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Notice2021-23301

Publication of a Report on the Effect of Imports of Titanium Sponge on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended

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Published

October 26, 2021

Issuing agencies

Commerce DepartmentIndustry and Security Bureau

Abstract

The Bureau of Industry and Security (BIS) in this notice is publishing a report that summarizes the findings of an investigation conducted by the U.S. Department of Commerce (the "Department") pursuant to Section 232 of the Trade Expansion Act of 1962, as amended ("Section 232"), into the effect of imports of titanium sponge on the national security of the United States. This report was completed on November 29, 2019 and posted on the BIS website in July 2021. BIS has not published the appendices to the report in this notification of report findings, but they are available online at the BIS website, along with the rest of the report (see the ADDRESSES section).

Full Text

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[Federal Register Volume 86, Number 204 (Tuesday, October 26, 2021)]
[Notices]
[Pages 59115-59147]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-23301]

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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

RIN 0694-XC081

Publication of a Report on the Effect of Imports of Titanium
Sponge on the National Security: An Investigation Conducted Under
Section 232 of the Trade Expansion Act of 1962, as Amended

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Publication of a report.

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SUMMARY: The Bureau of Industry and Security (BIS) in this notice is
publishing a report that summarizes the findings of an investigation
conducted by the U.S. Department of Commerce (the ``Department'')
pursuant to Section 232 of the Trade Expansion Act of 1962, as amended
(``Section 232''), into the effect of imports of titanium sponge on the
national security of the United States. This report was completed on
November 29, 2019 and posted on the BIS website in July 2021. BIS has
not published the appendices to the report in this notification of
report findings, but they are available online at the BIS website,
along with the rest of the report (see the ADDRESSES section).

DATES: The report was completed on November 29, 2019. The report was
posted on the BIS website in July 2021.

ADDRESSES: The full report, including the appendices to the report, are
available online at <a href="https://bis.doc.gov/232">https://bis.doc.gov/232</a>.

FOR FURTHER INFORMATION CONTACT: For further information about this
report contact Erika Maynard, Special Projects Manager, (202) 482-5572;
and Leah Vidovich, Management and Program Analyst, (202) 482-1819. For
more information about the Office of Technology Evaluation and the
Section 232 Investigations, please visit: <a href="http://www.bis.doc.gov/232">http://www.bis.doc.gov/232</a>.

SUPPLEMENTARY INFORMATION:

The Effect of Imports of Titanium Sponge on the National Security

An Investigation Conducted Under Section 232 of the Trade Expansion Act
of 1962, as Amended

U.S. Department of Commerce, Bureau of Industry and Security, Office of
Technology Evaluation

November 29, 2019

Table of Contents

I. Executive Summary
II. Legal Framework
A. Section 232 Requirements
B. Discussion
III. Investigation Process
A. Initiation of Investigation
B. Public Comments
C. Information Gathering and Data Collection Activities
D. Interagency Consultation
IV. Product Scope of the Investigation
V. Background on the U.S. Titanium Industry
A. Titanium Sponge Manufacturing
1. Kroll Process
2. Hunter Process
B. History of U.S. Titanium Sponge Production
C. Titanium Melting and Finished Titanium Products
VI. Global Titanium Sponge Industry Conditions
A. Overview
B. Prior Trade Investigations
C. U.S. Duties on Titanium Sponge Imports
VII. Findings
A. Titanium Sponge Is Essential to U.S. National Security
1. Titanium Sponge Is Required for National Defense Systems
2. Titanium Sponge Is Required for Critical Infrastructure
3. Titanium Is Considered a Critical Mineral
B. The Economic Decline of the U.S. Titanium Sponge Industry Is
Caused by Increased Imports of Titanium Sponge
1. U.S. Reliance on Imports of Titanium Sponge Is Increasing
2. Although Imports of Sponge Are Increasing, U.S. Dependence on
Non-U.S. Titanium Semi-Finished and Finished Products is Minimal
3. Price History and Recent Price Trends
4. Employment Trends
5. Financial Outlook
6. Research and Development
7. Capital Expenditures
C. Diminishing U.S. Titanium Sponge Production Capacity May
Impair the National Security in the Future
1. U.S. Production Is Well Below Domestic Demand
2. Domestic Titanium Sponge Capacity Is Highly Concentrated and
Limits Capacity Available for a National Emergency
3. [TEXT REDACTED]
D. Increased Global Titanium Sponge Capacity and Production
Further Impact the Long-Term Viability of U.S. Titanium Sponge
Production
1. Extreme Growth in Chinese Titanium Sponge Production Will
Place Downward Pressure on Global Titanium Sponge Prices
2. Increased Chinese and Russian Premium Quality Sponge
Production Threatens U.S. Aerospace Supply Chains
VIII. Conclusion

Appendices

Appendix A: Section 232 Investigation Notification Letter to Acting
Secretary of Defense Patrick Shanahan, March 4, 2019
Appendix B: Federal Register Notice--Notice of Requests for Public
Comments on Section 232 National Security Investigation of Imports
of Titanium Sponge, March 8, 2019

[[Page 59116]]

Appendix C: Summary of Public Comments
Appendix D: Survey for Data Collection (Producers and Melters of
Titanium Sponge)
Appendix E: Survey for Data Collection (End Users of Titanium
Sponge)
Appendix F: Trade Cases Involving Titanium Sponge, 1968-2017
Appendix G: U.S. Department of Defense Systems Using Titanium

Prepared by Bureau of Industry and Security

https://www.bis.doc.gov

I. Executive Summary

This report summarizes the findings of an investigation conducted
by the U.S. Department of Commerce (the ``Department'') pursuant to
Section 232 of the Trade Expansion Act of 1962, as amended
(hereinafter, the ``statute'' or ``Section 232''), into the effect of
imports of titanium sponge \1\ on the national security of the United
States.
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\1\ See Section IV, ``Product Scope of the Investigation,'' for
definition of titanium sponge.
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Titanium sponge is the product of the application of various
chemical processes on titanium ore, resulting in an end product called
titanium sponge. Premium quality titanium sponge is used as the basis
for titanium parts in many U.S. defense systems including military
fighter aircraft and engines, satellite parts, naval and commercial
ships, submarines, and military ground vehicles. Further, critical
infrastructure applications such as petrochemical facilities, energy
systems, water and sewer systems, and commercial aircraft and engines
all depend on varying purities of titanium sponge.
The ore used to make titanium sponge is readily available
worldwide. However, as of the date of this report, there is only one
active large-scale industrial plant in the United States that produces
titanium sponge. This facility is declining due to aging and damaged
facilities and overall low global prices for titanium sponge. This
facility only produced about [TEXT REDACTED] of U.S. consumption in
2018 and requires large-scale capital investment approaching [TEXT
REDACTED] for continued operations. At full production, this facility
would account for [TEXT REDACTED] of U.S. titanium sponge consumption
in 2018, or approximately [TEXT REDACTED] per annum.
The United States imports 68 percent of the titanium sponge needed
to fulfill domestic demand, largely from Japan, with smaller quantities
coming from countries such as Kazakhstan and Ukraine. Some foreign
producers, such as Russia's VSMPO-Avisma do not pass on the full cost
of titanium sponge to downstream consumers and offer artificially low-
priced finished titanium goods. This is most notable with VSMPO-
Avisma's joint venture with Boeing to produce titanium-based aircraft
parts in Russia for use in U.S.-assembled commercial aircraft.
China has a burgeoning capacity to manufacture titanium sponge.
However, at present almost all of China's titanium sponge production is
consumed by domestic demand. Nevertheless, Chinese producers are
developing export markets for their downstream titanium products, and
estimates indicate that at least 23 percent of all Chinese titanium
mill products are exported. As Chinese producers develop their
technical capabilities to include production of aerospace-grade sponge
suitable for use in rotating aircraft parts, China's impact on the
global titanium sponge and downstream titanium markets may grow.
If no action is taken, it is anticipated that by [TEXT REDACTED]
the U.S. may cease to have any domestic titanium sponge production
capacity when the current U.S. facility reaches the end of its useful
life. Despite national security concerns, for the reasons set forth in
detail herein, an adjustment of tariffs on imported titanium sponge
will not address the distortionary effect of non-market producers such
as Russia, and eventually China, on the global titanium sponge market.
An alternative approach could include the United States government
temporarily compensating U.S. industry for the difference between its
comparatively higher production prices and lower global sale prices,
affording U.S. industry time to make the investments required to reduce
production costs to a level comparable with other market producers, and
additional government stockpiles of U.S.-origin titanium sponge or
U.S.-melted titanium in a stable form such as ingots. This report also
examines the possibility for multilateral negotiations among the
world's market titanium sponge producers to constructively address low
prices, low inventory levels, and other factors that harm the U.S. and
other market producers.
As required by the statute, the Secretary considered all factors
set forth in Section 232(d). The Secretary examined the effect of
imports on national security requirements, specifically:
i. Domestic production needed for projected national defense
requirements;
ii. the capacity of domestic industries to meet such requirements;
iii. existing and anticipated availabilities of the human
resources, products, raw materials, and other supplies and services
essential to the national defense;
iv. the requirements for growth of such industries and such
supplies and services including the investment, exploration, and
development necessary to assure such growth; and
v. the importation of goods in terms of their quantities,
availabilities, character, and use as those affect such industries; and
the capacity of the United States to meet national security
requirements.
The Secretary also recognized the close relation of the economic
welfare of the United States to its national security. Factors that can
compromise the nation's economic welfare include, but are not limited
to, the impact of ``foreign competition on the economic welfare of
individual domestic industries; and any substantial unemployment,
decrease in revenues of government, loss of skills, or any other
serious effects resulting from the displacement of any domestic
products by excessive imports'' (19 U.S.C. 1862(d)). In particular,
this report assesses whether titanium sponge is being imported ``in
such quantities'' and ``under such circumstances'' as to ``threaten to
impair the national security.'' \2\
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\2\ 19 U.S.C. 1862(b)(3)(A).
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Findings

In conducting the investigation, the Secretary found:

A. Titanium Sponge Is Essential to U.S. National Security

1. Titanium sponge is essential to the manufacturing and
maintenance of U.S. defense systems. Titanium is used in many military
applications, including aircraft frames, jet and helicopter engines,
satellites, ships, submarines, and ground vehicles. Titanium sponge is
the intermediate product resulting from the conversion of titanium ore
into a form of titanium metal that can be melted to manufacture slab or
ingot, which in turn is used to produce finished titanium products.
Consequently, titanium sponge production is essential to the production
and sustainment of many U.S. defense systems, and preserving this
critical capability is imperative to the national security.
2. Further, Congress has implicitly recognized that titanium sponge
is critical to national security by including titanium as a strategic
material in the Specialty Metals Clause (10 U.S.C.

[[Page 59117]]

2533b). The clause requires all titanium used in national defense
systems to be melted or produced in the United States or a qualifying
country. Additionally, the Department of the Interior included titanium
on the 2018 List of Critical Minerals required by Executive Order 13817
(December 20, 2017). The list established titanium as essential to the
national security of the United States and found that the absence of a
titanium supply would have significant consequences for the U.S.
economy and the national security. An economically viable domestic
source of titanium sponge, therefore, strengthens and diversifies the
security of supply of U.S. semi-finished and finished titanium goods.
3. Titanium sponge is also vital for critical infrastructure.
Titanium sponge, as the intermediate product for titanium metal,
supports 15 of the 16 critical infrastructure sectors identified by the
Department of Homeland Security (DHS).\3\ Titanium sponge is used in
products that support critical infrastructure sectors such as
petrochemicals, energy systems, medical applications, transportation
systems, water systems, commercial airframe and aircraft engines, and
others.
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\3\ U.S. White House. Office of the Press Secretary. Critical
Infrastructure Security and Resilience. Presidential Policy
Directive 21. (Washington, DC: 2013) <a href="https://obamawhitehouse.archives.gov/the-press-office/2013/02/12/presidential-policy-directive-critical-infrastructure-security-and-resil">https://obamawhitehouse.archives.gov/the-press-office/2013/02/12/presidential-policy-directive-critical-infrastructure-security-and-resil</a>.
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B. The Continued Production of Titanium Sponge at the Sole Remaining
Domestic Producer Is Threatened

1. Though the U.S. was the first nation to commercialize titanium
sponge production in the 1950s, U.S. domestic titanium sponge
production capacity has declined significantly. In 1984, there were
five plants producing titanium sponge in the U.S.; by 2019, only one
producer capable of producing titanium sponge for defense, commercial,
and industrial applications remained. U.S. titanium sponge producers
had a combined capacity of [TEXT REDACTED] at two facilities in
2016,\4\ but the idling of one of these facilities in late 2016 reduced
available U.S. capacity to [TEXT REDACTED] in 2019.
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\4\ [TEXT REDACTED]
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2. TIMET, the sole remaining U.S. titanium sponge producer, also
has titanium melting operations. TIMET utilizes the entirety of its
sponge production to satisfy internal demand for their titanium melt
operations, which in turn manufactures semi-finished and finished
titanium products for defense and critical infrastructure applications.
The availability of economically viable titanium sponge production,
therefore, is an essential component in TIMET's continued melt
operations. It is important to note that TIMET's production of sponge
does not fully cover needs for their internal melt operations, and
TIMET imports about [TEXT REDACTED], on average, of its sponge needs
each year.
3. [TEXT REDACTED] The disparity between TIMET's U.S. sponge
production costs and non-U.S. sponge prices contributes to TIMET's
increasing difficulty in determining whether the return on investment
justifies continued sponge production.
4. TIMET, in addition to high production costs, must invest
approximately [TEXT REDACTED] in its sponge facility by [TEXT REDACTED]
in order to continue production due to ``end of life'' issues with
portions of their integrated production process (including the crucial
chlorination process). These essential, expensive capital investments,
coupled with the availability of low-priced imports, have pressured
TIMET to seriously consider closing its domestic sponge operations in
favor of importing low priced non-U.S. sponge. The availability of low-
priced sponge imports threatens the financial viability of the sole
remaining large-scale sponge facility in the United States.

C. Low Priced Titanium Sponge Imports Threaten Continued U.S.
Production and Contribute to the Weakening of the Internal Economy

1. The United States imports significant quantities of titanium
sponge. Imports increased 13 percent from approximately 20,700 metric
tons, or 59 percent of total consumption in the United States in 2010,
to approximately 23,400 metric tons, or 68 percent of total consumption
in the United States in 2018.\5\ The value of these imports averaged
$196 million annually over the 2015 to 2018 period.
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\5\ U.S. Geological Survey Minerals Report (2010-2018). Note
that the U.S. Geological Survey statistics include Honeywell
Electronic Materials' 500-metric-ton plant at Bountiful, Utah in its
capacity figures. As this plant does not produce material that is
used for industrial metal applications, it is excluded from this
investigation. More information on this is provided in Chapters IV
and V.
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2. U.S. titanium sponge production and inventories satisfied just
32 percent of U.S. sponge demand in 2018, with the remainder of demand
being filled by imports. Aggregate U.S. titanium sponge consumption
exceeded production by [TEXT REDACTED], or [TEXT REDACTED], between
2015 and 2018. At most, U.S. production operating at full capacity
could satisfy only [TEXT REDACTED] of U.S. demand for titanium sponge
in 2018.
3. The vast majority of titanium sponge imports in 2018 came from
Japan (94.4 percent), with smaller quantities from Kazakhstan (5.2
percent), and China, Russia, and Ukraine (each less than 1 percent).\6\
Japanese imports increased from 75 percent of all imports in 2015, to
94.4 percent in 2018, an increase largely driven by the idling of one
of the two remaining domestic sponge production facilities in 2016.
Between 2015 and 2018, imports of Japanese titanium sponge increased by
43 percent as U.S. production decreased by 60 percent.<SUP>7 8</SUP>
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\6\ USGS Minerals Yearbook 2018, Volume 1, Commodity Report.
\7\ USITC Data Web, HTSUS Code 8108.20.0010, 2005-2018 Japanese
Imports for consumption.
\8\ BIS Survey Data (U.S. Production).
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4. Allegheny Technologies Incorporated (ATI), a major U.S. titanium
manufacturer, idled its titanium sponge operations in late 2016. ATI
cited high costs of production and availability of low-priced imports
as justification for idling its facility. [TEXT REDACTED]
5. TIMET is facing a similar situation as ATI did in 2016. TIMET
must decide whether to continue to produce titanium sponge for their
melting operations or import low-priced sponge instead. As sponge
import prices continue to drop, TIMET is having an increasingly
difficult time justifying the continuation of its sponge production.
[TEXT REDACTED] This issue is compounded by TIMET's need to
recapitalize its sponge operation [TEXT REDACTED].
6. Declining global prices and higher imports of low-priced
titanium sponge, principally from Japan, are the primary causes of the
decline in U.S. titanium sponge capacity and production. The continued
substitution of non-U.S. imports for U.S. produced sponge is the
predominant factor in the domestic titanium sponge industry's decline.
7. Another factor impacting the health and competitiveness of U.S.
sponge production is the growing use of titanium scrap. Advancements in
melt technology have allowed titanium producers to use increasing
amounts of titanium scrap, which is less expensive than titanium
sponge, as a source of melt feedstock. Sponge demand and prices have
therefore decreased due to increasing use of scrap. It is important to
note that approximately 52 percent of scrap used in downstream U.S.
titanium

[[Page 59118]]

production is imported. The remaining 48 percent, which is domestically
produced, is still dependent on non-U.S. titanium sponge imports for
its initial production. Increasing usage of scrap in place of sponge
and the consequent downward pressure on sponge prices places even
further financial pressure on the remaining U.S. producer of titanium
sponge.

