6
Potential Economic Scenarios for the U.S. Supply of Chromium Metal and the Role of the National Defense Stockpile
Previous chapters indicate that the chromium-metal industry is currently sufficiently healthy to produce the quantities of high-purity chromium metal required by the aerospace industry. This favorable situation, however, could change. This chapter first presents the committee 's deliberations concerning the general question of how to balance trade policy with national security issues. The chapter then examines the role of the National Defense Stockpile and its responsibility to ensure that sufficient quantities of critical materials are available in case of a national emergency. It then considers several possible situations that could conceivably give rise to shortages in the future and the need for public policies to cope with such situations should they arise.
FREE TRADE VERSUS NATIONAL SECURITY
Since high-purity chromium metal is an essential ingredient in the production of both military and civilian jet engines, the committee first had to address the general question of how to balance trade policy with national security issues. It is widely agreed among economists that mutual loosening of trade restrictions among countries raises standards of living among all of them, although possibly in different degrees in different countries. This theory was originally forwarded by Adam Smith (1776), but even he believed that a valid argument could be made for protecting those industries that are essential to national security because of the ease by which world trade patterns can be disrupted.
Adam Smith wrote at a time when the chief means of transportation were the stagecoach and the sailing ship; the enormous reduction in transport costs since then has led to a highly integrated international market with countries specializing to an increasingly greater extent in products for which they have a comparative advantage. Thus the current cost of national self-sufficiency is much
greater than it was in the past. The British Empire, protected by the Royal Navy, formed a fairly self-sufficient unit in the nineteenth century from the point of view of national security. Since what is essential for national security is secure and rapid access to strategic materials, NATO could be regarded as a modern and similarly secure region.
The three main methods of protecting a domestic source of a material are the imposition of import restrictions, the granting of government subsidies, or the establishment of stockpiles. All three of these methods have disadvantages.
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Import restrictions can cause an increase in domestic prices, which increase costs for domestic chromium-metal users (i.e., jet engine and aircraft producers) and decrease their competitiveness in the international marketplace.
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Government subsidies strain both the U.S. budget and international relations. Protection of domestic suppliers by either subsidies or import restrictions could create difficulties with the new World Trade Organization and lead to retaliation on the part of European producers.
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Stockpiling can cause initial price increases in a commodity when the government enters the market. The liquidation of stockpiles can also depress prices if supply outpaces demand.
The committee believes that stockpiling is the most benign of the methods of ensuring that a material is available during a period of crisis. Thus the committee agrees that a reasonable point of departure would be that the disadvantages of taking active measures to protect a domestic industry would probably outweigh any advantages, provided that an adequate stockpile were maintained.
NATIONAL DEFENSE STOCKPILE
The National Defense Stockpile is maintained by the Defense Logistics Agency to provide the United States with a supply of strategic and critical raw materials in the event of a national emergency. By law these materials can only be used in the interest of national security and cannot be used for economic purposes.
The U.S. Department of Defense mandates the types and quality of materials that are maintained in the stockpile. The requirements are reviewed
biennially, using input from the U.S. Departments of State, Commerce, and Interior. The most recent report on requirements published in 1993, requires an inventory of 24,344 metric tons of chromium metal. The stockpile currently retains 7,700 metric tons of material, of which the National Defense Stockpile technical staff estimates that between 3,500 and 4,500 metric tons is suitable for aerospace applications.
The collapse of the Soviet Union in 1992 has caused the Department of Defense to reassess the quantities of materials required in the stockpile and has raised the question of whether there is any continuing need to have a stockpile at all. As of this writing, no decision has been made concerning what disposition is to be made of the 7,700 metric tons of chromium metal currently retained. All indications suggest that the Department of Defense will most likely find little or no continuing need for any of the materials in the stockpile, however, chromium metal included. The committee recommends that the National Defense Stockpile should maintain and continually upgrade to industry standards a sufficient quantity of high-purity chromium metal to meet the industry's needs in the event of an emergency.
