  not defined the metrics for evaluating the extent of risk and the  effectiveness of its strategy because, as indicated earlier it relies on the  market to respond to a supply disruption. Without such metrics, it will be  difficult for MIBP to monitor and adjust its mitigating actions.
In addition to its stated strategy, MIBP officials said to identify potential  supply disruption risks for materials, such as rare earths, they rely on the  military departments and program offices to elevate issues so that MIBP  can react to them as they “bubble up.” Similarly in our 2008 report on  DOD’s industrial policy, we found that DOD used an informal approach to  identify supplier-base concerns, often relying on the military services,  program offices, or prime contractors to identify and report these  concerns, including gaps or potential gaps. We further found that as there  was no requirement for when to report such gaps to higher-level offices,  knowledge of defense supplier-base gaps across DOD could be limited.  Currently, MIBP partly relies on the Joint Industrial Base Working Group,  which consists of department-wide representatives, to identify industrial  base issues, such as rare earths unavailability or supply risk. We found  that no guidance exists for when military departments and program  offices are to report rare earth supply disruption risks, but MIBP officials  reported that rare earths have never come up as an issue in the working  group.
section_title: DOD Has Not Analyzed the Effects of a Supply Disruption on National Defense
paragraphs: The SMPB, chaired and vice-chaired by MIBP and DLA-Strategic  Materials, has not taken a broader approach to comprehensively address  the underlying risks of the unavailability of rare earths, including  determining the effects and possible mitigating actions of the  unavailability of rare earths, by leveraging the dispersed expertise that  exists in the department. The current approach is thus fragmented. For  example, although MIBP has offered a strategy to ensure a reliable  supply, SMPB has not taken the additional step of assessing and building  upon MIBP’s work to develop and recommend a department-wide  strategy. Further, although DLA-Strategic Materials’ stockpiling efforts are  proactive, according to DOD officials, the department has never used the  rare earths from the National Defense Stockpile and does not know the  time and cost to establish the capability to process the stockpiled material  into a usable form, a necessary step to implement mitigating actions.  Currently, there is a limited commercial capability in the United States for  processing certain types of rare earths used in defense applications,  according to government and industry officials. We previously reported in  April 2010 that rebuilding a domestic rare earths supply chain may take  significant time and money. Industry representatives we spoke with  during this review agreed that while there is domestic expertise, with  limited domestic capability, turning certain stockpiled rare earths into a  useable form would most likely have to be conducted outside the United  States, which may also introduce risks of a supply disruption. SMPB has  also not built upon DLA-Strategic Materials work to understand what is  necessary to use the stockpiled materials.
According to defense officials, complete data on the use of rare earths in  the defense industrial base are limited and challenging to collect, which  can limit assessments of the defense supply chain needed to  comprehensively address risks. For example, the Defense Contract  Management Agency–Industrial Analysis Center, which conducts  analyses of the industrial base for DOD, surveyed prime contractors and  select subcontractors of acquisition category I programs—with a  procurement cost of more than $2.79 billion—about their supply chains  for rare earths. According to Industrial Analysis Center officials, only 10  percent of surveys sent to prime contractors for 79 acquisition category I  programs in July 2014 were returned with meaningful information. The  prime contractors reported that among the reasons for not responding  were concerns about the release of sensitive information and non- disclosure agreements with suppliers.
Although officials from MIBP and DLA-Strategic Materials also told us that  their offices do not have the resources to track rare earths through  defense supply chains from ore to weapon system, the SMPB has not  leveraged the department’s dispersed expertise in order to analyze the  impact of unavailability on national defense. We found DOD officials who  understood the vulnerability and effect of unavailability of rare earths  based on their knowledge of the supply chain for select weapon systems.  For example, a DOD-wide subject matter expert in radars at Naval  Surface Warfare Center–Crane told us that rare earth magnets enable  microwave tubes to effectively focus the radar’s energy. Without the  magnets, the radars cannot function and provide the needed capability to  the warfighter. Further, he said that there are no substitutes for the rare  earths in these magnets. His assessment was based, in part, on his  knowledge of and relationships with sub-tier contractors and weapon  system program officials. See figure 5 for a graphic example of how rare  earths enter the defense supply chain for radars based on information  from a defense industrial base report on radars, a subject matter expert  and other DOD officials, and company representatives. He added that  after the potential unavailability of rare earths in 2010, the Navy made a  deliberate effort to understand the materials, vendors, and supply chains  for DOD radars in order to determine the impact if rare earths were  unavailable. We found the Navy’s efforts are similar to some of the  company approaches, discussed earlier, for managing risk. DLA-Strategic  Materials officials later said that it is not always necessary to track a  material through the supply chain to the weapon system to make a  stockpiling recommendation but did so when beneficial. For example, for  scandium used in ships, DLA-Strategic Materials did conduct a study that  went from mine to platform and included program offices and prime  contractors in their research due to specific manufacturing issues.