D. Increased Foreign Sponge Capacity and Production Raise Future
National Security Concerns

1. As U.S. titanium sponge production capacity has declined, other
countries' capacities have increased. Between 2004 and 2018, Chinese
titanium sponge production capacity increased approximately 1,050
percent from 9,500 metric tons to 110,000 metric tons.\9\ Japanese
capacity increased by 84 percent from 37,000 to 68,000 metric tons, and
Russian capacity increased by 66 percent from 28,000 tons to 46,500
metric tons.\10\ By comparison, U.S. capacity stood at just [TEXT
REDACTED] in 2018.
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\9\ U.S. Geological Survey, ``Titanium and Titanium Dioxide:
2006'' and ``Titanium and Titanium Dioxide: 2018.''
\10\ Ibid.
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2. Although Chinese exports accounted for less than 1 percent of
total U.S. imports of titanium sponge in 2018, China's dramatic growth
in sponge production and capacity (38 percent of world capacity in
2018) is contributing to overall downward pressure on global titanium
prices. The sole remaining domestic producer struggles to justify
continued production due to availability of low-priced imports and the
need for large capital expenditures. Any further decreases in global
prices will put additional pressure on remaining U.S operations. This
downward pressure may increase further as domestic Chinese demand for
sponge is satisfied and China looks to export excess material of both
sponge and finished titanium products.
3. Though China currently consumes almost all of its domestic
production of titanium sponge, their large-scale capacity for mill
products has allowed them to export approximately 23 percent of their
titanium ingot and billet production. While no significant quantities
of Chinese ingots or billets are imported into the U.S. at present,
China has been exporting increasing quantities of commercial and
industrial products containing titanium (bicycles, heat exchangers,
condensers, automobile parts, structural aerospace parts, medical
devices, construction materials, etc.). Increased Chinese exports of
commercial and industrial products containing titanium (with a broader
range than Russian exports of aerospace-focused titanium products), and
a future focus on exports of titanium sponge, ingot, and billet is
expected, as China has implemented a similar export strategy in other
material markets. As the U.S. is the second largest market for titanium
products in the world, the U.S. will be a natural target for low price
imports from China.
4. Only the United States, Japan, Russia, and Kazakhstan have
titanium sponge plants certified to produce aerospace rotating-quality
sponge that can be used for aerospace engine parts and other sensitive
aerospace applications. While Chinese producers have not yet been
certified in the U.S. to supply this type of aerospace-grade sponge, it
is expected that they will develop the capability to do so in the near
future. Increased Russian and future Chinese premium-quality sponge
exported at non-market prices will harm the remaining U.S. and Japanese
producers and may force U.S. commercial aircraft and engine
manufacturers into dependence on Russian and Chinese sources.
Conclusion
Based on these findings, the Secretary concludes that the present
quantities and circumstance of titanium sponge imports are ``weakening
our internal economy'' and threaten to impair the national security as
defined in Section 232. The consequent adverse impact on the domestic
titanium sponge industry, along with the circumstance of increased
global production and capacity in titanium sponge, especially in non-
market economies, places the United States at risk of losing the
remaining industrial capacity and technical knowledge essential to
producing the titanium sponge needed to meet national defense and
critical infrastructure requirements.
Imports of titanium sponge, which accounted for 68 percent of all
sponge consumed in the United States in 2018, threaten to impair the
national security by placing the remaining U.S. titanium sponge
producer's operation under severe financial stress. Low-priced sponge
imports, as well as low-priced titanium scrap imports, depress the
price of U.S. titanium sponge and de-incentivize recapitalization of
the remaining active facility's aging production capabilities. If the
remaining facility ceases operation, the U.S. will have no active
domestic capacity to produce titanium sponge for national defense and
critical infrastructure needs.
Absent domestic titanium sponge production capacity, the U.S. will
be completely dependent on imports of titanium sponge and scrap and
will lack the surge capacity required to support defense and critical
infrastructure needs in an extended national emergency.
Titanium producers, including producers of goods such as ingot,
billet, sheet, coil, and tube, as well as end-users of finished
titanium goods, are almost all entirely dependent on non-U.S. sources
for sponge and scrap. This circumstance presents the possibility that,
in a national emergency, U.S. titanium producers would be denied access
to imports of titanium sponge and scrap due to supply disruption. If
U.S. titanium producers do not have access to either domestic or
imported supplies of sponge and scrap, their manufacturing operations
would severely decline or cease once their existing titanium
inventories are depleted. [TEXT REDACTED] The U.S. no longer maintains
titanium sponge in the National Defense Stockpile.
Further, under current global market conditions and with the low
price charged by non-market Russian and Chinese titanium producers, it
is difficult for the remaining U.S. titanium sponge producer to justify
the capital investments needed for continued operations. This inability
to invest threatens continued operation of the sole domestic titanium
sponge plant. If this capacity and associated skilled workforce are
lost, it will be challenging and expensive to reconstitute U.S.
titanium sponge production capabilities should the need arise.
The Department acknowledges that larger industry trends, including
increased use of titanium scrap and downstream producers' emphasis on
scrap recovery, have decreased the need for titanium sponge. These
trends reflect U.S. titanium producers and end users' interest in
maximizing profits by leveraging lower scrap costs and mitigating the
need for new sponge purchases. However, these trends do not eliminate
the need for new titanium sponge. Certain titanium parts, particularly
those used in national defense systems, cannot be made using scrap and
require new titanium sponge. Moreover, approximately 52 percent of all
scrap is imported and subject to the same potential supply disruptions
as sponge imports. The remaining 48 percent of scrap that is
domestically produced is also subject to potential supply disruptions.
The vast majority of this domestic scrap is generated from semi-
fabricated and finished titanium product manufacturing operations,
which at present rely on imported

[[Page 59119]]

sponge for approximately 68 percent of their total sponge consumption.
The displacement of domestic titanium sponge by low-priced imports
places the United States at risk of not being able to meet national
security and critical infrastructure requirements during an emergency.
The Secretary therefore finds that imports of titanium sponge threaten
to impair the national security as defined in Section 232.
Recommendations
The Department has identified several potential actions that could
be taken to address the threat of imports of titanium sponge to
national security.\11\ These actions include domestic initiatives and
multilateral negotiations.
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\11\ The following recommendations are the Department's and do
not necessarily reflect the recommendations of the other agencies
with which the Department consulted during the course of this
investigation.
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Option 1--Domestic Initiatives
The Department has identified two possible domestic initiatives
that the U.S government can undertake to stimulate reinvestment in
domestic sponge production. These options include:
Option 1A--Voluntary Agreements With U.S. Titanium Sponge Producer(s)
Under Title VII of the Defense Production Act of 1950
One of the challenges identified by the U.S. industry is that low
prevailing market prices, which are driven by high volumes of low-
priced imports, do not justify the capital investments required to
sustain future production. To mitigate this situation, the U.S.
government could temporarily compensate U.S. producer(s) for the
difference between their current production costs and global purchase
prices.
Such compensation would serve as a temporary bridge until such time
that U.S. producer(s) could make the capital investments needed to
upgrade or build new production facilities, which will in turn lower
production costs and safeguard future production. Although the proposed
compensation is not likely to cover the full cost of any major capital
investment, it would nevertheless encourage U.S. producers to invest
their own funds in modernizing sponge production.
As shown in Figure A below, the Department estimates that providing
this compensation over a five-year period would cost approximately
[TEXT REDACTED] per year, or approximately [TEXT REDACTED] of titanium
sponge produced. The Department bases these calculations on the
remaining active U.S. producer of titanium sponge and assumes a five-
year period would be required to make the essential capital investments
needed to safeguard production. After completion of needed capital
investments, U.S. production costs are expected to be competitive with
the global sponge prices, and the compensation would no longer be
required.

[TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED]
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[[Page 59120]]

Option 2--Multilateral Negotiations
As the Department observed in the recent steel, aluminum, and
uranium Section 232 investigations, non-market actors can substantially
distort the global market for products through price, quantity, and
market access. For titanium sponge and downstream products, Russia and
China are examples of such non-market actors. In 2018, Russian and
Chinese titanium sponge producers controlled 61 percent of the world's
titanium sponge production, an increase on their combined 55 percent
share in 2008 and 37 percent share in 1998.
Non-market actors lower the price of titanium sponge, which causes
financial harm to U.S. and other market producers, particularly Japan.
Japanese producers have responded to low global prices by lowering
their own sponge prices. Multilateral negotiations between the United
States and other market producers of titanium sponge, including Japan
and Kazakhstan, would present an opportunity to address issues
affecting market titanium sponge production. The option below is budget
neutral.
Option 2--Common Inventory of Sponge for Use Among the Parties To
Mitigate Supply Issues
In this option, the U.S. and other market titanium producers could
agree to establish pre-positioned strategic stores of sponge for use by
titanium sponge customers to be held at their U.S. titanium facilities
or other locations in the United States. The amount of sponge held
would vary with the annual amount sold to each particular customer
commensurate to their market share. This action would mitigate
potential shortfalls in sponge imports caused by a national emergency.
U.S. Titanium Industrial Base Analysis
The Department, in collaboration with the Department of Defense
(DoD), the Department of Interior (DOI), and the U.S. Geological Survey
(USGS), should survey and assess the operating status and capacity of
the U.S. titanium sponge and downstream titanium industries every three
years. Such action would provide the USG with needed economic and
financial data on this critical industrial base sector.

II. Legal Framework

A. Section 232 Requirements

Section 232 provides the Secretary with the authority to conduct
investigations to determine the effect on the national security of the
United States of imports of any article. It authorizes the Secretary to
conduct an investigation if requested by the head of any department or
agency, upon application of an interested party, or upon his own
motion. See 19 U.S.C. 1862(b)(1)(A).
Section 232 directs the Secretary to submit to the President a
report with recommendations for ``action or inaction under this
section'' and requires the Secretary to advise the President if any
article ``is being imported into the United States in such quantities
or under such circumstances as to threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A).
Section 232(d) directs the Secretary and the President to consider,
in light of the requirements of national security and without excluding
other relevant factors, the domestic production needed for projected
national defense requirements and the capacity of the United States to
meet national security requirements. See 19 U.S.C. 1862(d).
Section 232(d) also directs the Secretary and the President to
``recognize the close relation of the economic welfare of the Nation to
our national security, and . . . take into consideration the impact of
foreign competition on the economic welfare of individual domestic
industries'' by examining whether any substantial unemployment,
decrease in revenues of government, loss of skills or investment, or
other serious effects resulting from the displacement of any domestic
products by excessive imports, or other factors, results in a
``weakening of our internal economy'' that may impair the national
security.\12\ See 19 U.S.C. 1862(d).
---------------------------------------------------------------------------

\12\ An investigation under Section 232 looks at whether imports
threaten to impair the national security, rather than looking at
unfair trade practices as in an antidumping investigation.
---------------------------------------------------------------------------

Once an investigation has been initiated, Section 232 mandates that
the Secretary provide notice to the Secretary of Defense that such an
investigation has been initiated. Section 232 also requires the
Secretary to do the following:

(1) ``Consult with the Secretary of Defense regarding the
methodological and policy questions raised in [the] investigation;''
(2) ``Seek information and advice from, and consult with,
appropriate officers of the United States;'' and
(3) ``If it is appropriate and after reasonable notice, hold
public hearings or otherwise afford interested parties an
opportunity to present information and advice relevant to such
investigation.'' \13\ See 19 U.S.C. 1862(b)(2)(A)(i)-(iii).
---------------------------------------------------------------------------

\13\ Department regulations (i) set forth additional authority
and specific procedures for such input from interested parties, see
15 CFR 705.7 and 705.8, and (ii) provide that the Secretary may vary
or dispense with those procedures ``in emergency situations, or when
in the judgment of the Department, national security interests
require it.'' Id., Sec. 705.9.
---------------------------------------------------------------------------

As detailed in the report, all of the requirements set forth above
have been satisfied.
In conducting the investigation, Section 232 permits the Secretary
to request that the Secretary of Defense provide an assessment of the
defense requirements of the article that is the subject of the
investigation. See 19 U.S.C. 1862(b)(2)(B). Upon completion of a
Section 232 investigation, the Secretary is required to submit a report
to the President no later than 270 days after the date on which the
investigation was initiated. See 19 U.S.C. 1862(b)(3)(A). The report
must:
(1) Set forth ``the findings of such investigation with respect to
the effect of the importation of such article in such quantities or
under such circumstances upon the national security;''
(2) Set forth, ``based on such findings, the recommendations of the
Secretary for action or inaction under this section;'' and
(3) ``If the Secretary finds that such article is being imported
into the United States in such quantities or under such circumstances
as to threaten to impair the national security . . . so advise the
President.'' See 19 U.S.C. 1862(b)(3)(A).
All unclassified and non-proprietary portions of the report
submitted by the Secretary to the President must be published. See 19
U.S.C. 1862(b)(3)(B).
Within 90 days after receiving a report in which the Secretary
finds that an article is being imported into the United States in such
quantities or under such circumstances as to threaten to impair the
national security, the President shall:
(1) ``Determine whether the President concurs with the finding of
the Secretary;'' and
(2) ``If the President concurs, determine the nature and duration
of the action that, in the judgment of the President, must be taken to
adjust the imports of the article and its derivatives so that such
imports will not threaten to impair the national security'' See 19
U.S.C. 1862(c)(1)(A).

B. Discussion

While Section 232 does not specifically define ``national
security'' both Section 232 and the implementing regulations at 15 CFR
part 705 contain non-exclusive lists of factors that the Secretary must
consider in evaluating the effect of imports on the national

[[Page 59121]]

security. Congress in Section 232 explicitly determined that ``national
security'' includes, but is not limited to, ``national defense''
requirements. See 19 U.S.C. 1862(d).
The Department has determined that ``national defense'' includes
both the defense of the United States directly and the U.S. ``ability
to project military capabilities globally.'' \14\ The Department also
concluded that ``[i]n addition to the satisfaction of national defense
requirements, the term `national security' can be interpreted more
broadly to include the general security and welfare of certain
industries, beyond those necessary to satisfy national defense
requirements, which are critical to the minimum operations of the
economy and government.'' \15\ The Department deemed these certain
industries as ``critical industries.'' \16\ This report uses these
interpretations of the terms ``national defense'' and ``national
security,'' as applying to ``critical industries.'' In doing so, this
report considers 16 critical infrastructure sectors identified in
Presidential Policy Directive 21.\17\
---------------------------------------------------------------------------

\14\ Department of Commerce, Bureau of Export Administration;
The Effect of Imports of Iron Ore and Semi-Finished Steel on the
National Security; Oct. 2001 (``2001 Report'').
\15\ Id.
\16\ Id.
\17\ Presidential Policy Directive 21, Critical Infrastructure
Security and Resilience (February 12, 2013) (``PPD-21'').
---------------------------------------------------------------------------

Section 232 directs the Secretary to determine whether imports of
any article are being made ``in such quantities'' or ``under such
circumstances'' that those imports ``threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A). Accordingly, either the
quantities or the circumstances, standing alone, may be sufficient to
support an affirmative finding.
The statute does not prescribe a threshold or a standard for when
``such quantities'' of imports are sufficient to threaten to impair the
national security, nor does it define the ``circumstances'' that might
qualify.
Likewise, the statute does not require a finding that the
quantities or circumstances are impairing the national security.
Instead, the threshold question under Section 232 is whether those
quantities or circumstances ``threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A). This makes evident that
Section 232 may be used to prevent a threatened impairment to the
national security from occurring before the national security is
actually impaired.
Section 232(d) contains a list of factors for the Secretary to
consider in determining if imports ``threaten to impair the national
security'' \18\ of the United States, and this list is mirrored in the
implementing regulations. See 19 U.S.C. 1862(d) and 15 CFR 705.4.
Congress was careful to note twice in Section 232(d) that the list
provided, while mandatory, is not exclusive.\19\ Congress' illustrative
list is focused on the ability of the United States to maintain the
domestic capacity to provide the articles in question as needed to
maintain the national security of the United States.\20\ Congress broke
the list of factors into two equal parts using two separate sentences.
The first sentence focuses directly on ``national defense''
requirements, thus making clear that ``national defense'' is a subset
of the broader term ``national security.'' The second sentence focuses
on the broader economy and expressly directs that the Secretary and the
President ``shall recognize the close relation of the economic welfare
of the Nation to our national security.'' \21\ See 19 U.S.C. 1862(d).
---------------------------------------------------------------------------

