The Defense Logistics Agency’s Defense National Stockpile Center (DNSC) has managed the stockpile since 1988. Government’s View of Usual Market for Zinc Has a Sound Basis

When evaluating the potential for undue market disruption, DNSC and the Market Impact Committee consider the usual market for zinc to be the total U.S. market for all grades of the commodity. AZA contends, however, that the statute requires an evaluation based only on the markets for the grades of zinc the stockpile plans to sell. 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. 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. One major U.S. zinc producer, for example, produces only one grade of zinc, which is one of those DNSC has offered for sale. Some customers taking advantage of lower prices from a new supplier is a normal commercial activity. 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. Table 1 provides a summary of the amounts requested and approved. 4.) DNSC plans to continue to closely monitor prices when accepting bids to ensure that the market is not unduly disrupted. Scope and Methodology

The focus of our work was on the dispute between the government and AZA as it related to the government’s interpretation of the statutory phrase “usual markets” as applied to the zinc sales program, and DOD’s efforts to not unduly disrupt the zinc market. To 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. 2. 3. 5. 6. 8. 9. 10. 2.
Why GAO Did This Study

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.

What GAO Found

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.