As stated in Chapter 1 and Chapter 2, the domestic aerospace industry requires approximately 2,000-2,500 metric tons of material annually. In the case of a national emergency, the 1994 stockpile inventory is sufficient to provide an approximate two-year supply of metal and sustain the aerospace industry until new aluminothermic and degassing facilities are brought into operation if (1) the metal is totally devoted to the aerospace industry, (2) the demand for chromium metal does not suddenly increase, and (3) the domestic source of metal is no longer in production.
POTENTIAL ECONOMIC SCENARIOS FOR THE U.S. SUPPLY
Most U.S. aerospace melters buy chromium metal from a variety of sources, and as a group they buy from all of the world's major producers. The one possible exception is the secondarily treated Russian electrolytic material, which is currently being evaluated.
Given what is now known about the chromium-metal market, chromium-metal producers, and global economics and politics, it is possible to construct scenarios where shortages of high-purity chromium metal could arise. Three such scenarios are presented in this section. The first envisages a worldwide surge in demand for high-purity chromium metal. The second assumes both a surge in demand and the closure of the one significant domestic producer,
Elkem. The third, building on the second scenario, considers the additional loss of one or more foreign suppliers to the U.S. market. The latter two scenarios are highly unlikely within the foreseeable future but provide worst-case scenarios. These scenarios, it is important to stress, are not predictions by the committee but simply situations that could conceivably occur. They are all based on the data presented above and summarized in Table 6-1.
Scenario 1: A Surge in Demand for High-Quality Chromium Metal
The impact that an increase in the demand for aerospace-quality chromium metal would have on the marketplace depends on its magnitude. If demand suddenly were to jump to 4,000 metric tons per year, existing world capacity would still be capable of meeting demand. The U.S. producer could supply up to 3,000 metric tons per year, the French producer could increase supply to 1,000 metric tons per year, and the German producer could increase supply by at least 1,000 metric tons per year. Material from Russia and the new plant in the United Kingdom would be available as well. Additional sources of aluminothermic chromium metal could also be quickly redirected or initiated. As stated in Chapter 1, there are no aluminothermic chromium-metal production plants currently extant in the United States, but existing aluminothermic production plants that produce other high-purity metals could produce chromium metal if required. Also, since the aluminothermic process is not as capital-equipment intensive as the electrolytic process, the construction of new facilities appears to be a minor factor should the need arise.
TABLE 6-1 Data Used as Basis for Discussion on Scenarios
Chromium-Metal Statistics |
Metric Tons per Year |
Current world demand (secondarily treated for aerospace applications) |
2,000-2,500 |
U.S. supply |
3,000 |
National stockpile (total) |
7,700 |
National stockpile (aerospace quality) |
3,500-4,500 |
If demand should dramatically increase to 6,000 metric tons per year, doubling or tripling current levels, the resulting rise in market price would encourage the French, German, British, and Russian suppliers to increase their supply, perhaps to 2,000 metric tons per year from each source. The U.S. producer could supply up to 3,000 metric tons per year operating at two shifts and up to 4,500 tons per year by adding a third shift. Its output might be further increased by vacuum-degassing purchased material and upgrading it to aerospace quality. The vacuum-degassing capacity of the U.S. producer is very large, above any foreseen demand requirement. Again, within a year or so, new production capacity could be added. Finally, defense production can, if necessary, obtain chromium metal either by government allocation or by outbidding other potential uses.
Scenario 2: Loss of the Domestic Industry
This scenario assumes that Elkem, the one significant U.S. producer, closes down as a result of a plant failure, the loss of economic competitiveness, environmental problems, or some other factor. The increases in chromium-metal output for this scenario would not be very different than that described for scenario 1. Prices would rise, providing strong incentives to expand existing sources, to qualify Russian material quickly, and to develop new sources as required. The two predominant differences between the first and second scenarios would be that Elkem customers would be forced to buy high-purity chromium metal from foreign suppliers and that a major vacuum-degassing facility would be lost. As stated in Chapter 4, the degassing operations are harder to initiate quickly because of the relatively large vacuum furnaces needed. A new vacuum-degassing facility could be constructed within two years, however, if the need were sufficiently great.