\18\ 19 U.S.C. 1862(b)(3)(A).
\19\ See 19 U.S.C. 1862(d) (``the Secretary and the President
shall, in light of the requirements of national security and without
excluding other relevant factors . . .'' and ``serious effects
resulting from the displacement of any domestic products by
excessive imports shall be considered, without excluding other
factors . . .'').
\20\ This reading is supported by Congressional findings in
other statutes. See, e.g., 15 U.S.C. 271(a)(1) (``The future well-
being of the United States economy depends on a strong manufacturing
base . . .'') and 50 U.S.C. 4502(a) (``Congress finds that--(1) the
security of the United States is dependent on the ability of the
domestic industrial base to supply materials and services . . .
(2)(C) to provide for the protection and restoration of domestic
critical infrastructure operations under emergency conditions . . .
(3) . . . the national defense preparedness effort of the United
States government requires--(C) the development of domestic
productive capacity to meet--(ii) unique technological requirements.
. . (7) much of the industrial capacity that is relied upon by the
United States Government for military production and other national
defense purposes is deeply and directly influenced by--(A) the
overall competitiveness of the industrial economy of the United
States; and (B) the ability of industries in the United States, in
general, to produce internationally competitive products and operate
profitably while maintaining adequate research and development to
preserve competitiveness with respect to military and civilian
production; and (8) the inability of industries in the United
States, especially smaller subcontractors and suppliers, to provide
vital parts and components and other materials would impair the
ability to sustain the Armed Forces of the United States in combat
for longer than a short period.'').
\21\ Accord 50 U.S.C. 4502(a).
---------------------------------------------------------------------------

In addition to ``national defense'' requirements, two of the
factors listed in the second sentence of Section 232(d) are
particularly relevant in this investigation. Both are directed at how
``such quantities'' of imports threaten to impair national security.
See 19 U.S.C. 1862(b)(3)(A). In administering Section 232, the
Secretary and the President are required to ``take into consideration
the impact of foreign competition on the economic welfare of individual
domestic industries'' and any ``serious effects resulting from the
displacement of any domestic products by excessive imports'' in
``determining whether such weakening of our internal economy may impair
the national security.'' See 19 U.S.C. 1862(d). Imports of titanium
sponge supplied 68 percent of U.S. consumption in 2018. Many of these
imports are priced well below the prevailing price for U.S.-origin
titanium sponge and have been a major factor in the decline of U.S.
titanium sponge production.
Two other factors included in the statute that are also
particularly relevant to this investigation are ``loss of skills'' and
``loss of investment.'' See 19 U.S.C. 1862(d). As imports of titanium
sponge have increased, losses of U.S. titanium sponge production
capacity have caused a decline in the skilled workforce needed for the
sponge manufacturing process. These imports are also a disincentive for
needed investment in aging U.S. titanium sponge production facilities;
without this investment, future production of domestic titanium sponge
is not sustainable. These factors are illustrative of a ``weakening of
the internal economy [that] may impair the national security'' as
defined in Section 232.

III. Investigation Process

A. Initiation of Investigation

On September 27, 2018 Titanium Metals Corporation (TIMET)
petitioned the Secretary to conduct an investigation under Section 232
of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), to
determine the effect of imports of titanium sponge on the national
security.
Upon receipt of the petition, the Department reviewed the material
facts outlined in the petition. Initial discussions were held with
other bureaus within the Department as well as with the Department of
Defense. Legal counsel at the Department also reviewed the petition to
ensure it met the requirements of the Section 232 statute and the
implementing regulations.
Subsequently, on March 4, 2019 the Department accepted the petition
and initiated the investigation. Pursuant to Section 232(b)(1)(b), the
Department notified the U.S. Department of Defense with a March 4, 2019
letter from

[[Page 59122]]

Secretary Ross to Acting Secretary of Defense Patrick Shanahan (See
Appendix A).
On March 8, 2019, the Department published a Federal Register
Notice (See Appendix B--Federal Register, 84 FR 8503) announcing the
initiation of an investigation to determine the effect of imports of
titanium sponge on the national security. The notice also announced the
opening of the public comment period.

B. Public Comments

On March 8, 2019, the Department invited interested parties to
submit written comments, opinions, data, information, or advice
relevant to the criteria listed in Section 705.4 of the National
Security Industrial Base Regulations (15 CFR 705.4) as they affect the
requirements of national security, including the following:
(a) Quantity of the articles subject to the investigation and other
circumstances related to the importation of such articles;
(b) Domestic production capacity needed for these articles to meet
projected national defense requirements;
(c) The capacity of domestic industries to meet projected national
defense requirements;
(d) Existing and anticipated availability of human resources,
products, raw materials, production equipment, facilities, and other
supplies and services essential to the national defense;
(e) Growth requirements of domestic industries needed to meet
national defense requirements and the supplies and services including
the investment, exploration and development necessary to assure such
growth;
(f) The impact of foreign competition on the economic welfare of
any domestic industry essential to our national security;
(g) The displacement of any domestic products causing substantial
unemployment, decrease in the revenues of government, loss of
investment or specialized skills and productive capacity, or other
serious effects;
(h) Relevant factors that are causing or will cause a weakening of
our national economy; and
(i) Any other relevant factors.
The initial public comment period ended on April 22, 2019.
The Department received 14 initial written submissions concerning
this investigation, all of which were posted on <a href="http://Regulations.gov">Regulations.gov</a> for
public review. Parties who submitted comments included titanium
industry participants, representatives of state and local governments,
foreign governments, and other concerned parties.
All comments were then opened for a rebuttal period ending on May
22, 2019. Four rebuttal comments from titanium industry participants
and other stakeholders were received and posted on <a href="http://Regulations.gov">Regulations.gov</a> for
public review.
All public comments were reviewed and factored into the
investigative process. All public comments received are summarized in
Appendix C, along with a link to the <a href="http://Regulations.gov">Regulations.gov</a> docket (BIS-2018-
0027) where comments can be viewed in full.

C. Information Gathering and Data Collection Activities

In order to gain insight into the U.S. titanium sponge industry,
information gathering activities and meetings were held with
representatives of domestic and international titanium sponge
producers, titanium end users, industry associations, foreign
governments, and other parties with an interest in the U.S. titanium
sponge industry.
Due to the limited number of firms engaged in the U.S. titanium
sponge industry, it was determined that a public hearing was not
necessary in order to conduct a comprehensive investigation. In lieu of
holding a public hearing on this investigation, the Department issued
surveys (See Appendices D and E) to all participants in the U.S.
titanium sponge industry as well as a representative sample of
downstream consumers of titanium products. These surveys collected both
qualitative and quantitative information. The first survey was designed
for titanium sponge and semi-fabricated titanium product producers and
was distributed to 10 organizations. The second survey was sent to 17
organizations, representative of downstream consumers of titanium
products, including aerospace and other firms. The surveys provided an
opportunity for organizations to disclose confidential and non-public
information needed by the Department to conduct a thorough
investigation.
These mandatory surveys were conducted pursuant to Section 705 of
the Defense Production Act (DPA) of 1950, as amended (50 U.S.C. 4555),
and collected data on imports/exports, production, capacity
utilization, employment, operating status, global competition, and
financial information. The resulting aggregate data provided the
Department with detailed industry information that is otherwise not
publicly available and was necessary to conduct analysis for this
investigation.
Responses to the Department's questionnaires were mandatory (See 50
U.S.C. 4555). Information furnished in the survey responses is deemed
confidential and will not be published or disclosed except in
accordance with Section 705 of the DPA. Section 705 of the DPA
prohibits the publication or disclosure of this information unless the
President determines that the withholding of such information is
contrary to the interest of the national defense. Information will not
be shared with any non-government entity other than in aggregate form.

D. Interagency Consultation

The Department consulted with the Department of Defense, including
the Office of Industrial Policy and the Defense Logistics Agency,
regarding methodological and policy questions that arose during the
investigation.
The Department also consulted with other U.S. Government agencies
with expertise and information regarding the domestic and global
titanium sponge industries, including the Department's International
Trade Administration, the Department of the Interior's U.S. Geological
Survey, the Department of State, and the White House Office of Trade
and Manufacturing Policy.

IV. Product Scope of the Investigation

The scope of this investigation defines titanium sponge at the
Harmonized Tariff Schedule of the United States (HTS) 10-digit level.
The product and its associated HTS code are provided in Figure 1 below.

[[Page 59123]]

[GRAPHIC] [TIFF OMITTED] TN26OC21.000

The HTS code includes all grades of titanium sponge, including
standard grade and premium grade (aerospace non-rotating and aerospace
rotating).\22\ TIMET, the only operating U.S. titanium sponge facility,
and Allegheny Technologies Incorporated (ATI), with an idled facility
(2016), are the only two domestic companies with the capability and
capacity to produce the types of titanium sponge included in the scope
of this investigation. Though the HTS code also includes ``ultra-high
purity'' titanium sponge, this type of sponge is not considered in the
investigation. Ultra-high purity sponge is not used in conventional
industrial titanium metal applications and is exclusively used for
electronics manufacturing. Material from the one facility in the U.S.
producing ultra-high purity sponge is not certified for aerospace
applications.\23\ Neither TIMET nor ATI have produced ultra-high purity
sponge.
---------------------------------------------------------------------------

\22\ Most titanium sponge is classified by its intended end use.
Standard grade sponge is used for manufacturing and other routine
industrial uses. Aerospace non-rotating grade sponge is used in
static aerospace structural parts such as wing spars. Aerospace
rotating grade sponge is used in high performance aerospace
applications, such as engines and landing gear. Each of these grades
has different chemistry and quality requirements established by end
users.
\23\ Honeywell Electronic Materials ``Honeywell Sodium-Reduced
Titanium Sponge'' (2010). In the United States, this type of
titanium sponge is manufactured by Honeywell Electronic Materials at
a facility in Bountiful, Utah. [TEXT REDACTED].
---------------------------------------------------------------------------

Titanium sponge is the necessary intermediate product between
unprocessed titanium ore and titanium ingot and other downstream
titanium products. For the purposes of this investigation, some
downstream products including items such as titanium ingot and billet,
titanium bar, titanium rod, titanium wire, titanium plate and sheet,
and other titanium products, are examined in order to understand the
titanium industry as a whole.
Another product examined is titanium scrap. Scrap is included
because it can be used as a source of feedstock for titanium melting
operations in addition to and in lieu of titanium sponge. U.S. melters
are increasingly using both U.S. and non-U.S. origin scrap as feedstock
for their melting operations.\24\ The titanium scrap that is produced
and re-used in the U.S. is reliant on the availability of imported
sponge for initial titanium production. Increased reliance on import-
dependent titanium scrap, coupled with an increasing reliance on
imported titanium sponge, highlights the growing concern that imports
pose to both the titanium sponge producers as well as the U.S.
downstream titanium industry.
---------------------------------------------------------------------------

\24\ More information on scrap usage can be found in Chapter
VII.
---------------------------------------------------------------------------

The investigation also considers titanium consumption in aerospace
and defense applications, including titanium parts used in airframe and
engine assembly in addition to land and naval turbines. In addition,
titanium use in critical infrastructure applications is included in
overall consumption calculations.

V. Background on the U.S. Titanium Industry

The U.S. began producing titanium metal for industrial applications
in the mid-20th century.\25\ Titanium, which is principally found in
ilmenite and rutile ores, is required for production of two broad types
of titanium product. The largest market for titanium, accounting for 93
percent of global titanium feedstock consumption, is the production of
titanium dioxide pigment, which is used in applications such as papers,
paints, and plastics.\26\ The second major market includes the
production of titanium sponge for use in titanium metal semi-finished
goods and titanium metal finished goods. Less than five percent of
titanium feedstock is used in this market, which includes defense,
commercial aerospace, and industrial end-use products.\27\
---------------------------------------------------------------------------

\25\ Laurel G. Woodruff, George M. Bedinger, and Nadine M.
Piatak, ``Titanium: Chapter T of Critical Mineral Resources of the
United States--Economic and Environmental Geology and Prospects for
Future Supply''. United States Geological Survey, Vienna, VA (2017),
<a href="https://pubs.usgs.gov/pp/1802/t/pp1802t.pdf">https://pubs.usgs.gov/pp/1802/t/pp1802t.pdf</a>, T1.
\26\ Ibid, T2.
\27\ Ibid.
---------------------------------------------------------------------------

Titanium sponge is the source material needed to produce titanium
metal products used in defense, commercial aerospace, and industrial
applications. Titanium sponge is melted to produce titanium ingots,
billets, and other downstream titanium goods and finished products such
as titanium bar, titanium plate, titanium tube, titanium coil, and
titanium sheet. It is important to note that titanium dioxide pigment
and titanium sponge production are not interchangeable; titanium
dioxide pigment cannot be converted into titanium sponge.
Though the U.S. is a significant global consumer and supplier of
titanium products, there is only one remaining domestic producer
capable of manufacturing titanium sponge for industrial and defense
applications (See Figure 2). The other U.S. producer of titanium
sponge, ATI, idled operations in late 2016. Honeywell Electronics
Materials maintains limited capacity and capabilities to produce ultra-
high purity titanium sponge at their facility in Utah, but the
applications of this type of sponge are limited to specific electronic
uses. Honeywell is not considered a source of titanium sponge
production for defense and industrial applications.

[[Page 59124]]

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A. Titanium Sponge Manufacturing

The sponge production process must start with the conversion of
titanium ore into a usable form. This is achieved through the blending
of titanium feedstock, including rutile and ilmenite concentrates and
titanium slag, with petroleum coke.\28\ The concentrate/coke mixture is
then exposed to chlorine in a fluid bed reactor at high temperatures.
The resulting product is titanium tetrachloride (TiCl<INF>4</INF>).
TIMET manufactures TiCl<INF>4</INF> on-site at its Henderson facility
for use in sponge manufacturing.\29\ Other U.S. producers of
TiCl<INF>4</INF> include Chemours's facility in New Johnsonville,
Tennessee and Cristal's facility in Ashtabula, Ohio.\30\ However, the
TiCl<INF>4</INF> produced by these firms is primarily used for titanium
dioxide production for use in the pigments market. Once
TiCl<INF>4</INF> has been produced or obtained, it can then be
transformed into titanium sponge through two primary processes
described below.
---------------------------------------------------------------------------

\28\ Most TiCl<INF>4</INF> production in the United States is
done using rutile ore and a certain variety of slag. TZ Minerals
International Pty Ltd, ``Titanium Feedstock Market Dynamics 2010:
Outlook to 2018'', 24.
\29\ U.S. production of rutile and ilmenite ore is limited; in
2018, U.S. production of these minerals accounted for just 5.7
percent of the world's combined rutile and ilmenite production.
Petitioner obtains its rutile and ilmenite feedstock from Australia
and South Africa. U.S. Geological Survey, ``Titanium Mineral
Concentrates'' (2019), 177, <a href="https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-timin.pdf">https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-timin.pdf</a>.
\30\ Ibid.
---------------------------------------------------------------------------

1. Kroll Process
The Kroll process, which was devised in the 1930s by chemist
William Kroll and commercially deployed in 1948, is the principal
method for producing titanium sponge. Currently all global producers of
titanium sponge for aerospace and other industrial applications use the
Kroll process. Figure 3 below shows the Kroll process in more detail.
[GRAPHIC] [TIFF OMITTED] TN26OC21.001

The Kroll process involves several steps. First, a pressurized
steel vessel is filled with argon and magnesium enabling the reduction
of TiCl<INF>4</INF>.\31\ The vessel is then heated to approximately
1,470 to 1,650 degrees Fahrenheit, and TiCl<INF>4</INF> is slowly
introduced into the vessel.\32\ The combined chemical and heat reaction
causes the magnesium to react with the TiCl<INF>4</INF>.\33\ Two
products are left following the reaction: Titanium metal and magnesium
chloride (MgCl<INF>2</INF>).