Federal internal control standards state that management should define  objectives clearly to enable the identification of risks and define risk  tolerances in specific and measurable terms, including defining what is to  be achieved, who is to achieve it, how it will be achieved, and time frames  for achievement. Ultimately, SMPB has a goal of ensuring availability of  rare earths that are critical to national security. DOD has taken actions  without knowing the extent of the underlying risks the unavailability of rare  earths have on its weapon systems specifically and national defense  generally. By taking a comprehensive approach to meet this goal, such as  addressing processing of stockpiled materials from identified shortfalls  and defining metrics to measure risk and mitigating actions, the SMPB  may be better positioned to guide other DOD offices when to report rare  earths availability issues and to analyze the impact of the unavailability of  the materials.
section_title: Conclusions
paragraphs: Reliable access to the material it needs, such as rare earths, is a bedrock  requirement for DOD. Accordingly, a department-wide approach that  facilitates DOD focusing its resources on those rare earths that are critical  to national security would enable the department to meet its needs before  supply for a specific rare earth becomes an emergency. However, DOD  has no comprehensive, department-wide approach to determine which  rare earths are critical to national security, and how to deal with potential  supply disruptions to ensure continued, reliable access. It is important  that such an approach includes, for example, leveraging the dispersed  expertise in the department to identify which rare earths are critical,  analyzing risks to their supply and the effects of a potential disruption,  and taking actions to mitigate the specific risks. Developing a  comprehensive approach for ensuring a sufficient supply of rare earths for  national security needs—one that can establish criticality, assess supply  risks, and identify mitigating actions—would better position DOD to help  ensure continued functionality in weapon system components should a  disruption occur, even though supply disruptions in rare earths have not  occurred over the last several years. SMPB, with its statutory  responsibility and leadership from MIBP and DLA-Strategic Materials, is  well-positioned to take the lead on such an approach.
There is not yet agreement on what constitutes “critical” rare earths.  While various organizations’ definitions of critical may be similar, DOD  has identified 15 of the 17 rare earths as critical over the last 5 years.  This makes establishing priorities to analyze supply risk difficult. DLA- Strategic Materials does a methodical job of analyzing risks for all  materials, but its focus is a four-year timeframe with stockpiling as its  mitigation tool. MIBP relies on other DOD organizations to identify and  elevate risks, relies primarily on the market to resolve supply disruptions,  and has not put in place measures to evaluate the success of its  mitigating actions. The efforts by the military departments, such as the  Navy, to identify and mitigate risks by monitoring the defense supplier  base have been limited in scope or lacked department-wide involvement.  Without clear definitions and metrics to identify associated risk tolerances,  it will be difficult for MIBP to monitor and adjust its mitigating actions.
section_title: Recommendations for Executive Action
paragraphs: To fully identify and mitigate risks associated with the availability of rare  earths, we recommend that the Secretary of Defense take the following  three actions:
Direct the SMPB to designate which, if any, rare earths are critical to  national security in order to provide a common DOD understanding of  those materials and focus resources.
Direct the SMPB to analyze the effect of unavailability of rare earths  designated as critical to national security and develop a strategy to  help ensure a secure supply for those designated critical to national  security.
Direct MIBP to define reliable sources and secure supply for rare  earths in measurable terms and to provide metrics to determine the  effectiveness of its actions to better ensure continued availability.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for review and comment. DOD  concurred with all our recommendations. DOD’s written comments are  reprinted in appendix II. DOD and the United States Geological Survey  also provided technical comments that we incorporated into the report as  appropriate.
DOD concurred with our first two recommendations to the Secretary of  Defense to direct the SMPB to designate which rare earths, if any, are  critical to national security and to analyze the effects of the unavailability  of rare earths critical to national security. In DOD’s written response it  identified that the SMPB will convene a meeting with the purpose of  accomplishing both these tasks before the end of fiscal year 2016.
