National Defense Stockpile: Disposal of Excess Zinc
Published: 1996-11-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reviewed issues surrounding a dispute between the American Zinc Association (AZA) and the federal government about the Department of Defense's (DOD) sale of excess zinc from the National Defense Stockpile, focusing on: (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.
section_title: What GAO Found
paragraphs: GAO found that: (1) the statute that governs sales from the stockpile does not define the usual markets for stockpile materials; (2) accordingly, executive branch officials have discretion in identifying the relevant market for particular sales; (3) the Defense Logistics Agency's Defense National Stockpile Center (DNSC) and the Market Impact Committee, 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; (4) AZA considers the usual market to be the U.S. market for only the particular grades being sold from the stockpile; (5) GAO believes the government's determination has a sound basis; (6) the determination is based on practices that exist in the zinc industry, and it is consistent with the views of zinc market participants with whom GAO discussed this matter; (7) DNSC has policies and procedures for selling zinc without unduly disrupting the zinc market; (8) specifically, it has: (a) publicized its policy on timing of sales, amounts to be sold, and relation of sales prices to market prices; (b) provided plans to the appropriate congressional committees for approval; (c) sold less zinc than it was authorized to sell; and (d) given increased emphasis to selling at prices close to commercial market prices; (9) the government recognizes that stockpile sales can affect some sellers more than others, despite its attempts to minimize disruption; (10) 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; (11) the increase in zinc supplies can lower prices and cause particular producers or processors to lose business; (12) however, the Market Impact Committee contends that this is normal commercial activity, not an undue disruption; and (13) DNSC plans to continue to closely monitor prices when accepting bids to ensure that the market is not unduly disrupted.

section_title: Letter
paragraphs: This report responds to your request that we review issues surrounding a dispute between the American Zinc Association (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.
subsections: section_title: Background
paragraphs: 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 tons 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). “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.”
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. Between 1993 and March 1996, DNSC sold approximately 77,000 tons 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.
section_title: Government’s View of Usual Market for Zinc Has a Sound Basis
paragraphs: 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.
subsections: section_title: Statute Does Not Specify the Market the Government Is to Examine
paragraphs: 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 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.
section_title: Government’s Position Has a Sound Basis
paragraphs: 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, 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.
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.
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 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.
section_title: DNSC Has Policies and Procedures to Avoid Unduly Disrupting the Zinc Markets
paragraphs: 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.
subsections: section_title: DNSC’s Policy Is Publicized
paragraphs: 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.
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.
section_title: DNSC Has Sold Less Than It Was Authorized
paragraphs: 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.
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.
section_title: DNSC Has Shown Concern for Selling Closer to Market Prices
paragraphs: 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 Exchange 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 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.
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 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.
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 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.)
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 avoiding an undue disruption. It is important that DNSC accept prices for its zinc that are as close to market prices as possible.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
section_title: Scope and Methodology
paragraphs: 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 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:
Big River Zinc Corp., Sauget, Illinois
Huron Valley Steel, Belleville, Michigan
Savage Zinc, Inc., Clarksville, Tennessee
Zinc Corporation of America, Monaca, Pennsylvania
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.
We performed our review from December 1995 to August 1996 in accordance with generally accepted government auditing standards.
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.
section_title: Defense National Stockpile Center Zinc Stockpile Storage Sites and Inventory
paragraphs: Scotia, N.Y. Voorheesville, N.Y.
Somerville, N.J.
Marietta, Pa. Mechanicsburg, Pa. Chambersburg, Pa.
Point Pleasant, W.Va.
Huntsville, Ala.
subsections: section_title: Table I.1: Zinc Inventory by Storage Site
section_title: Information on the Dispute Between the Government and the American Zinc Association Concerning Market Size
paragraphs: 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.
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” galvanizersuse, 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, 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.
section_title: Summary of DNSC’s Sales Activities
paragraphs: Prices accepted as measured against the London Metal Exchange price (range in percent)
section_title: Comments From Governmental Organizations
section_title: Comments From the American Zinc Association
paragraphs: The following are GAO’s comments on the American Zinc Association’s letter dated September 6, 1996.
subsections: section_title: GAO Comments
paragraphs: 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 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. 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.
section_title: Comments From Individual Members of the American Zinc Association
paragraphs: The following are GAO’s comments on letters from individual members of AZA.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: Comments From Other Interested Parties
section_title: Major Contributors to This Report
subsections: section_title: National Security and International Affairs Division, Washington, D.C.
paragraphs: 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 The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.
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