[[Page 59125]]

The MgCl<INF>2</INF> and any remaining unreacted magnesium are removed
from the vessel, leaving only the titanium metal.\34\ Due to its porous
properties, the titanium metal produced in this process is colloquially
known as titanium sponge. After production, the sponge is sheared and
crushed into smaller pellets for storage and eventual melt.
---------------------------------------------------------------------------

\31\ Steven J. Gerdemann, ``Titanium Process Technologies'',
Advanced Materials and Processes (July 2001), <a href="https://www.asminternational.org/documents/10192/1755977/amp15907p041.pdf/292e9b8e-d88a-4a72-b67a-b1d8c7904baf">https://www.asminternational.org/documents/10192/1755977/amp15907p041.pdf/292e9b8e-d88a-4a72-b67a-b1d8c7904baf</a>, 41.
\32\ Ibid.
\33\ Ibid.
\34\ Ibid.
---------------------------------------------------------------------------

2. Hunter Process
There have been limited attempts to develop alternatives to the
Kroll process. The only current active commercial alternative to the
Kroll process in the United States is the Hunter process, which is used
at Honeywell Electronic Materials' plant in Bountiful, Utah.\35\
---------------------------------------------------------------------------

\35\ Honeywell Electronic Materials ``Honeywell Sodium-Reduced
Titanium Sponge'' (2010).
---------------------------------------------------------------------------

The Hunter process differs primarily in its use of sodium instead
of magnesium during the production process. Use of sodium allows for
the creation of a higher-purity sponge, albeit at a higher overall
cost. Consequently, sponge produced by the Hunter process is almost
exclusively used for manufacturing semiconductors.\36\
---------------------------------------------------------------------------

\36\ [TEXT REDACTED].
---------------------------------------------------------------------------

B. History of U.S. Titanium Sponge Production

Titanium sponge production in the United States began in 1938 with
a demonstration of the Kroll process funded by the Bureau of Mines.
During the Second World War, the U.S. government continued to fund
research into the Kroll process and scalability for commercial
production; a pilot production facility was completed in 1942.\37\
Commercial production began in 1947 when E.I. du Pont de Nemours and
Company (DuPont) opened a large scale production line. By 1952,
DuPont's facility produced more than 800 metric tons of sponge per
year.\38\
---------------------------------------------------------------------------

\37\ National Academy of Sciences--National Academy of
Engineering, ``Direct Reduction Processes for the Production of
Titanium Metal'', (March 1974), <a href="https://pdfs.semanticscholar.org/a101/06d88ae79a959156b3cfb6b45d2ad0372fe9.pdf">https://pdfs.semanticscholar.org/a101/06d88ae79a959156b3cfb6b45d2ad0372fe9.pdf</a>, 5.
\38\ F.H. Froes, ed., ``Titanium--Physical Metallurgy,
Processing, and Applications'', (2015), <a href="https://www.asminternational.org/documents/10192/1849770/05448G_Sample.pdf/0cceaefd-da84-49d9-9ca4-1f95eb9fc304">https://www.asminternational.org/documents/10192/1849770/05448G_Sample.pdf/0cceaefd-da84-49d9-9ca4-1f95eb9fc304</a>, 1.
---------------------------------------------------------------------------

Increased aerospace industry demand for titanium encouraged entry
into the titanium market. TIMET was founded in January 1950 as a joint
venture by the National Lead Company and Allegheny Ludlum Steel
Corporation.\39\ TIMET opened a titanium sponge production line in
Henderson, Nevada in 1951 which is still in service today. By 1957,
U.S. titanium sponge production capacity stood at 33,100 metric tons
per year, with an estimated actual production of 15,600 metric
tons.\40\
---------------------------------------------------------------------------

\39\ Ibid., 2.
\40\ Ibid.; USGS, ``Titanium Sponge Statistics'' (January 19,
2017).
---------------------------------------------------------------------------

U.S. government support was instrumental in setting up the domestic
titanium sponge industry. After funding multiple sponge research
projects, the General Services Administration (GSA) began a
comprehensive investment program for commercial production. Beginning
in August 1951, GSA advanced capital for the fixed investment costs in
titanium sponge plant capacity as part of a contract to purchase a
portion of plant output at specified prices or engaged in other
contractual agreements. These arrangements were essentially government-
backed loans.\41\ By the time the program ended in September 1955, it
had resulted in contracts with five companies and created 21,000 tons
of capacity.\42\
---------------------------------------------------------------------------

\41\ U.S. Department of Justice, ``Review of Voluntary
Agreements Program Under the Defense Production Act: Titanium Metal
Industry'' (May 9, 1957), 11.
\42\ Ibid.
---------------------------------------------------------------------------

The United States was not alone in developing a titanium sponge
industry. Imperial Chemicals Industries opened a titanium sponge
production line in the United Kingdom in 1948. Japanese production
began with Osaka Titanium Company in 1952, and, by 1954, five Japanese
companies had opened titanium sponge production facilities with a
combined capacity of 611 metric tons. The Soviet Union also opened
three titanium sponge plants during the same period. These foreign
competitors then began to challenge previous U.S. dominance of the
titanium sponge industry. Sponge imports into the United States were
first reported in 1956. By 1967, sponge imports accounted for one-third
of all U.S. sponge consumption.\43\
---------------------------------------------------------------------------

\43\ Ibid. In 1967, 81 percent of all U.S. imports came from the
United Kingdom and Japan and the remaining 19 percent came from the
Soviet Union. United States Tariff Commission, ``Titanium Sponge
from the U.S.S.R.'' (July 1968), 21.
---------------------------------------------------------------------------

Increased competition from foreign imports and fluctuating demand
caused consolidations and closures of U.S. sponge manufacturers. In
1984, there were five plants producing titanium sponge totaling 30,400
metric tons of capacity.\44\ By 1987, Teledyne Wah Chang in Albany,
Oregon and Western Zirconium in Utah had closed their facilities,
leaving a capacity of 25,400 metric tons.
---------------------------------------------------------------------------

\44\ F.H. Froes, ed., ``Titanium--Physical Metallurgy,
Processing, and Applications'', 3.
---------------------------------------------------------------------------

These closures left three active sponge plants: TIMET's Henderson,
Nevada facility, Oremet's Albany, Oregon plant, and a joint USX-
National Distillers and Chemicals Corporation facility (later RTI
International Metals, now Arconic) in Ashtabula, Ohio. Oremet's Albany
plant was later sold to ATI and reactivated for a time in the 1990s and
2000s. RMI Titanium closed the Ashtabula facility in 1992,\45\ and ATI
finally ended operations at the Albany plant in 2009 to coincide with
the opening of their new Rowley, Utah facility.\46\ During the same
period, TIMET upgraded its operations at the Henderson plant to include
a modern vacuum distillation plant, built with technology licensed from
Toho Titanium Company.
---------------------------------------------------------------------------

\45\ Unlike its contemporaries, the Ashtabula plant used the
Hunter process instead of the Kroll process. Paul C. Turner, Alan
Hartman, et al. ``Low Cost Titanium--Myth or Reality'', U.S.
Department of Energy, Office of Scientific and Technical Information
(2001), <a href="https://www.osti.gov/servlets/purl/899609">https://www.osti.gov/servlets/purl/899609</a>, 3.
\46\ Frank Haflich, ``ATI sponge plant closure seen a non-
issue'', Fastmarkets AMM (January 31, 2014), <a href="https://www.amm.com/Article/3304541/ATI-sponge-plant-closure-seen-a-non-issue.html">https://www.amm.com/Article/3304541/ATI-sponge-plant-closure-seen-a-non-issue.html</a>.
---------------------------------------------------------------------------

In September 2007, to support its contracts with Airbus, RTI
International Metals announced plans to build a 9,000 metric ton
titanium sponge plant in Hamilton, Mississippi.\47\ However, due to
cost concerns and market conditions, the company cancelled construction
of the plant in December 2009 and instead opted to sign new long-term
supply agreements with Japanese producer Osaka Titanium Technologies
Co. Ltd (OTC).\48\
---------------------------------------------------------------------------

\47\ Donna Ladd, ``Breaking: RTI to Build Titanium Sponge Plant
in Mississippi'', Jackson Free Press (September 17, 2007), <a href="http://www.jacksonfreepress.com/news/2007/sep/17/breaking-rti-to-build-titanium-sponge-plant-in/">http://www.jacksonfreepress.com/news/2007/sep/17/breaking-rti-to-build-titanium-sponge-plant-in/</a>.
\48\ Wally Northway, ``RTI puts plant on hold indefinitely'',
Mississippi Business Journal (December 16, 2009), <a href="https://msbusiness.com/2009/12/rti-puts-plant-on-hold-indefinitely/">https://msbusiness.com/2009/12/rti-puts-plant-on-hold-indefinitely/</a>.
---------------------------------------------------------------------------

ATI broke ground on a new titanium sponge plant in Rowley, Utah in
2006, with operations beginning at the facility at the end of 2009.\49\
The Rowley facility did not have on-site TiCl<INF>4</INF> production
capability and ATI had to source the material from other suppliers.\50\

[[Page 59126]]

Reliance on external suppliers and increased production costs at
Rowley, combined with decreasing global titanium sponge prices,
influenced ATI's decision to idle the plant in August 2016.\51\ [TEXT
REDACTED]\52\
---------------------------------------------------------------------------

\49\ ``(AMM) ATI's Rowley titanium sponge plant launched'',
Fastmarkets AMM (January 15, 2010), <a href="https://www.metalbulletin.com/Article/2374249/AMM-ATIs-Rowley-titanium-sponge-plant-launched.html">https://www.metalbulletin.com/Article/2374249/AMM-ATIs-Rowley-titanium-sponge-plant-launched.html</a>.
\50\ ATI obtained TiCl<INF>4</INF> from a supplier in Ohio and
shipped it via rail to the Rowley plant. The liability costs
associated with shipping TiCl<INF>4</INF> were one of the factors
contributing to ATI's decision to idle the plant. Allegheny
Technologies Incorporated, ``Comments on Section 232 National
Security Investigation of Imports of Titanium Sponge'', pp. 16-17.
\51\ Allegheny Technologies Incorporated, ``Allegheny
Technologies Announces Actions to Improve Future Financial
Performance'', (August 24, 2016), <a href="https://www.businesswire.com/news/home/20160824006136/en/Allegheny-Technologies-Announces-Actions-Improve-Future-Financial">https://www.businesswire.com/news/home/20160824006136/en/Allegheny-Technologies-Announces-Actions-Improve-Future-Financial</a>.
\52\ [TEXT REDACTED].
---------------------------------------------------------------------------

TIMET's Henderson facility has been the only operating U.S.
titanium sponge production facility since 2017. [TEXT REDACTED] \53\
[TEXT REDACTED] \54\
---------------------------------------------------------------------------

\53\ [TEXT REDACTED].
\54\ [TEXT REDACTED].
\55\ Two processes are used for melting titanium: Vacuum arc re-
melting (VAR) and hearth melting. The VAR process involves placing
the metal in a crucible in a vacuum-sealed furnace; the metal is
melted using an electric arc and then formed into an ingot. The
hearth melting process uses electron or plasma beams to melt the
sponge in a water-cooled hearth; the melted material then forms an
ingot.
---------------------------------------------------------------------------

Understanding the role of titanium sponge in downstream titanium
goods production is imperative to understanding the threat imports pose
to the national security. Figure 4 outlines the general flow of inputs
to outputs in the titanium products market and highlights the U.S.
titanium industry's reliance on imports of titanium sponge and scrap.
[GRAPHIC] [TIFF OMITTED] TN26OC21.002

C. Titanium Melting and Finished Titanium Products

Once produced, titanium sponge must then be melted before it can be
fabricated into ingot or slab suitable for downstream use.\55\ In the
United States, four companies have titanium melt capacity: TIMET,
Allegheny Technologies Incorporated (ATI), Arconic, and Perryman (See
Figure 5).

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

[TEXT REDACTED] These firms' capacity utilizations indicate overall
company health. On average, the four firms' titanium melting operations
had an average capacity utilization of 83 percent in 2018. Similarly,
the firms' titanium milling operations had an average capacity
utilization of 74 percent in 2018. High capacity utilization rates for
melting and milling operations are attributable to strong demand for
titanium products from the aerospace, medical, and petrochemical
sectors.
Employment figures also suggest a healthy business outlook for the
melters. [TEXT REDACTED] reported an average 21 percent increase in the
number full-time employees between 2015 and 2019. [TEXT REDACTED]
indicated a [TEXT REDACTED] decrease in full-time employees over the
same period, this decrease can be attributed to [TEXT REDACTED].
Although the U.S. titanium melting industry is broadly healthy, it
remains vulnerable to a potential national emergency. These melters, as
will be discussed in Chapter VII, are dependent on non-U.S. sources for
much of their titanium sponge and titanium scrap feedstock. If these
sources are lost, U.S. titanium melters would be unable to supply vital
national defense and critical infrastructure applications.

----------------------------------------------------------------------------------------------------------------

[[Page 59127]]

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
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[TEXT REDACTED]
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

[TEXT REDACTED]
[TEXT REDACTED]
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

Four notable U.S. firms use titanium in their finished products:
[TEXT REDACTED] Further information on their titanium usage are
outlined below in Figures 10 through 13.
These four end-user companies provide a snapshot of the types of
finished titanium products that U.S. companies manufactured in 2018, as
well as the sectors that these finished products supported. Both
commercial and defense sectors are supported by these companies, and
some exported a significant portion of their commercial titanium
products. These exports highlight the demand for U.S.-produced titanium
products and stress the health of this particular part of the U.S.
titanium supply chain.
Despite the health of these companies, it is important to note that
the four titanium melters which supply titanium goods to these end
users are reliant on imports of titanium sponge and scrap for
production. End users are therefore indirectly subjected to the same
potential risks as their titanium suppliers. The inter-dependency
between these companies emphasizes the entirety of the U.S. titanium
supply chain's dependency on imports of titanium sponge and scrap and
vulnerability to the associated national security threat.

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
-------------------------------------------------------
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[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED]
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[[Page 59128]]

[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
-------------------------------------------------------
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

VI. Global Titanium Sponge Industry Conditions

A. Overview

Only a few countries possess the capability to manufacture titanium
sponge due to the significant capital investment and supporting
infrastructure required to maintain and operate facilities. Figure 14
below identifies countries with titanium sponge production capacity.
Over the 2010-2018 period, countries such as China, Japan, and Russia
saw capacity growth rates between 15 and 38 percent; in contrast, the
U.S. experienced a 46 percent decline. The sole operating U.S. facility
has [TEXT REDACTED] of capacity, which is among the smallest
worldwide.\56\
---------------------------------------------------------------------------

\56\ The figure provided on this graph includes Honeywell
Electronic Materials' 500 MT facility which produces ultra-high
purity sponge for use in electronic applications. This type of
sponge is not considered in the investigation. [TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN26OC21.003

Many of the major non-U.S. producers of titanium sponge opened
their facilities in the immediate post WWII period to fulfill
burgeoning aerospace demand. Plants in Russia (now VSMPO-Avisma) and
Kazakhstan (now UKTMP), which were commissioned in the 1950s and 1960s
to serve Soviet military aerospace demand, are examples of these. Since
the collapse of the Soviet Union, VSMPO-Avisma and UKTMP have shifted
their focus towards civilian applications. VSMPO-Avisma, as will be
detailed in Chapter VII, has built extensive supplier relationships
with Boeing, Airbus, and other Western aerospace firms. UKTMP has
pursued similar relationships with aerospace firms and has also entered
into joint ventures with Korean and French firms to expand its ingot
and slab manufacturing capabilities.
Although VSMPO-Avisma and UKTMP have diversified their product
offerings, the two companies remain prominent global producers of
sponge. During the 2015-2018 period, both VSMPO-Avisma's and UKTMP's
production levels remained constant at 26,000 metric tons and 47,000
metric tons respectively. Combined, these firms account for
approximately 25 percent of global production.
China, India, and Saudi Arabia are more recent entries into the
global market. China's sponge production capacity, which stood at 7,000
metric tons in 1998, increased by nearly 1,500 percent to 110,000
metric tons in 2018.\57\ This increase in capacity has not yet resulted
in an increased supply of Chinese sponge on the global market, as
Chinese production is principally for domestic consumption at this
time. However, China is expected to participate in the global titanium
sponge market in the coming years once domestic needs are satisfied.
Chinese titanium sponge development, as will be described in a
subsequent section, is a key part of Chinese government initiatives to
develop the country's defense industrial base, particularly the
aerospace sector. Japanese and other titanium sponge producers have
limited to no access to the Chinese market for sponge.
---------------------------------------------------------------------------

\57\ U.S. Geological Survey, Titanium and Titanium Dioxide
(1999), <a href="https://s3-us-west-2.amazonaws.com/prd-wret/assets/palladium/production/mineral-pubs/titanium/670399.pdf">https://s3-us-west-2.amazonaws.com/prd-wret/assets/palladium/production/mineral-pubs/titanium/670399.pdf</a>.
---------------------------------------------------------------------------

India's sponge plant, which has a capacity of 500 metric tons and
came online in 2015, was built to address titanium needs for the
country's space program and is not yet intended for

[[Page 59129]]

commercial production. In contrast, Saudi Arabia's plant is part of the
country's economic diversification strategy. Owned by a joint venture
of Saudi firms Tasnee and Cristal and Japanese sponge producer Toho,
the Saudi plant's 15,600 metric ton capacity rivals existing plants in
the United States, Ukraine, Russia, and Japan and began operations in
September 2019.\58\
---------------------------------------------------------------------------

\58\ ``Tasnee postpones its titanium sponge project to H2
2019'', Argaam, (June 25, 2019), <a href="https://www.argaam.com/en/article/articledetail/id/615205">https://www.argaam.com/en/article/articledetail/id/615205</a>.
---------------------------------------------------------------------------

Several factors have driven new entries into the titanium sponge
market and expansions of existing capacity. One of these is significant
commercial aircraft production backlogs at Boeing and Airbus. As of
June 2019, Boeing had an estimated seven year backlog of 5,733 aircraft
and Airbus reported an estimated nine year backlog of 7,276
aircraft.\59\ Meeting these orders will require increased production of
titanium parts, which will require increased production of titanium
sponge. Growth in shipbuilding, particularly in China and the Republic
of Korea, is also driving demand for titanium.\60\ Titanium has growing
maritime applications, including in marine turbines, propeller shafts,
and various exhaust and piping systems. Expansions in global
petrochemical and power generation industries are also raising demand
for titanium parts.\61\
---------------------------------------------------------------------------

\59\ J. Kasper Oestergaard, ``Airbus and Boeing Report June 2019
Commercial Aircraft Orders and Deliveries''< Defense and Security
Monitor--Forecast International'' (July 16, 2019), <a href="https://dsm.forecastinternational.com/wordpress/2019/03/15/airbus-and-boeing-report-february-commercial-aircraft-orders-and-deliveries/">https://dsm.forecastinternational.com/wordpress/2019/03/15/airbus-and-boeing-report-february-commercial-aircraft-orders-and-deliveries/</a>.
\60\ Argus Metals, ``Feed shortage hampers world Ti sponge ramp
up,'' (May 16, 2019), <a href="https://metals.argusmedia.com/newsandanalysis/article/1904225">https://metals.argusmedia.com/newsandanalysis/article/1904225</a>.
\61\ Ibid.
---------------------------------------------------------------------------

Production follows a similar pattern of non-U.S. increases and U.S.
decreases. As shown in Figure 15 below, Chinese, Russian, and Japanese
production levels increased between 21 and 63 percent over the 2010 to
2018 period. Although U.S. production data before 2015 is unavailable,
U.S. production decreased [TEXT REDACTED] between 2015 and 2018.

