The Federal Emergency Management Agency (FEMA) has recommended that the government pay $15 to $25 a pound to encourage production of cobalt--a strategically important metal that can be bought for about $5 a pound.
Under the FEMA proposal, federal funds would be used to provide a guaranteed floor price for domestically produced cobalt, a practice that the General Accounting Office estimates could cost nearly $1 billion over a five-year period.
The issue arose Monday during hearings on legislation to extend the Defense Production Act beyond its scheduled expiration on March 31. The House of Representatives agreed yesterday to extend the act by six months by a voice vote. The Department of Defense has asked for $250 million over two years under a part of the act that authorizes alternatives to stockpiling minerals, including price guarantees.
The administration has discussed using the price supports to expand domestic production of cobalt and other minerals, and the subsidies have been supported by Sen. James A. McClure (R-Idaho). One of the two mines that might benefit is in Idaho; the other is in Missouri. Cobalt is used in jet engines and in other defense-related production.
Last year, McClure blocked a long-term renewal of the Defense Production Act, which has been extended by as little as 30 days and as long as two years since it first was scheduled to end in 1952.
A GAO official faulted the FEMA study that led to the recommendation of price supports and proposed that the Defense Production Act be amended to allow for more thorough analysis of such proposals.
Providing high price supports for domestic production of cobalt appears to be a "highly questionable expenditure, in my opinion," said Sen. Paul Trible (R-Va.) the Banking Committee member who was chairman for Monday's hearing.
FEMA made its recommendation as part of an effort to determine how best to rebuild cobalt availability to meet the National Defense Stockpile goal of 85.4 million pounds.
J. Dexter Peach, director of GAO's resources, community and economic development division, told the hearing that FEMA's proposal to stimulate domestic production of cobalt was based on faulty or outdated data. Peach said that studies by the Commerce and Interior departments in 1981 projected a price of $18 a pound or less through 1990.
FEMA assumed, in contrast, that the price would increase to more than $36 a pound, but--in fact--the price has declined to less than $6 a pound since FEMA completed its analysis, Peach noted.
If the price stays at that level and if the price guarantees rise to $25 a pound, the guarantee could cost $950 million, Peach said. Buying cobalt on the open market at today's prices would cost only $235 million, he said.
Peach also referred to a 1981 Bureau of Mines study concluding that, because reserves are limited, domestic cobalt production never could relieve dependence on imports from countries such as Zaire and Zambia.
Paul Krueger, FEMA's assistant associate director for resources preparedness, said that the two mines had expected lives of 30 and 50 years and that the interval of domestic production would be long enough to allow development of alternate materials or supplies. He also said that domestic production would have other benefits, including job creation.
But he added, "I would agree that at $6 a pound the proposal does not look as attractive as it did at $25 a pound, but that--of course--is hindsight."
Administration officials testified in favor of a five-year extension of the act but said they oppose a jobs provision that has been proposed as an addition to the extension. Trible indicated he would attempt to amend the DPA to allow for more review of how funds are spent under the part of the act that would allow price supports and other devices to be used.