DOD also concurred with our recommendation to the Secretary of  Defense to direct MIBP to define reliable sources and secure supply for  rare earths and provide metrics to determine the effectiveness of its  actions. In response DOD wrote that MIBP addresses this  recommendation by carrying out its responsibilities under 10 U.S.C. §  139c by providing its input to the Secretary of Defense’s Biennial Report  on Stockpile Requirements and that the metrics and analyses used in  Biennial Report on Stockpile Requirements do evaluate the effectiveness  of the department’s actions. However, we are concerned whether the  Biennial Report on Stockpile Requirements addresses the department’s  responsibilities under 10 U.S.C. § 139c. As stated earlier in the report, in  carrying out responsibilities under 50 U.S.C. § 98 et seq., DLA-Strategic  Materials officials caveat their analyses as being valid for a single point in  time and for decisions related to the National Defense Stockpile and not  for other statutory responsibilities such as MIBP’s identification of  materials critical to national security in 10 U.S.C. § 139c. Further, MIBP,  in its response, has not explained how its input for the Biennial Report on  Stockpile Requirements will define reliable sources and secure supply,  and what metrics that the report will provide to determine the  effectiveness of the department’s mitigation efforts.
In addition, DOD, in its technical comments, disagreed with our  characterization that DOD has no department-wide approach for critical  materials. We agree that DLA-Strategic Materials’ process may be  ongoing, methodical, and incorporate information from DOD, government,  and industry sources, however, as stated in the report, the assessments  are limited to a four-year time frame related to DOD defined national  emergencies. Further, during our review, DLA-Strategic Materials officials  told us that they caveat their analyses as being valid for a single point in  time and for decisions specifically related to the National Defense  Stockpile, and thereby not necessarily for determining criticality for  national security purposes. We continue to believe our findings  demonstrate the need for a comprehensive approach for ensuring a  sufficient supply of rare earths for national security needs—one that can  establish criticality, assess supply risks, and identify mitigating actions— beyond planning scenarios used for purposes of the National Defense  Stockpile. Such an approach would better position DOD to help ensure  continued functionality in weapon system components should a disruption  occur.
We are sending copies of this report to the appropriate congressional  committees and the Secretary of Defense. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or makm@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Joint Explanatory Statement accompanying the Carl Levin and  Howard P. “Buck” McKeon National Defense Authorization Act (NDAA)  for Fiscal Year 2015 included a provision for GAO to review the  Department of Defense’s (DOD) efforts to identify and mitigate risks in its  rare earth materials (rare earths) supply chain, including the Defense  Logistics Agency-Strategic Materials’ (DLA-Strategic Materials)  stockpiling efforts. We assessed the extent that DOD (1) determined  which rare earths, if any, are critical to national security; and (2) has  identified and mitigated risks associated with rare earths, including the  effects of a potential supply disruption.
To determine the extent DOD identified which rare earths, if any, were  critical to national security, we reviewed DOD reports from 2011 to 2015  to understand the analyses and criteria that DOD conducted and used to  determine critical rare earths. We selected 2011 to 2015, because we last  reported on rare earths in 2010. We reviewed DOD reports from the  Office of the Undersecretary of Defense for Acquisition, Technology, and  Logistics including the biennial Strategic and Critical Materials Report on  Stockpile Requirements for the National Defense Stockpile and the  Annual Industrial Capabilities Report from 2011 through 2015 to  determine the analyses DOD had conducted to identify which rare earths  may be critical. We reviewed relevant legislation including the Strategic  and Critical Materials Stock Piling Act (50 U.S.C. § 98 et seq.), 10 U.S.C.  § 139c that outlines the responsibilities of the Office of the Deputy  Assistant Secretary of Defense for Manufacturing and Industrial Base  Policy (MIBP), and 10 U.S.C. § 187 that outlines the duties of the  Strategic Materials Protection Board (SMPB). We also reviewed available  meeting minutes from the SMPB from 2007 through 2015. Further we  reviewed relevant DOD components' actions to determine if they had  separately identified any critical rare earths in their supply chains. We  interviewed DOD officials from MIBP, SMPB, and DLA-Strategic  Materials, which is the program manager of the National Defense  Stockpile. In addition, we collected data, documents, and conducted  interviews with officials from the DOD components, such as Defense  Procurement and Acquisition Policy and the Office of the Assistant  Secretary of Defense for Logistics and Materiel Readiness, the military  departments—Air Force, Army, and Navy—and their respective research  laboratories, and members of the Joint Industrial Base Working Group.  We collected data supporting DLA-Strategic Materials assessment of  materials from 2011 to 2015, documents, and conducted interviews with  officials at other offices and agencies that had knowledge of rare earths,  the defense industrial base, and the National Defense Stockpile including:  Office of the Inspector General; Defense Logistics Agency, Warstopper  Program; Congressional Research Service; the Department of the  Interior, United States Geological Survey; Department of Commerce,  Bureau of Industry and Security; and the Department of Energy.