----------------------------------------------------------------------------------------------------------------

B. Prior Trade Investigations

The United States Government has examined previous allegations of
dumping and subsidies for the titanium sponge industry (See Figure 16).
A review of these cases can be found in Appendix F.
[GRAPHIC] [TIFF OMITTED] TN26OC21.004

C. U.S. Duties on Titanium Sponge Imports

As of November 2019, all titanium sponge imported into the United
States is subject to a 15 percent duty rate.\62\ However, U.S. firms
importing titanium sponge generally do not pay this rate due to the
drawback provisions of 19 CFR part 191. Under 19 CFR part 191,
manufacturers are able to claim drawback:
---------------------------------------------------------------------------

\62\ Harmonized Tariff Schedule of the United States (2019)
Revision 14, Chapter 81, Metals, Cermets, Articles Thereof,
8108.20.0010.

``upon the exportation [of articles] . . . which are not used in the
United States prior to their exportation or destruction, and which
are manufactured or produced in the United States, wholly or in part
with the use of particular imported, duty-paid merchandise and/or
drawback products.'' \63\
---------------------------------------------------------------------------

\63\ U.S. Code of Federal Regulations Title 19, Part 191.21.

In other words, a titanium manufacturer that imports sponge and
then uses it to manufacture an ingot or other downstream titanium
product that is exported to another country can claim drawback on the
15 percent duty paid

[[Page 59130]]

on the sponge. Titanium manufacturers also benefit from the provision
of 19 CFR part 191 that allows for a degree of substitution between
industrial inputs. U.S. manufacturers have agreements with U.S. Customs
and Border Protection that permit them to substitute scrap for sponge
in drawback claims, thus allowing them to reclaim some of the duty paid
without having to use the physical sponge associated with that duty
amount.\64\
---------------------------------------------------------------------------

\64\ Until 2018, titanium manufacturers could reclaim up to 99
percent of the duty paid through the drawback process. In 2015, the
Trade Facilitation and Trade Enforcement Act (TFTEA) introduced a
``lesser of'' provision that calculates the drawback amount based on
the ``lesser of'' (a) the value of duties, taxes, and fees paid on
the imported material or (b) the value of duties, taxes, and fees
that would have been paid on the substitute material if it had been
imported. TIMET calculates that this will cap drawback recovery at
approximately 66 percent of total duty paid for most manufacturers.
U.S. Customs and Border Protection and the Treasury Department,
``Modernized Drawback: A Proposed Rule'', Federal Register vol. 83,
37886-37990. <a href="https://www.federalregister.gov/documents/2018/08/02/2018-16279/modernized-drawback">https://www.federalregister.gov/documents/2018/08/02/2018-16279/modernized-drawback</a> and Titanium Metals Corporation,
Petition for Relief under Section 232, Exhibit 16.
---------------------------------------------------------------------------

Some titanium producers have argued that the existing tariff harms
the U.S. industry's overall competitiveness. As all producers other
than TIMET are 100 percent dependent on imported sponge, U.S. producers
must pursue the drawback process to recover the duty paid. In contrast,
certain downstream goods made with significant quantities of titanium,
including aircraft parts, can be imported into the United States duty-
free.\65\
---------------------------------------------------------------------------

\65\ Harmonized Tariff Schedule of the United States (2019)
Revision 14, Chapter 88, Aircraft, Spacecraft, and Parts Thereof.
---------------------------------------------------------------------------

VII. Findings

A. Titanium Sponge is Essential to U.S. National Security

As discussed in Chapter II, ``national security'' under Section 232
includes both national defense requirements and critical infrastructure
applications.
The vast majority of titanium sponge is used to satisfy civilian
aerospace and other industrial applications (See Figure 17).

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
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[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
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----------------------------------------------------------------------------------------------------------------
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[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

1. Titanium Sponge Is Required for National Defense Systems
Titanium metal, and, by extension, titanium sponge, is a critical
material for many U.S. defense systems.\66\ As a lightweight and
durable material, titanium has been incorporated into U.S. military
aircraft, including fighter jets, bombers, attack aircraft, transports,
and helicopters. Newer aircraft use increased amounts of titanium
compared to earlier generations of aircraft, as illustrated in Figure
18.
---------------------------------------------------------------------------

\66\ The distinction between metal and sponge is made because
sponge is an intermediate product. Titanium sponge is one of several
sources of potential feedstock for titanium metal, including scrap
titanium and titanium slag.
[GRAPHIC] [TIFF OMITTED] TN26OC21.005

Titanium is also used for ground vehicle armor and frames, as well
as naval vessel components. A brief listing of U.S. defense systems
using titanium metal can be found in Appendix G.
Congress has recognized the defense importance of titanium metal,
including titanium sponge, through legislation. In

[[Page 59131]]

1973, Congress expanded the Berry Amendment (10 U.S.C. Sec. 2533a) to
include what it defined as ``specialty metals.'' \67\ This addition,
commonly known as the ``Specialty Metals Clause,'' requires that
certain metals procured by DoD for defense use must be melted or
produced in the United States or a qualifying country.\68\ Both
titanium and titanium alloys are covered by the Specialty Metals
Clause.\69\ Although the clause does not require that titanium sponge
be of U.S. origin, the domestic melt requirement conveys a
Congressional recognition of domestic titanium's overall importance to
U.S. defense objectives and the criticality of titanium sponge to
defense needs.
---------------------------------------------------------------------------

\67\ The Fiscal Year 2007 National Defense Authorization Act
removed this requirement from the Berry Amendment and separately
established it in 10 U.S.C. 2533b. Valerie Bailey Grasso, ``The
Specialty Metal Clause: Oversight Issue sand Opinions for
Congress'', Congressional Research Service (February 6, 2014), 1.
\68\ As defined by DFAR 252.225-7001, qualifying countries are
defined as those countries which have reciprocal defense procurement
memorandums of understanding or other similar international
agreements with the United States. These countries include
Australia, Austria, Belgium, Canada, the Czech Republic, Denmark,
Egypt, Estonia, Finland, France, Germany, Greece, Israel, Italy,
Japan, Latvia, Luxembourg, the Netherlands, Norway, Poland,
Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey, and the
United Kingdom.
\69\ Ibid.
---------------------------------------------------------------------------

Though titanium is a key component of many defense systems, defense
requirements are a small fraction of overall titanium demand.
Consequently, U.S. titanium sponge production depends on the industry's
commercial viability and continued ability to supply civilian needs for
titanium metal.
While the United States does not currently maintain a stockpile of
titanium sponge, a stockpile was maintained for over 50 years.
Beginning in 1954, the Defense National Stockpile Center (DNSC)
maintained a substantial stockpile of titanium sponge pursuant to the
Strategic and Critical Minerals Stockpiling Act. The DNSC initially
envisioned that the stockpile would be of sufficient size to supply
peak consumption by downstream industry for up to one year. The exact
yearly figure has not been publicly released, however, it was estimated
to include up to 25,964 short tons (23,554 MT) of stockpile grade in
1994.\70\ Following the end of the Cold War, Congress determined that
the stockpile was no longer required and authorized its disposal in
1997; all material was sold off by 2005.\71\
---------------------------------------------------------------------------

\70\ DNSC distinguished between stockpile grade and non-
stockpile grade titanium sponge. In 1994, for example, the DNSC
stockpile included 25,964 short tons of stockpile grade sponge and
10,866 short tons of non-stockpile grade sponge. U.S. Geological
Survey, ``Minerals Yearbook: Titanium'' (1994), 1. <a href="https://s3-us-west-2.amazonaws.com/prd-wret/assets/palladium/production/mineral-pubs/titanium/670494.pdf">https://s3-us-west-2.amazonaws.com/prd-wret/assets/palladium/production/mineral-pubs/titanium/670494.pdf</a>.
\71\ Seong, Younoussi and Goldsmith, ``Titanium: Industrial
Base, Price Trends, and Technology Initiatives'', 38.
---------------------------------------------------------------------------

2. Titanium Sponge Is Required for Critical Infrastructure
Titanium sponge is also required to satisfy U.S. critical
infrastructure needs. As noted earlier, U.S. civilian industries
consume roughly [TEXT REDACTED] of all titanium sponge produced each
year. The Department's definition of critical infrastructure follows
the sectors identified in Presidential Policy Directive 21 (PPD-21)
(See Figure 19).\72\
---------------------------------------------------------------------------

\72\ PPD-21 was also used in the Department's 2018 Section 232
investigations on steel and aluminum, as well as the 2019
investigation on uranium. The White House, Office of the Press
Secretary, ``Presidential Policy Directive--Critical Infrastructure
Security and Resilience'', (February 12, 2013), <a href="https://obamawhitehouse.archives.gov/the-press-office/2013/02/12/presidential-policy-directive-critical-infrastructure-security-and-resil">https://obamawhitehouse.archives.gov/the-press-office/2013/02/12/presidential-policy-directive-critical-infrastructure-security-and-resil</a>.
[GRAPHIC] [TIFF OMITTED] TN26OC21.006

Of these 16 sectors, titanium sponge most regularly supports the
Transportation Systems sector. This sector includes commercial
passenger and cargo aviation and related aircraft engines, which
carried approximately 841 million passengers \73\ and 27.8 million
revenue tons of cargo \74\ in 2018. Almost all modern passenger and
cargo aircraft and related engines contain significant amounts of
titanium. For example, a completed Boeing 787 Dreamliner requires
approximately 24.9 metric tons of titanium for its manufacture; \75\
and the similarly sized Airbus A350 requires approximately 27.4 metric
tons of titanium.\76\ Passenger aircraft manufacturers are using
increasing amounts of titanium due to titanium's unique properties.
---------------------------------------------------------------------------

\73\ U.S. Department of Transportation, Bureau of Transportation
Statistics, ``Table 1B. 2018 Passengers on U.S. and Foreign Airlines
by Origin and Destination'', <a href="https://www.bts.gov/table-1b-2018-passengers-us-and-foreign-airlines-origin-and-destination">https://www.bts.gov/table-1b-2018-passengers-us-and-foreign-airlines-origin-and-destination</a>.
\74\ U.S. Department of Transportation, Bureau of Transportation
Statistics, ``Air Cargo Summary Data October 2002--February 2019)'',
<a href="https://www.transtats.bts.gov/freight.asp?pn=0&display=data2">https://www.transtats.bts.gov/freight.asp?pn=0&display=data2</a>.
\75\ Alwyn Scott, ``Boeing looks at pricey titanium bid to stem
787 losses'', Reuters (July 24, 2015), <a href="https://www.reuters.com/article/us-boeing-787-titanium-insight-idUSKCN0PY1PL20150724">https://www.reuters.com/article/us-boeing-787-titanium-insight-idUSKCN0PY1PL20150724</a>.
\76\ AZO Materials, ``The A350 XWB--Advanced Materials and
Design'', (November 26, 2012), <a href="https://www.azom.com/article.aspx?ArticleID=7858">https://www.azom.com/article.aspx?ArticleID=7858</a>.
---------------------------------------------------------------------------

Although the aerospace sector is the largest single consumer of
titanium, other sectors also require titanium. The U.S. Geological
Survey estimates that approximately 20 percent of titanium sponge or
19,000 metric tons per year, is used for non-aerospace
applications.\77\ Oil, gas, and other petrochemical industries and
nuclear reactors typically use titanium for heat

[[Page 59132]]

exchangers, pressure vessels and piping systems. Titanium is used due
to its corrosion resistance and endurance for high pressure, high
temperature uses. These properties also make titanium a suitable
material for use in power generation applications. Many modern
electrical turbines include titanium components.
---------------------------------------------------------------------------

\77\ U.S. Geological Survey, ``Titanium and Titanium Dioxide:
2019'', <a href="https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf">https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf</a>, 174.
---------------------------------------------------------------------------

Titanium is also used for medical applications, including surgical
instruments, replacement joints, dental implants, wheelchairs, and
other apparatuses. Titanium is highly biocompatible; it can be
implanted in the human body without causing a reaction or
rejection.\78\ Eight of the 10 producers and melters survey respondents
reported manufacturing titanium products used in various critical
infrastructure applications. Eight of the ten producers and melters
survey respondents supported the Transportation Systems sector through
manufacture of airplanes and aerospace components. The top 5 sectors,
not including the defense industrial base sector, supported by the 10
survey respondents are represented in Figure 20.
---------------------------------------------------------------------------

\78\ C.N. Elias, J.H.C. Lima, R. Valiev and M.A. Meyers,
``Biomedical Applications of Titanium and its Alloys'', JOM, (March
2008), <a href="http://meyersgroup.ucsd.edu/papers/journals/Meyers%20316.pdf">http://meyersgroup.ucsd.edu/papers/journals/Meyers%20316.pdf</a>,
46.
[GRAPHIC] [TIFF OMITTED] TN26OC21.007

3. Titanium Is Considered a Critical Mineral
Titanium is one of the 35 minerals included by DOI on the Critical
Minerals List. This list, which President Trump directed DOI to define
in Executive Order 13817 of December 20, 2017, includes minerals which
meet the following criteria:
(i) A non-fuel mineral or mineral material essential to the
economic and national security of the United States,
(ii) the supply chain of which is vulnerable to disruption, and
(iii) that serves an essential function in the manufacturing of a
product, the absence of which would have significant consequences for
our economy or our national security.\79\
---------------------------------------------------------------------------

\79\ White House, ``Presidential Executive Order on a Federal
Strategy to Ensure Secure and Reliable Supplies of Critical
Materials'', (December 20, 2017), <a href="https://www.whitehouse.gov/presidential-actions/presidential-executive-order-federal-strategy-ensure-secure-reliable-supplies-critical-minerals/">https://www.whitehouse.gov/presidential-actions/presidential-executive-order-federal-strategy-ensure-secure-reliable-supplies-critical-minerals/</a>.
---------------------------------------------------------------------------

USGS observed that titanium has significant uses for aerospace,
defense, energy, and telecommunications; these sectors are
representative of industries critical to U.S. economic and national
security.\80\ For this reason among others as well as based on input
from other U.S. government agencies, USGS included titanium on the
critical minerals list.
---------------------------------------------------------------------------

\80\ U.S. Geological Survey, ``Draft Critical Mineral List--
Summary of Methodology and Background Information--U.S. Geological
Survey Technical Input Document in Response to Secretarial Order No.
3359'' (2018), <a href="https://pubs.usgs.gov/of/2018/1021/ofr20181021.pdf">https://pubs.usgs.gov/of/2018/1021/ofr20181021.pdf</a>,
2.
---------------------------------------------------------------------------

Although titanium sponge is not separately mentioned, USGS's
methodology implies a recognition that titanium sponge is just as
critical as titanium:

Potential supply chain vulnerabilities relating to critical
minerals extend beyond what is described herein and should be
considered as part of the strategy within the report to the
President required by the E.O. For example, enhancing domestic
mineral processing capacity is important to prevent the immediate
export of domestically mined ore.\81\
---------------------------------------------------------------------------

\81\ Ibid.