If Elkem were to go out of business, certain economic and security benefits derived from having a domestic producer would be lost. First, the local economy in Ohio would suffer for several years or even longer. For instance, many of the company's 632 employees would likely require retraining or relocation, and the community would lose part of its tax base. Second, ease of communication between the downstream users of high-purity chromium metal in the United States and their suppliers could be restricted. Unimpeded communication is important for developing improved materials and resolving problems. Third, the security of domestic supplies of high-purity chromium metal could be compromised. Imports are susceptible to restrictions or curtailments imposed by foreign governments. Fourth, the upgrading of the
National Defense Stockpile of chromium metal might suffer. The chromium metal must be periodically upgraded to maintain the quality standards required by the aerospace industry. This task was previously carried out by domestic producers. Fifth, the United States might lose the technology needed to produce high-purity chromium metal. Domestic production helps ensure that the required technologies are locally available, should the need to expand capacity arise.
While the benefits of domestic production are significant, they do not, in the judgment of the committee, justify the government protecting or in other ways subsidizing domestic production. Local economic benefits, such as jobs and tax revenues, can be claimed by almost any company. Modern technology makes communication between U.S. consumers and foreign producers almost as easy as between U.S. consumers and domestic producers. Foreign governments, out of self-interest, are unlikely to restrict exports of chromium metal and similar commodities where new production capacity can be relatively cheaply and quickly constructed abroad. Such actions call into question the reputation of their own producers as reliable sources of supply and undermine their ability to compete in the international market. For the same reason, foreign producers are likely to be just as eager and able to upgrade the chromium metal in the National Defense Stockpile as a domestic producer. Finally, the technology for producing high-purity chromium metal is well understood and widely available with or without domestic production.
In weighing these benefits of domestic production, one should also consider the costs. Today, Elkem is a competitive producer and needs neither protection nor subsidy. Were this not the case, the costs of domestic production could be substantial, extending far beyond just the financial burden that subsidies and protection entail. Insulation from foreign competition, particularly when there are few if any other domestic rivals, reduces the incentives to innovate and increase efficiency. Vested interests arise and resources are devoted to lobbying and other efforts to keep or extend favorable government policies. Domestic consumers may be forced to pay more for their chromium metal than their foreign competitors, undermining the domestic companies ' ability to compete in both the domestic and international marketplace. Also, such efforts to sustain uncompetitive domestic production undermine the leadership role the United States should take in promoting international trade.
Scenario 3: Loss of Foreign Supply
This scenario, presumably the worst-case scenario, assumes the closure of domestic production followed by a surge in domestic demand for high-purity
chromium metal and a cutoff of part or all of foreign supply. Although highly unlikely, this scenario cannot be completely ruled out, particularly during a global military emergency. In such dire circumstances, releases from government and private stockpiles would provide sufficient chromium metal to sustain the highest priority needs, including those of the aerospace industry, while domestic production capacity was quickly constructed. As stated previously, it is technically feasible to bring new aluminothermic and degassing facilities into operation within 24 months, if necessary. Thus the existing inventory of high-purity chromium metal in the National Defense Stockpile could currently provide for most domestic requirements, including all military and essential civilian needs, while new aluminothermic and degassing facilities were constructed. During this time period, small experimental furnaces should be used to refine the degassing process and ensure that aerospace-quality chromium metal would be produced once the larger degassing facilities are brought on line. Since only about one-fifth of the chromium produced by the aluminothermic process is suitable for secondary treatment by the degassing process, unless the surge in demand for high-purity chromium is accompanied by a corresponding increase in demand for lower grades of chromium metal, additional uses for the less pure output would have to be found in the market place.