To assess the extent to which DOD has identified risks and taken action  to mitigate the risks associated with the availability of rare earths, and  analyzed the effects of a potential supply disruption, we reviewed DOD  reports from 2011 to 2015 to understand the analyses DOD had  conducted to identify risks related to the availability of rare earths and any  mitigating actions. We reviewed DOD reports from the Office of the  Undersecretary of Defense for Acquisition, Technology, and Logistics  including the biennial Strategic and Critical Materials Report on Stockpile  Requirements for the National Defense Stockpile and the Annual  Industrial Capabilities Report from 2011 through 2015 to determine the  analyses DOD had conducted to identify and mitigate risks from rare  earths. We reviewed relevant legislation including the Strategic and  Critical Materials Stock Piling Act (50 U.S.C. § 98 et seq.), 10 U.S.C. §  139c that outlines the responsibilities of MIBP, and 10 U.S.C. § 187 that  outlines the duties of the SMPB. In addition, we reviewed applicable  policies, such as DOD Instruction 5000.60, Defense Industrial Base  Assessments (July 18, 2014), to determine additional requirements for  DOD in managing risks in its rare earths supply chain. We also reviewed  available meeting minutes from the SMPB from 2007 through 2015.  Further we reviewed relevant DOD components' actions to determine if  they had separately identified any risks from rare earths in their supply  chains and taken mitigating actions. We interviewed DOD officials from  MIBP, SMPB, and DLA-Strategic Materials, the program manager of the  National Defense Stockpile. We also collected documents and conducted  interviews with the Institute for Defense Analyses, a not-for-profit  corporation that operates three federally funded research and  development centers, that conducts research and created and operates  the econometric model for DLA-Strategic Materials; and with Oak Ridge  National Laboratory, a federally funded research and development center  that developed the Strategic Materials Analysis and Reporting  Topography software tool. In addition, we collected data, documents, and  conducted interviews with officials from the DOD components, such as  Defense Procurement and Acquisition Policy and the Office of the  Assistant Secretary of Defense for Logistics and Materiel Readiness, the  military departments—Air Force, Army, and Navy—and their respective  research laboratories, and members of the Joint Industrial Base Working  Group. We collected data, documents, and conducted interviews with  officials at other offices and agencies that had knowledge of rare earths,  the defense industrial base, and the National Defense Stockpile including:  Defense Contract Management Agency–Industrial Analysis Center; Office  of the Inspector General; Defense Logistics Agency, Warstopper  Program; Congressional Research Service; the Department of the  Interior, United States Geological Survey; Department of Commerce,  Bureau of Industry and Security; and the Department of Energy.
We conducted interviews and collected information for a non- generalizable sample of 20 cases for illustrative purposes on rare earths  and materials risk management that included:
Three DOD offices (Naval Surface Warfare Center–Crane both  Radars and Lasers, and Army Program Executive Office for  Ammunition) with purview over at least seven weapon systems  selected on rare earths in the weapon systems;
Three vendors of rare earth components selected on rare earths in
Two rare earths companies selected on rare earths in their products;
One trade association selected on its involvement in the rare earth
Six individuals selected on their knowledge of rare earths;
Three defense contractors selected on their defense products and  materials risk management processes; and
Two companies, including a petroleum company, selected on their  materials risk management processes.
We reviewed DOD’s sources of data for its analytical processes. Based  on our review, we determined that the information that we collected were  sufficiently reliable for our report. We assessed DOD’s policies,  procedures, and practices against criteria in applicable statutes,  Standards for Internal Control in the Federal Government, and GAO’s  framework for risk assessment.
We conducted this performance audit from February 2015 to February  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact name above, the following staff members made  key contributions to this report: Penny Berrier, Assistant Director; James  Kim; Matthew Jacobs; Jeffrey Harner; Stephanie Gustafson; Bob  Swierczek; Roxanna Sun; Marie Ahearn; Jean McSween; Katrina Pekar- Carpenter; Pedro Almoguera; Godwin Agbara; Chris Murray; and Darnita  Akers.