By extension, the U.S. downstream industry's reliance on titanium
sponge imports can be considered a supply chain vulnerability. USGS
assesses the United States as having a ``moderate import reliance on
titanium metal (sponge),'' while also noting that the U.S. is a
significant exporter of finished titanium products.\82\ As titanium
sponge is required for the manufacture of downstream titanium goods,
limited sponge production capacity can create a supply bottleneck. Such
a bottleneck is one of the ``vulnerabilities'' identified in Executive
Order 13817.\83\
---------------------------------------------------------------------------

\82\ Although USGS distinguishes between import reliance and
import vulnerability (e.g., reliance on imports from countries with
`governance risks'), this distinction is not relevant for the
present Section 232 investigation. The Section 232 statute discusses
imports in broad terms and does not distinguish among importers
based on perceived political risk.
\83\ White House, ``Presidential Executive Order on a Federal
Strategy to Ensure Secure and Reliable Supplies of Critical
Materials''.
---------------------------------------------------------------------------

B. The Economic Decline of the U.S. Titanium Sponge Industry Is Caused
by Increased Imports of Titanium Sponge

1. U.S. Reliance on Imports of Titanium Sponge Is Increasing
The United States possesses one third of the world's titanium melt
capacity and one quarter of its titanium milling capacity, which
results in a substantial demand for inputs including titanium
sponge.\84\ Because only [TEXT REDACTED] of 2018 domestic demand

[[Page 59133]]

can be filled by domestic production, U.S. companies are heavily
reliant on imports of titanium sponge. Imports accounted for 68 percent
of all titanium sponge consumed in the United States in 2018. This
reliance on imports of titanium sponge increased by more than 13
percent between 2015 and 2018 (See Figure 21).
---------------------------------------------------------------------------

\84\ Roskill, ``Titanium Metal: Global Industry, Markets, and
Outlook 2018--8th Edition''.
[GRAPHIC] [TIFF OMITTED] TN26OC21.008

Over the 2010 to 2018 period, both titanium sponge import
penetration and titanium scrap import penetration have grown (See
Figure 22). Though titanium ingot import penetration remains low over
the period, ingot production is reliant on both titanium sponge and
scrap as feedstock. Increasing reliance on non-U.S. sponge and scrap to
meet ingot production needs indicates the threat imports pose to the
titanium industry as a whole.
---------------------------------------------------------------------------

\85\ USGS Minerals Yearbook, 2018.
\86\ [TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN26OC21.009

Of the titanium sponge imported in 2018, 94.4 percent came from
Japanese producers, 5.2 percent came from Kazakhstan, and the remaining
amount (less than 1 percent) was sourced from Russia and Ukraine, among
other countries.\85\ Japanese imports of titanium sponge increased from
75 percent of all imports in 2015 to over 94 percent by 2018 (See
Figure 23). [TEXT REDACTED] \86\

[[Page 59134]]

[GRAPHIC] [TIFF OMITTED] TN26OC21.010

As imports of Japanese sponge increased between 2015 and 2018,
imports of sponge from non-Japanese sources declined by approximately
75 percent in the same period (See Figure 24). In Russia and
Kazakhstan, decreased sponge exports trend with their producers'
preference for selling higher volume, less price-sensitive finished
downstream titanium products.\87\ Imports of Chinese titanium sponge
also declined due to increased internal demand from their domestic
titanium industry.
---------------------------------------------------------------------------

\87\ VSMPO-Tirus, the exclusive U.S. distributor for VSMPO-
Avisma, does not advertise sponge as a product for sale. <a href="https://www.vsmpo-tirus.com/products/">https://www.vsmpo-tirus.com/products/</a>. In recent years, Kazakh producer
UKTMP has also shifted its focus towards sale of milled products
through its joint ventures with Korean producer Posco and French
producer Aubert et Duval.
[GRAPHIC] [TIFF OMITTED] TN26OC21.011

U.S. reliance on imported titanium sponge is even clearer when
compared to total U.S. consumption of sponge. Figure 25 indicates that
demand for sponge continued to increase as U.S. production decreased.
Although U.S. consumers of sponge are currently able to meet their
needs through imported sponge, decreasing U.S. production and rising
U.S. demand illustrate the potential national security problem during a
national emergency scenario that causes an import disruption. [TEXT
REDACTED]

------------------------------------------------------------------------

-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
[TEXT REDACTED]
------------------------------------------------------------------------

Currently, all U.S. titanium sponge production comes from TIMET's
single facility in Henderson, Nevada. Should this facility close, all
titanium melters in the United States will be reliant on imported
titanium sponge.
2. Although Imports of Sponge Are Increasing, U.S. Dependence on Non-
U.S. Titanium Semi-Finished and Finished Products is Minimal

[[Page 59135]]

[TEXT REDACTED] \88\ The 2017 U.S. International Trade Commission
(USITC) investigation found that TIMET was not considering becoming a
merchant sponge producer.\89\ ATI internally consumed all sponge
produced at Rowley during the facility's period of operation and
reported no outside sales of sponge during the USITC investigation
period.
---------------------------------------------------------------------------

\88\ [TEXT REDACTED]
\89\ USITC, Titanium Sponge from Japan and Kazakhstan, V-6.
---------------------------------------------------------------------------

[TEXT REDACTED] The entire volume of U.S. titanium sponge exports
from 1985 to 2014 totaled approximately 33,000 metric tons.\90\ By
comparison, Japanese titanium sponge exports in 2017 and 2018 alone
exceeded a combined. [TEXT REDACTED] \91\
---------------------------------------------------------------------------

\90\ USGS, ``Titanium Sponge Statistics'' (January 19, 2017).
\91\ [TEXT REDACTED]
---------------------------------------------------------------------------

Although the United States imports a majority of its titanium
sponge, there is no similar dependence on foreign sources for
downstream titanium metal goods. It is important to note, however, that
U.S. semi-finished and finished titanium production is subject to the
same 68 percent import dependency on sponge and 52 percent import
dependency on scrap.
During the 2014 to 2019 period, approximately 7,100 metric tons of
titanium ingots were imported into the United States for consumption.
During the same timeframe, U.S. exports of titanium ingot stood at
approximately 45,000 metric tons (See Figure 26).
[GRAPHIC] [TIFF OMITTED] TN26OC21.012

A similar phenomenon can be seen with titanium bars, rods,
profiles, and wire (See Figure 27). In the 2014 to 2019 period,
approximately 11,000 metric tons were imported into the United States
compared to an approximate 37,000 metric tons exported. These high
exports to imports ratios indicate a financially healthy and globally
competitive U.S. titanium melt products industry.
[GRAPHIC] [TIFF OMITTED] TN26OC21.013

[[Page 59136]]

High export volumes can be explained in part by extensive U.S.
titanium melting capacity. Roskill Information Services estimated that,
as of 2016, the United States possessed approximately 136,000 metric
tons of melt capacity, approximately 31 percent of total global melt
capacity.\92\ Only China, which is estimated to have an approximate
138,000 metric tons of melt capacity, is on par with the United States.
China's melt capacity is currently largely used for domestic
consumption, while U.S. titanium producers use their significant
capacity to serve both domestic and foreign demand.
---------------------------------------------------------------------------

\92\ A 2013 presentation by Roskill Consulting Group estimates
that Chinese producers Zunyi Titanium as well as the Pangang and
Jichuan Groups produced small amounts of premium grade sponge in
2012. This material was used in Chinese domestic industry and was
not exported. Philip Dewhurst, ``Titanium Sponge Supply: Past,
Present and Future'', Presentation at the Titanium USA 2013
Conference in Las Vegas, Nevada, (October 9, 2013), <a href="https://cdn.ymaws.com/titanium.org/resource/resmgr/2010_2014_papers/DewhurstPhilipTiUSA2013Suppl.pdf">https://cdn.ymaws.com/titanium.org/resource/resmgr/2010_2014_papers/DewhurstPhilipTiUSA2013Suppl.pdf</a>, 21.
---------------------------------------------------------------------------

U.S. titanium metal production is also bolstered by high demand
from U.S. aerospace firms such as Boeing, Lockheed Martin, Pratt and
Whitney, and General Electric Aviation. These companies require
considerable amounts of downstream titanium products, and the titanium
sponge used as melt feedstock for these products is highly reliant on
non-U.S. sponge. This reliance on foreign titanium sponge highlights
the potential vulnerabilities of the titanium production supply chain
in the event of a sponge import disruption.
3. Price History and Recent Price Trends
Overview
Although a 44 percent increase in titanium sponge prices between
2002 and 2018 suggests broad U.S. titanium sponge industry health, a
deeper investigation of prices reveals difficulties for the industry.
Falling prices after 2009, prompted by increased Chinese domestic
production and industry trends such as increased scrap reversion,
highlight the mid and long-term problems for U.S. sponge production.
Titanium sponge price trends since 2002 are displayed in Figure 28.
[GRAPHIC] [TIFF OMITTED] TN26OC21.014

Global Increases in Capacity and Production Depress Sponge Prices
Increased demand for titanium sponge incentivized the creation of
additional global sponge capacity. Figure 29 shows increases in U.S.
and non-U.S. titanium sponge production capacity from 2002 to 2018.
[GRAPHIC] [TIFF OMITTED] TN26OC21.015

[[Page 59137]]

Though U.S. sponge capacity experienced net growth between 2005 and
2018 from 8,940 to 13,100 metric tons, U.S. capacity peaked in 2015 at
24,500 metric tons. These gains were lost in 2016 when ATI Rowley idled
operations. ATI's closure represented a 46.5 percent decrease in U.S.
sponge capacity from 24,500 metric tons in 2015 to 13,100 metric tons
in 2018. In contrast, non-U.S. sponge capacity increased by
approximately 178,840 tons, or 177 percent, between 2005 and 2018.
These capacity additions were principally driven by China, Japan, and
Russia in response to increasing global aviation consumption and other
demand.
Continued increases in global titanium sponge production
contributed to eventual declines in titanium sponge prices. Between
2009 and 2011, global sponge production increased 69 percent from
110,000 metric tons to 186,000 metric tons.\93\ Most of these increases
were seen in Japan and China, which boosted production by 26,000 and
25,000 metric tons respectively.\94\ The average titanium sponge price
declined by 48 percent as result, from $27.58 per Kg ($27,580 per
metric ton) in 2009 to $14.31 per Kg ($14,310 per metric ton) in 2011.
---------------------------------------------------------------------------

\93\ U.S. Geological Survey, ``Titanium and Titanium Dioxide:
2010'' and ``Titanium and Titanium Dioxide: 2012''.
\94\ Ibid.
---------------------------------------------------------------------------

Although production slightly declined after 2015, prices continued
to fall due to market saturation. As sponge prices continued to
decrease, some plants were idled due to declining market conditions.
Chinese producers idled approximately 30,000 metric tons of capacity
between 2015 and 2016, much of which had been built to capitalize on
price increases in the late 2000s.\95\ By 2016, sponge prices declined
to $9.36 per Kg ($9,360 per metric ton). Although prices slightly
recovered to $10.00 per Kg ($10,000 per metric ton) in 2018, the price
is still 23 percent below 2003 levels.
---------------------------------------------------------------------------

\95\ USGS Data.
---------------------------------------------------------------------------

Cost of Feedstock Impacts Sponge Prices
Another factor influencing sponge prices and production are
feedstock prices. Titanium sponge producers use several different types
of feedstock in the Kroll process, including rutile and ilmenite ores
as well as slag. Prices for these inputs are shown in Figure 30.
[GRAPHIC] [TIFF OMITTED] TN26OC21.016

On average, titanium sponge feedstock prices increased by 48
percent over the 2008 to 2018 period. The most profound increases were
in rutile and ilmenite, which increased by 59 and 76 percent
respectively. Although these price increases coincided with increases
in global titanium sponge production, sponge production has only a
limited impact on feedstock price increases.
Increased titanium dioxide production, which accounts for 93
percent of all industrial use of titanium feedstock, is the primary
driver of these increases in feedstock prices. Between 2008 and 2018,
global titanium dioxide capacity jumped 45 percent from approximately
5.3 million metric tons to approximately 7.7 million metric tons.\96\
Expansions of Chinese capacity account for a significant portion of
this increase: Chinese capacity increased 267 percent from
approximately 900,000 metric tons to 3.3 million metric tons between
2008 and 2018.\97\ Consequently, as global demand for titanium dioxide
increases, feedstock prices also increase.
---------------------------------------------------------------------------

\96\ U.S. Geological Survey, Titanium and Titanium Dioxide:
2009'' and ``Titanium and Titanium Dioxide: 2018''.
\97\ Ibid.
---------------------------------------------------------------------------

[TEXT REDACTED]
U.S. Cost of Titanium Sponge Production Compared to Import Prices
[TEXT REDACTED]

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
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[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

ATI cited both higher input prices, particularly TiCl4, and
availability of low-cost titanium sponge imports as drivers of its
decision to idle its sponge plant in favor of purchasing from foreign
suppliers:

``. . . Titanium sponge, including aerospace quality sponge, can now
be purchased from qualified global producers under long-term supply
agreements at prices lower than the

[[Page 59138]]

production costs at ATI's titanium sponge facility in Rowley, UT. .
. . ATI has entered into long-term, cost-competitive supply
agreements with several leading global producers of premium-grade
and standard-grade titanium sponge.'' \98\
---------------------------------------------------------------------------

\98\ ``Allegheny Technologies Announces Actions to Improve
Future Financial Performance'', ATI (August 24, 2016), <a href="https://ir.atimetals.com/news-and-events/news-releases/2016/08-24-2016-122218784">https://ir.atimetals.com/news-and-events/news-releases/2016/08-24-2016-122218784</a>.

[TEXT REDACTED]

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED]
[TEXT REDACTED]
[TEXT REDACTED]
[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------

Low non-U.S. prices, as seen in Figure 32, inhibit domestic
investment and the continuation of sponge production in the U.S. [TEXT
REDACTED] \99\ [TEXT REDACTED] However, high energy and labor costs in
Japan raise the question of whether Japanese producers can continue to
seemingly subsidize their exports of titanium sponge.
---------------------------------------------------------------------------

\99\ [TEXT REDACTED]
---------------------------------------------------------------------------

Increased Use of Titanium Scrap Affects Titanium Sponge Prices

Titanium scrap, which is generated during the downstream
manufacturing process, can also be used as a source of feedstock for
titanium melting operations. Titanium scrap prices increased
substantially over the 2002 to 2018 period (See Figure 33).
[GRAPHIC] [TIFF OMITTED] TN26OC21.017

Increased scrap prices stem from downstream consumers' initiatives
to recover scrap. In most cases, as a billet is forged, rolled, and/or
machined to produce a finished good, excess titanium metal is produced.
This metal can then be collected and returned to a titanium melter for
reprocessing into another ingot or billet. Downstream consumers,
particularly aerospace firms, seek to increase the amount of recycled
scrap that they use in their products in order to realize cost-savings
on input costs.\100\
---------------------------------------------------------------------------

\100\ Seong, Younoussi, and Goldsmith, ``Titanium: Industrial
Base, Price Trends, and Technology Initiatives'', 15.
---------------------------------------------------------------------------

On average, approximately 40 to 50 percent of a given melt's
feedstock comes from scrap.\101\ This percentage, however, will vary
depending on the customer's requirements for the alloy.\102\ Globally,
scrap accounts for an average of 31 percent of titanium producers'
annual melt feedstock.\103\ U.S. producers use even higher amounts,
ranging between 59 and 66 percent.\104\ U.S. producers also
dramatically increased their titanium scrap imports in the first half
of the 2010s, as shown in Figure 34.
---------------------------------------------------------------------------

\101\ Ibid.
\102\ Purer alloys cannot use higher percentages of scrap. Some
applications, such as billets for the F-35 Joint Strike Fighter, use
no scrap whatsoever. Ibid., 17.
\103\ U.S. Geological Survey.
\104\ U.S. Geological Survey.

---------------------------------------------------------------------------

[[Page 59139]]

[GRAPHIC] [TIFF OMITTED] TN26OC21.018

One reason for the increased use of scrap is the aviation
industry's use of the ``buy to fly'' (BTF) ratio. The BTF ratio
specifies the amount of titanium required to produce a given part.\105\
For example, if the BTF ratio for a given part weighing one pound is
20:1, 20 pounds of titanium metal is required to produce the part
weighing 1 pound. New developments in metallurgy and manufacturing
techniques have allowed for increased use of scrap in aerospace-grade
titanium. In 2008, Boeing and VSMPO-Avisma announced the development of
a titanium alloy that can use up to 75 percent scrap for its initial
melt to be produced in Russia.\106\ Additive manufacturing techniques,
including 3-D printing and joining techniques such as linear friction
welding and explosive forming, have the potential to reduce BTF ratios
to 2:1 from the then-contemporary industry average of 10:1.\107\
Manufacturers thus have significant financial incentive to recover and
reuse scrap titanium.
---------------------------------------------------------------------------

\105\ Ibid., 18.
\106\ The Boeing Company, ``The quest for stronger, cheaper
titanium alloys,'' (February 2018), <a href="https://www.boeing.com/features/innovation-quarterly/feb2018/feature-titanium.page">https://www.boeing.com/features/innovation-quarterly/feb2018/feature-titanium.page</a>.
\107\ Guy Norris, ``Metallics Make Comeback With Manufacturing
Advances', Aviation Week and Space Technology (May 6, 2013), <a href="https://aviationweek.com/awin/metallics-make-comeback-manufacturing-advances">https://aviationweek.com/awin/metallics-make-comeback-manufacturing-advances</a>.
---------------------------------------------------------------------------

Another incentive for increasing scrap usage is due to the price
difference between scrap and titanium sponge (See Figure 35).
[GRAPHIC] [TIFF OMITTED] TN26OC21.019

Availability of cheaper scrap inputs incentivizes use of scrap
material in place of titanium sponge where possible. Further, as
aircraft production increased in the years following 2011, available
scrap supplies increased. Increased availability caused scrap prices to
decrease by 44 percent; in contrast, sponge prices only decreased by 37
percent. By 2018, the cost per Kg of scrap was 47 percent of that for a
Kg of sponge (Note: 1 metric ton equals 1,000 Kg). Increased use of
titanium scrap has offset use of titanium sponge (See Figure 36).
However, decreasing scrap prices are putting further financial
pressures on the domestic production of titanium sponge.

[[Page 59140]]

[GRAPHIC] [TIFF OMITTED] TN26OC21.020

Increased use of titanium scrap as feedstock does not, however,
eliminate the need for new titanium sponge. In the United States, scrap
accounts for approximately 59-66 percent of titanium melt
feedstock.\108\ Using scrap as a source of feedstock allows titanium
manufacturers to offset price increases in sponge with increased
consumption of scrap, or vice-versa.\109\ However, the chemical
composition requirements for aerospace rotating-grade titanium preclude
usage of higher amounts of scrap. The inability to substitute high
grade sponge with scrap emphasizes the importance of a secure supply of
sponge for defense applications.\110\
---------------------------------------------------------------------------

\108\ U.S. Geological Survey.
\109\ Decreased aircraft production during 2003-2005 caused
global shortages of titanium scrap; between 2003 and 2006, the
average per-kilogram price of titanium scrap imports jumped 326
percent. In contrast, titanium sponge prices increased by only 66
percent. Imports of sponge thus increased by 136 percent of the
period, compared to 130 percent for scrap. USITC Dataweb and Seong,
Younoussi, and Goldsmith, ``Titanium: Industrial Base, Price Trends,
and Technology Initiatives'' 36-37.
\110\ Titanium scrap can contain non-titanium elements that
cannot reasonably removed during the recycling and melt processes.
The presence of these elements thus precludes use of significant
amounts of scrap in higher grades of sponge.
---------------------------------------------------------------------------

It is also important to note the U.S. dependency on scrap, when
combined with higher import levels of sponge, further jeopardizes the
ability of the U.S. to produce titanium ingot, billet, and other
downstream finished titanium products in a national emergency.
Domestically produced titanium scrap is reliant on the availability of
titanium sponge in the initial production of titanium goods. As
imported sponge accounts for 68 percent of U.S. titanium sponge
consumption, U.S. titanium scrap production is similarly reliant on the
availability of sponge imports.
4. Employment Trends
[TEXT REDACTED]

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED] .................................... ....................................
[TEXT REDACTED] ....................................
----------------------------------------------------------------------------------------------------------------

[TEXT REDACTED] These positions, about one third of the workforce,
aside from maintenance and engineering and administration and
management, require no formal education and have minimal on the job
training requirements; maintenance and administration require
bachelor's degrees and one to six months of on-the-job training.

[TEXT REDACTED] Downstream Titanium Employment
Employment in downstream titanium manufacturing has shown growth
over the 2015 to 2019 period (See Figure 39).

[[Page 59141]]

[GRAPHIC] [TIFF OMITTED] TN26OC21.021

Stable employment in downstream titanium manufacturing indicates a
broadly healthy sector. [TEXT REDACTED] \111\
---------------------------------------------------------------------------

\111\ [TEXT REDACTED].
---------------------------------------------------------------------------

[TEXT REDACTED] However, as reviewed in this section, stable
downstream industry employment does not imply stability for employment
in sponge manufacturing. The remaining [TEXT REDACTED] employees in the
U.S. titanium sponge industry, all concentrated at TIMET's Henderson
facility, will probably transfer to other industries and regions if
sponge production ceases. By the time that old capacity was to be
reactivated or new capacity built, it is unlikely that the required
skills and technical knowledge would be readily available. Any effort
to restore U.S. titanium sponge capacity would therefore incur
additional costs and delays due to the need to train a new skilled
workforce.
5. Financial Outlook
TIMET is the sole active titanium sponge manufacturer in the United
States, and the firm's financial health highlights the status of U.S.
titanium sponge production. [TEXT REDACTED] \112\ [TEXT REDACTED]
---------------------------------------------------------------------------

\112\ [TEXT REDACTED].

[TEXT REDACTED] \113\ [TEXT REDACTED] \114\ [TEXT REDACTED] \115\
[TEXT REDACTED]
---------------------------------------------------------------------------

\113\ Ibid.
\114\ Ibid.
\115\ U.S. International Trade Commission DataWeb.
---------------------------------------------------------------------------

6. Research and Development
Overall titanium industry research and development expenditures
increased over the 2015 to 2018 period for the five companies reporting
(See Figure 41).

Of these expenditures, an average of 11 percent went to basic
research, 21 percent went to applied research, and the remaining 68
percent went to process development. [TEXT REDACTED]
An increase in overall industry R&D expenditures should not be
taken as a sign of health for U.S. titanium sponge production. As
discussed earlier in this report, the basic titanium sponge production
process has remained unchanged for several decades. The expenditures
reported in Figure 41 above likely pertain to downstream production
processes, including advanced melting and additive manufacturing
techniques, rather than sponge operations.
7. Capital Expenditures
Low-priced sponge imports have impeded U.S. producers' ability to
make needed capital investments for future production. [TEXT REDACTED]
<SUP>116 117</SUP> [TEXT REDACTED] \118\
---------------------------------------------------------------------------

\116\ Petition, 36.
\117\ Business Confidential Exhibit 19, 9.
\118\ Ibid, 8.
---------------------------------------------------------------------------

[TEXT REDACTED]

[[Page 59142]]

[TEXT REDACTED]
Low sponge prices had already harmed ATI's ability to continue
sponge production operations at its Rowley, Utah plant, which was idled
in 2016. The Rowley plant, unlike TIMET's facility, did not have the
capacity to produce TiCl<INF>4</INF> or recycle magnesium, both of
which are critical to sponge production. These materials were obtained
from third parties and shipped by rail to the Rowley facility.\119\
[TEXT REDACTED]
---------------------------------------------------------------------------

\119\ U.S. ITC, In the Matter of Titanium Sponge from Japan and
Kazakhstan (701-TA-587 and 731-TA-1385-1386), p. 108.
---------------------------------------------------------------------------

C. Diminishing U.S. Titanium Sponge Production Capacity May Impair the
National Security in the Future

1. U.S. Production Is Well Below Domestic Demand
Total consumption of titanium sponge in the United States was
approximately 34,000 metric tons in 2018.\120\ As identified earlier,
total available U.S. titanium sponge capacity is only [TEXT REDACTED],
representing approximately [TEXT REDACTED] of total U.S. demand.
However, actual production in 2018 was approximately [TEXT REDACTED].
The entirety of current U.S. titanium sponge production satisfies just
[TEXT REDACTED] of U.S. demand.\121\
---------------------------------------------------------------------------

\120\ U.S. Geological Survey, ``Titanium and Titanium Dioxide:
2019.''
\121\ U.S. Geological Survey, 2019 Mineral Commodity Summaries:
Titanium and Titanium Dioxide, 174. <a href="https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf">https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf</a>.
---------------------------------------------------------------------------

[TEXT REDACTED] \122\ [TEXT REDACTED] U.S. titanium melters will
continue to rely on imported titanium sponge and scrap for the
foreseeable future.
---------------------------------------------------------------------------

\122\ USGS reports that aerospace applications accounted for 80
percent of titanium sponge usage in 2018. The USGS figure does not
appear to distinguish between commercial and military aerospace
applications. Ibid.

Surge Capability
The U.S. has some ability to utilize surge capabilities in the
event of a national emergency through ATI's idled sponge facility. This
reactivated capacity would add as much as [TEXT REDACTED] of titanium
sponge production capacity. [TEXT REDACTED] However, given the non-
integrated nature of the plant and the associated difficulties with
obtaining titanium tetrachloride and magnesium inputs, the Rowley
facility would face significant obstacles to full production. It is
unclear whether the Rowley plant would be able to adequately meet
emergency needs within a reasonable period of time.
2. Domestic Titanium Sponge Capacity Is Highly Concentrated and Limits
Capacity Available for a National Emergency
Active U.S. titanium sponge production is concentrated exclusively
at TIMET's plant in Henderson, Nevada. This plant, which began
operations in the 1950s, is aging and will not be able to continue
future operations without significant capital investments. ATI's plant
in Rowley, Utah was indefinitely idled at the end of 2016 and the
company [TEXT REDACTED]. Additionally, ATI's plant in Albany, Oregon
was idled in 2009, when ATI Rowley began operations, and is now
permanently closed without the ability to reopen. If TIMET does not
replace the chlorination facility at Henderson by [TEXT REDACTED] and
consequently closes its titanium sponge production facility, there will
be no active titanium sponge production capacity suitable for
industrial metal applications in the United States.\123\
---------------------------------------------------------------------------

\123\ While it is expected that Honeywell Electronic Materials'
plant in Bountiful, Utah will remain operational, as noted earlier,
this plant does not currently produce titanium sponge suitable for
most national defense and critical infrastructure applications.
---------------------------------------------------------------------------

Reduced sponge capacity already forces U.S. downstream producers
into a heightened dependence on foreign suppliers. Although U.S.
downstream producers have used imports to satisfy some of their
production requirements for decades, the current level of import
dependence is at a historic high. In 1988, U.S. titanium sponge
production could fulfill all domestic consumption. By 2018, production
at the last operational sponge facility fulfilled just [TEXT REDACTED]
of domestic consumption.\124\ In an emergency scenario where imports
were disrupted, U.S. downstream producers may not be able to continue
normal melting and fabrication operations without access to titanium
sponge and scrap imports.
---------------------------------------------------------------------------

\124\ U.S. Geological Survey, ``Titanium Sponge Statistics''
(January 19, 2017).
---------------------------------------------------------------------------

In contrast, China and Russia have integrated titanium production
capacity. In a hypothetical emergency scenario involving conflict
between the United States and either China or Russia, the U.S. could
soon lose its capability to manufacture titanium parts due to a lack of
sponge availability and a finite supply of scrap. This would be further
compounded by a cutback in imports of semi-finished and finished
titanium products. China or Russia, in contrast, could continue
titanium production without significant interruptions.
National emergency scenarios could potentially affect imports from
Japan and Kazakhstan. In the event of a general conflict in the
Pacific, including China and/or Russia, the United States may not be
able to access titanium sponge or scrap imports from Japan. [TEXT
REDACTED] \125\ Loss of these imports and limited domestic sponge
capacity from TIMET would effectively halt U.S. titanium metal
production and could impair sustainment and assembly of aircraft and
other defense systems requiring titanium.
---------------------------------------------------------------------------

\125\ [TEXT REDACTED].
---------------------------------------------------------------------------

[TEXT REDACTED] \126\ While these capacity additions could mitigate
import losses, shortages are still possible, and U.S. national security
would be impaired.
---------------------------------------------------------------------------

\126\ [TEXT REDACTED].
---------------------------------------------------------------------------

These possibilities, in the Secretary's assessment, represent a
significant weakening of the internal economy needed to support defense
and critical infrastructure needs and threatens to impair the national
security as defined in Section 232.
3. [TEXT REDACTED]
[TEXT REDACTED]

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D. Increased Global Titanium Sponge Capacity and Production Further
Impact the Long-Term Viability of U.S. Titanium Sponge Production

1. Extreme Growth in Chinese Titanium Sponge Production Will Place
Downward Pressure on Global Titanium Sponge Prices
Although Chinese imports accounted for only 0.01 percent of all
U.S. titanium sponge imports and 0.16 percent of downstream titanium
imports (ingot and billet) in 2018, China's dramatic growth in titanium
sponge production will contribute to overall downward pressure on
global titanium sponge prices.\127\ This pressure may increase in the
future if Chinese producers shift their business focus away from
supplying domestic industry and towards exports of titanium sponge,
ingot, and billet.
---------------------------------------------------------------------------

\127\ USITC Dataweb.
---------------------------------------------------------------------------

Currently, the Chinese are instead exporting a variety of finished
products which contain titanium metal (bicycles, cookware, heat
exchangers, condensers, automobile parts, structural aerospace parts,
medical devices, construction materials, etc.).
As shown in Figure 47, Chinese producers have exponentially
increased their sponge capacity and production over the past two
decades.
[GRAPHIC] [TIFF OMITTED] TN26OC21.022

These increases in capacity and production, facilitated in no small
part by state assistance to producers, continued despite low global
sponge prices. As reviewed earlier in this chapter, sponge prices in
2018 were 63 percent lower than their 2009 peak. Over the same
timeframe, Chinese production increased by 14 percent and capacity by
41 percent. These increases in Chinese capability despite declining
global prices suggest that, similar to the country's actions in the
steel and aluminum industries, Chinese titanium sponge producers need
not heed market signals in the same way as U.S. and other market
producers.
China is virtually self-sufficient in titanium sponge
production.\128\ In 2018, estimated Chinese production may have been as
high as 75,000 metric tons, compared to approximate total Chinese
demand of 79,000 metric tons.\129\ The gap between domestic production
and consumption largely represents shortfalls in premium-grade sponge
manufacture, which is currently being filled with imports. However,
this gap will likely be lowered in the coming years. Chinese production
of premium-grade sponge suitable for aerospace structures is already
estimated to be 30 percent of total global capacity.\130\
---------------------------------------------------------------------------

\128\ TIMET testimony before the U.S. International Trade
Commission, <a href="https://www.usitc.gov/trade_remedy/731_ad_701_cvd/investigations/2017/Titanium%20Sponge%20from%20Japan%20and%20Kazakhstan/Preliminary/titanium_sponge_from_japan_and_kazakhstan-conference-09-14-2017.pdf">https://www.usitc.gov/trade_remedy/731_ad_701_cvd/investigations/2017/Titanium%20Sponge%20from%20Japan%20and%20Kazakhstan/Preliminary/titanium_sponge_from_japan_and_kazakhstan-conference-09-14-2017.pdf</a>,
36.
\129\ Argus Metals, ``Feed shortage hampers world Ti sponge ramp
up'' (May 16, 2019), <a href="https://metals.argusmedia.com/newsandanalysis/article/1904225">https://metals.argusmedia.com/newsandanalysis/article/1904225</a>.
\130\ Roskill, ``Titanium Metal: Global Industry, Markets, and
Outlook 2018--8th Edition''.
---------------------------------------------------------------------------

Chinese demand for titanium sponge will increase over the coming
decades due to rapid expansions in the country's chemical, aerospace,
and electricity generation industries. In 2018, these three sectors
consumed nearly three quarters of all titanium products produced in
China.\131\ Government initiatives emphasizing advanced manufacturing,
including the Made in China 2025 plan, the Chang'e lunar exploration
project, and development of domestic civilian airliners such as the
C919 and CR929 will drive an increasing demand for titanium metal.
---------------------------------------------------------------------------

\131\ Exhibit 11, TIMET Rebuttal Comment: ``Sylvain Gehler,
World Titanium Sponge Supply Situation'', 14.
---------------------------------------------------------------------------

Chinese domestic near self-sufficiency in titanium production
places significant pressure on other titanium producers. Foreign
producers are currently able to access roughly 5 percent of the Chinese
sponge market and, as China develops more premium-grade sponge
capacity, will be further excluded. Further, it is anticipated that
China will begin to export material once domestic production exceeds
domestic demand.
The gap between Chinese capacity and production, therefore, is
notable. The UGS estimates that only 63 percent of Chinese titanium
sponge capacity was active in 2018, and China continues to increase
sponge capacity.\132\ If increased to full capacity, Chinese production
would exceed combined Japanese and Russian sponge production. This
potential illustrates the impact of Chinese production and capacity on
the global market and highlights the impact China will have on the
global market should their production focus switch towards exports. An
increased presence of low-priced Chinese sponge in the global market
would place further downward pressure on sponge prices and potentially
force market producers, like Japan, to cut prices below economically
viable levels in order to remain competitive in the export market.
---------------------------------------------------------------------------

\132\ U.S. Geological Survey, ``Titanium and Titanium Dioxide:
2019'', <a href="https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf">https://prd-wret.s3-us-west-2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-titan.pdf</a>.

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[[Page 59144]]

Though China currently consumes almost all domestic production of
titanium sponge, their large-scale capacity for mill products has
allowed them to export approximately 23 percent of their ingot and
billet production (no significant quantities are imported to the U.S.).
Instead, China has been exporting large quantities of commercial and
industrial products containing titanium (bicycles, heat exchangers,
condensers, automobile parts, structural aerospace parts, medical
devices, construction materials, etc.).
Increased Chinese exports of commercial and industrial products
containing titanium (with a broader range than Russian exports of
aerospace-focused titanium products), and a future focus on exports of
titanium sponge, ingot and billet, are expected as China has
implemented a similar strategy in other material markets.
Chief among export markets is the United States. The United States
is the second largest market for titanium products in the world and is
a natural focus for exports. [TEXT REDACTED] Existing availability of
low-price imports has forced TIMET to consider the future of its own
aging sponge production facility and its high production costs.
Increased competition from Japanese producers due to rising Chinese
production, as well as the potential for China to begin exporting more
low-priced material to the U.S., may further depress sponge and scrap
prices. A further reduction in import prices would make it even more
difficult for TIMET to justify continued sponge production when low-
priced imports are available.
2. Increased Chinese and Russian Premium Quality Sponge Production
Threatens U.S. Aerospace Supply Chains
Premium quality sponge is required for rotating aircraft parts,
particularly in engines. As highlighted earlier, not every titanium
sponge plant is certified to supply premium quality sponge. The
certification process requires extensive consultation with equipment
manufacturers and testing of sponge samples to ensure chemical purity.
Most U.S. and European Union aerospace firms have at some point granted
certification to six producers: TIMET, ATI, Toho Titanium, Osaka
Titanium, VSMPO-Avisma, and UKTMP (Kazakhstan).\133\
---------------------------------------------------------------------------

\133\ Prior to its 2016 idling, ATI had obtained certification
for its Rowley facility.
---------------------------------------------------------------------------

Although China has not yet produced aerospace non-rotating grade
titanium sponge for export, Chinese producers have produced it for
domestic consumption.\134\ Aerospace non-rotating grade sponge is
believed to have been used for structural aerospace applications in
Chinese military airframes. However, it is not clear whether Chinese
producers are capable of producing aerospace rotating-grade titanium
sponge at this time.
---------------------------------------------------------------------------

\134\ A 2013 presentation by Roskill Consulting Group estimates
that Chinese producers Zunyi Titanium as well as the Pangang and
Jichuan Groups produced small amounts of premium grade sponge in
2012. This material was used in Chinese domestic industry and was
not exported. Philip Dewhurst, ``Titanium Sponge Supply: Past,
Present and Future'', Presentation at the Titanium USA 2013
Conference in Las Vegas, Nevada, (October 9, 2013), <a href="https://cdn.ymaws.com/titanium.org/resource/resmgr/2010_2014_papers/DewhurstPhilipTiUSA2013Suppl.pdf">https://cdn.ymaws.com/titanium.org/resource/resmgr/2010_2014_papers/DewhurstPhilipTiUSA2013Suppl.pdf</a>, 21.
---------------------------------------------------------------------------

As noted earlier, China will need increasing amounts of aerospace
non-rotating titanium sponge in the future to support new initiatives
in the aerospace sector. Furthermore, Chinese government objectives of
self-sufficiency in aircraft engine production will require the
development of aerospace rotating grade sponge capacity.\135\ The
Department anticipates that future Chinese activities in titanium
sponge will follow the same pattern as their activities in the global
steel and aluminum trade, namely price-insensitive production that will
undermine all other competitors.\136\
---------------------------------------------------------------------------

\135\ At present, Chinese civil and military aircraft
manufacturers rely on engines from U.S., European Union, and Russian
companies. To counteract this dependence, the Chinese government
created the Aero Engine Corporation of China in 2016 as an
integrated engine manufacturing firm. Development of premium grade
titanium sponge capacity complements this effort to build a domestic
aircraft engine industry. BBC News, ``China launches own aircraft
engine-maker to rival the West'' (August 29, 2016), <a href="https://www.bbc.com/news/business-37212009">https://www.bbc.com/news/business-37212009</a>.
\136\ Section 232 steel report, 52-53, <a href="https://www.bis.doc.gov/index.php/documents/steel/2224-the-effect-of-imports-of-steel-on-the-national-security-with-redactions-20180111/file">https://www.bis.doc.gov/index.php/documents/steel/2224-the-effect-of-imports-of-steel-on-the-national-security-with-redactions-20180111/file</a>, and Section 232
aluminum report, 102, <a href="https://www.bis.doc.gov/index.php/documents/steel/2224-the-effect-of-imports-of-steel-on-the-national-security-with-redactions-20180111/file">https://www.bis.doc.gov/index.php/documents/steel/2224-the-effect-of-imports-of-steel-on-the-national-security-with-redactions-20180111/file</a>.
---------------------------------------------------------------------------

Russia's activities in global titanium sponge trade suggest a
precedent for future Chinese activity. Russian producer VSMPO-Avisma,
like many Chinese producers, receives a significant amount of state
assistance.\137\ VSMPO-Avisma is also an integrated producer of
titanium sponge and downstream titanium products, and is able to offer
titanium products at lower prices than U.S. or European producers.
---------------------------------------------------------------------------

\137\ Russian state holding company Rostec owns a blocking
interest of 25 percent in VSMPO-Avisma. VSMPO-Avisma has also passed
through several periods of outright control by the Russian state;
additionally, VSMPO management has significant ties to the Russian
government.
---------------------------------------------------------------------------

These low prices and favorable contract terms were a major
incentive behind Boeing's 2006 joint venture with VSMPO-Avisma to
establish Urals Boeing Manufacturing (UBM) at Verkhnyaya Salda in
Sverdlovsk Oblast.\138\ The UBM plant creates titanium forgings from
VSMPO-manufactured sponge and ingot for use in Boeing's 787 aircraft.
In 2018, Boeing and VSMPO-Avisma announced plans for a second $82.3
million production line at UBM that would support the 787, 737 MAX, and
777X aircraft. Altogether, VSMPO-Avisma provides 35 percent of Boeing's
titanium products. European manufacturer Airbus is similarly dependent
on VSMPO-Avisma's exports. In 2009, Airbus signed a $4 billion
agreement with the firm to supply titanium through 2020.\139\ As of
2019, VSMPO-Avisma supplied approximately 50 percent of Airbus's annual
titanium requirements.\140\ Although VSMPO-Avisma is not a significant
exporter of sponge, its ventures with Boeing and Airbus indicate an
interest in increasing the company's share of the global titanium
aviation parts market.
---------------------------------------------------------------------------

\138\ The Boeing Company, ``Boeing and VSMPO-AVISMA Announce
Titanium Agreement'', (August 11, 2006), <a href="https://boeing.mediaroom.com/2006-08-11-Boeing-and-VSMPO-AVISMA-Announce-Titanium-Agreement">https://boeing.mediaroom.com/2006-08-11-Boeing-and-VSMPO-AVISMA-Announce-Titanium-Agreement</a>.
\139\ Eleonore Demry, ``Russia, Airbus Sign $4 Billion Titanium
Deal), Agence France Presse (April 20, 2009), <a href="https://www.industryweek.com/companies-amp-executives/russia-airbus-sign-4-billion-titanium-deal">https://www.industryweek.com/companies-amp-executives/russia-airbus-sign-4-billion-titanium-deal</a>.
\140\ ``Interview: Julien Franiatte, head of Airbus Russia'',
Russian Aviation Insider (August 27, 2019), <a href="http://www.rusaviainsider.com/interview-julien-franiatte-head-of-airbus-russia/">http://www.rusaviainsider.com/interview-julien-franiatte-head-of-airbus-russia/</a>.
---------------------------------------------------------------------------

Lower prices, made possible by Russian state support, allow VSMPO-
Avisma to capture a significant share of Boeing's business. [TEXT
REDACTED]

[[Page 59145]]

VSMPO-Avisma's export model could easily be copied by a Chinese
manufacturer in the future. A fully integrated Chinese titanium sponge
and downstream titanium producer could offer U.S. and other market
aerospace firms significant cost savings over market titanium sponge
and titanium product producers. Such an outcome would threaten the
future viability of market production of aerospace grade titanium
sponge, including U.S., Japanese, and Kazakhstani production.
If Chinese production assists in the displacement of market
production of aerospace grade sponge, global aircraft manufacturers,
including those in the United States and European Union, will depend on
state-influenced Russian and Chinese sources of titanium metal. Russia
and China could then use their de facto dominance of the global
titanium sponge industry as a tool of geopolitical leverage, as they
have with other industries such as uranium and steel. Additionally, in
the event of an emergency potentially involving hostilities with Russia
or China, U.S. titanium production would be severely impaired if
deprived of imports from these countries. As Russia and China are both
identified in the 2017 National Security Strategy as ``revisionist
powers . . . that challenge U.S. values and interests,'' \141\
dependence on these countries for titanium sponge would threaten to
impair the national security.
---------------------------------------------------------------------------

\141\ Executive Office of the President, ``National Security
Strategy of the United States of America'', (December 2017), 25.
---------------------------------------------------------------------------

VIII. Conclusion

Based on these findings, the Secretary concludes that the present
quantities and circumstance of titanium sponge imports are ``weakening
our internal economy'' and threaten to impair the national security as
defined in Section 232. The consequent adverse impact on the domestic
titanium sponge industry, along with the circumstance of increased
global production and capacity in titanium sponge, especially in non-
market economies, places the United States at risk of losing the
remaining industrial capacity and technical knowledge related to
titanium sponge production that is essential to meet national defense
and critical infrastructure requirements.
Imports of titanium sponge, which accounted for 68 percent of all
sponge consumed in the United States in 2018, threaten to impair the
national security by placing the sole remaining U.S. titanium sponge
producer's operation under severe financial stress. Low-priced sponge
imports, as well as low priced titanium scrap imports, depress the
price of U.S. titanium sponge and de-incentivize recapitalization of
the remaining active facility's aging production capabilities. If the
remaining facility ceases operation, the U.S. will have no active
domestic capacity to produce titanium sponge for national defense and
critical infrastructure needs.
Absent domestic titanium sponge production capacity, the U.S. will
be completely dependent on imports of titanium sponge and scrap and
will lack the surge capacity required to support defense and critical
infrastructure needs in an extended national emergency.
Titanium producers, including producers of goods such as ingot,
billet, sheet, coil, and tube, as well as end-users of finished
titanium goods, are almost all entirely dependent on non-U.S. sources
for sponge and scrap. This circumstance presents the possibility that,
in a national emergency, U.S. titanium producers would be denied access
to imports of titanium sponge and scrap due to supply disruption. If
U.S. titanium producers do not have access to either domestic or
imported supplies of sponge and scrap, their manufacturing operations
would severely decline or cease once their existing titanium
inventories were depleted. These working and strategic inventories have
decreased substantially during the 2015 to 2018 period and are now
estimated to only last approximately five months at current consumption
rates. The U.S. no longer maintains titanium sponge in the National
Defense Stockpile.
Further, under current global market conditions and the going rate
of non-market Russian and Chinese titanium producers, it is difficult
for the remaining U.S. titanium sponge producer to justify the capital
investments needed for continued operations. This inability to invest
threatens continued operation of the sole domestic titanium sponge
plant. If this capacity and associated skilled workforce are lost, it
will be challenging and prohibitively expensive to reconstitute U.S.
titanium sponge production capabilities.
The Department acknowledges that larger industry trends, including
increased use of titanium scrap and downstream producers' emphasis on
scrap recovery, have decreased the need for titanium sponge. These
trends reflect U.S. titanium producers and end users' interest in
maximizing profits by leveraging lower scrap costs and mitigating the
need for new sponge purchases. However, these trends do not eliminate
the need for new titanium sponge. Certain titanium parts, particularly
those used in national defense systems, cannot be made using scrap and
require new titanium sponge. Moreover, approximately 52 percent of all
scrap is imported and subject to the same potential supply disruptions
as sponge. The remaining 48 percent of scrap that is domestically
produced is also subject to potential supply disruptions. The vast
majority of this scrap is generated from semi-fabricated and finished
titanium product manufacturing operations, which rely on imported
sponge for approximately 68 percent of their total sponge consumption.
The displacement of domestic titanium sponge by low-priced imports
places the United States at risk of not being able to meet national
security requirements during an emergency. The Secretary therefore
finds that imports of titanium sponge threaten to impair the national
security as defined in Section 232.
Recommendations
The Department has identified several potential actions that could
be taken to address the threat of imports of titanium sponge to
national security.\142\ These actions include domestic initiatives and
multilateral negotiations.
---------------------------------------------------------------------------

\142\ The following recommendations are the Department's and do
not necessarily reflect the recommendations of the other agencies
with which the Department consulted during the course of this
investigation.
---------------------------------------------------------------------------

Option 1--Domestic Initiatives
The Department has identified two possible domestic initiatives
that the U.S. government can undertake to stimulate reinvestment in
domestic sponge production. These options include:
Option 1A--Voluntary Agreements With U.S. Titanium Sponge Producer(s)
Under Title VII of the Defense Production Act of 1950
One of the challenges identified by the U.S. industry is that low
prevailing market prices, which are driven by high volumes of imports,
do not justify the capital investments required to sustain future
production. To mitigate this situation, the U.S. government could
temporarily compensate U.S. producer(s) for the difference between
their current production costs and global purchase prices.
Such compensation would serve as a temporary bridge until such time
that U.S. producer(s) could make the capital investments needed to
upgrade or build production facilities, which will in turn lower
production costs and safeguard

[[Page 59146]]

future production. Although the proposed compensation is not likely to
cover the full cost of any major capital investment, it would
nevertheless encourage U.S. producers to invest their own funds in
modernizing sponge production.
As shown in Figure 1A below, the Department estimates that
providing this compensation over a five-year period would cost
approximately [TEXT REDACTED] per year, or approximately [TEXT
REDACTED] of titanium sponge produced. The Department bases these
calculations on the remaining active U.S. producer of titanium sponge
and assumes a five-year period would be required to make the essential
capital investments needed to safeguard production. After completion of
needed capital investments, U.S. production costs are expected to be
competitive with the global sponge prices, and the compensation would
no longer be required.

[TEXT REDACTED]
----------------------------------------------------------------------------------------------------------------
[TEXT REDACTED] [TEXT REDACTED]
[TEXT REDACTED] [TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED]
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[TEXT REDACTED] [TEXT REDACTED] ....................................
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Option 1B--Expansion of the National Defense Stockpile To Include
Titanium Sponge and Additional Amounts of Titanium Metal
The USG also could address the threatened impairment by adding
additional titanium materials to the National Defense Stockpile, while
simultaneously encouraging the upgrade of domestic sponge production
capacity by instituting long-term supply contracts for U.S. producers
of titanium sponge and metal. To encourage domestic sponge production,
the agreement for this additional material would specify that the
winning bidder(s) agree to provide U.S.-origin titanium sponge and
domestically melted semi-finished titanium products to fulfill the
anticipated 15-year contract.
In order to safeguard against supply chain disruptions, the
proposed National Defense Stockpile would maintain one year's worth of
U.S. titanium sponge consumption needs (combined defense and
commercial). Department survey data on U.S. producers and melters'
2018-2019 inventories, consumption, and costs were used to calculate
and estimate needs for this proposed stockpile. In 2018, 34,100 metric
tons of titanium sponge were consumed in the U.S. The sole domestic
manufacturer of titanium sponge produced sponge at a cost of [TEXT
REDACTED]. Additionally, [TEXT REDACTED] of titanium sponge was held by
U.S. commercial producers in their inventories in 2018. In order to
maintain one years' worth of U.S. consumption in the proposed stockpile
(34,100 metric tons total), the USG would have to procure [TEXT
REDACTED] of titanium sponge in order to supplement the 2018 commercial
inventory level of [TEXT REDACTED]. The agreement would stipulate that
commercial inventory levels cannot be sold or liquidated and must be
maintained at 2018 levels.
A 15-year agreement to procure the total shortfall of [TEXT
REDACTED] would require the purchase of roughly [TEXT REDACTED] of
titanium sponge per year, at an average price of [TEXT REDACTED], for a
cost of [TEXT REDACTED]. The 15-year agreement would result in the
procurement of [TEXT REDACTED] of sponge for the stockpile maintained
by the USG at a total cost of [TEXT REDACTED]. However, the final
amount and mix of sponge and metal (titanium ingots and billets) to be
added would be determined by the DoD in consultation with the
Department and other agencies. Commercial inventories in the U.S.
(including inventories of non-U.S. suppliers) and other factors that
could impact demand in a national emergency would be factored into the
acquisition plan.
Option 2--Multilateral Negotiations
As the Department observed in the recent steel, aluminum, and
uranium Section 232 investigations, non-market actors can substantially
distort the global market for products through price, quantity, and
market access. For titanium sponge and downstream products, Russia and
China are examples of such non-market actors. In 2018, Russian and
Chinese titanium sponge producers accounted for 61 percent of the
world's titanium sponge production, an increase over their combined 55
percent share in 2008 and 37 percent share in 1998.
Non-market actors lower the price of titanium sponge, which causes
financial harm to U.S. and other market producers, particularly Japan.
Japanese producers have responded to low global prices by lowering
their own sponge prices. Multilateral negotiations between the United
States and other market producers of titanium sponge, including Japan
and Kazakhstan, would present an opportunity to address issues
affecting market titanium sponge production. The option below is budget
neutral.
Option 2--Common Inventory of Sponge for Use Among the Parties To
Mitigate Supply Issues
In this option, the U.S. and other market titanium producers could
agree to establish pre-positioned strategic stores of sponge for use by
titanium sponge customers to be held at their U.S. titanium facilities
or other locations in the United States. The amount of sponge held
would vary with the annual amount sold to each particular customer
commensurate to their market share. This action would mitigate
potential shortfalls in sponge imports caused by a national emergency.
U.S. Titanium Industrial Base Analysis
The Department, in collaboration with DoD, DOI, and USGS, should
survey and assess the operating status and capacity of the U.S.
titanium sponge and downstream titanium industries every three years.
Such action would provide the USG with needed economic and

[[Page 59147]]

financial data on this critical industrial base sector.

Matthew S. Borman,
Deputy Assistant Secretary for Export Administration.
[FR Doc. 2021-23301 Filed 10-25-21; 8:45 am]
BILLING CODE 3510-33-P

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