The path to U.S. AP problems
In the 1980s there were two producers of ammonium perchlorate in the U.S.: Pacific Engineering and Production Company of Nevada (PEPCON) and Kerr-McGee. PEPCON became AMPAC in 1986.
The largest non-nuclear explosion in U.S. history happened in 1988 at AMPAC’s facility in Nevada.
One result of the fallout from such a massive industrial disaster was the merging of PEPCON and Kerr-McGee into one producer of ammonium perchlorate under the roof of a state-of-the-art facility designed to handle all of the U.S. government’s ammonium perchlorate needs in Cedar City, Utah, with a 40 million pound-a-year capacity.
The government decided to assist in consolidating the business because having two suppliers was not efficient, according to one source. The two suppliers were having to make up for large fixed costs to run their facilities while producing roughly 20 million pounds per year. Merging the two under one roof drove the cost per pound of ammonium perchlorate down due to economies of scale.
The government also right-sized the facility based on the amount of ammonium perchlorate it projected it would need on a regular yearly basis. The cost to the government for its AP purchases each year has been roughly $60 million on a consistent basis, the source said.
However, with the cancellation of NASA’s space shuttle program and a few other factors, the government’s demand for AP is less, at least for the next five or six years until a few major programs that will require a large amount of AP come online.
Since the facility is now producing less AP due to the current demand, it still needs to make up for the fixed cost to run the facility and therefore the price per pound goes up. "There are fewer programs to absorb the $60 million in AP costs," the source said. "The problem is there is not enough volume in the system to keep that price per pound low."
The company needs to net roughly $65 million a year to make a profit, several sources calculated.
AMPAC was struggling with this reality when Huntsman Family Investments, a not-for-profit that also supports a renowned cancer institute, acquired the company in late 2015.
The AP price tag dilemma
With the AP price rising in the U.S., those companies buying it to produce rocket motors for the U.S. government are starting to look elsewhere for better prices or options that would bring the price down.
The rise of AP costs results in the rise of rocket motor costs, which subsequently can affect the amount of missiles or boosters the U.S. government can order.
Orbital ATK negotiated a three-year deal with AMPAC at a certain price, but that deal will come to a close in 2019, and the company is said to be entertaining other options, according to several sources.
Safran is the only other major qualified AP source in the world, while there are other AP manufacturers in existence, and it supplies all of the AP to European countries including its space launch program. Nammo uses AP from Safran for its AMRAAM rocket motors.
It is only until very recently that the DOD has even been willing to discuss the possibility of using foreign AP as well as the entertain the idea of another AP plant in the U.S.
According to a request for information posted to the Federal Business Opportunities website at the end of May, the U.S. Army Contracting Command-New Jersey-Emerging Technologies Contracting Center is "seeking sources (contractors/vendors) on behalf of the Manufacturing and Industrial Base Policy office … to produce Ammonium Perchlorate and its pre-cursor Sodium Perchlorate, with an estimated yearly capacity of four million pounds of AP per year."
The notice requests information on "price, schedule, delivery, other market information, or capabilities for planning purposes related to developing the domestic capability to manufacture AP for use by the DoD."
Orbital ATK is currently looking at the possibility of requalifying another source of AP, most likely Safran, at a lower price, according to industry sources.
But even if AP comes at a lower price per pound, sources say the U.S. would have to pay to requalify all of its programs to use foreign AP, which could cost as much as $800 million, an Institute for Defense Analysis report estimated. Other sources say the cost would be lower, more in the "tens of millions" range.
Orbital ATK also has the capability to recycle AP from old Minuteman missiles obtained through a competitive government bid process. The Air Force allows companies with the capability of disposing through burning, destroying or reusing to compete for the old engines.
In 2015, Orbital ATK beat out Aerojet Rocketdyne for a service contract to provide boosters for the United Launch Alliance’s Atlas V launch system. The offer was based on price per launch and the bid came in at a much lower price.
It’s unclear whether Orbital ATK will use AP from AMPAC, from an alternate source or from recycled AP when it begins building the rocket engines in the 2019 timeframe. Since it is considered a commercial contract, using recycled AP would be allowed, an industry source said.
If Orbital decides to use a source that is not AMPAC for the Atlas V contract, the AP manufacturer could lose up to 30 percent of its expected volume, a source tracking the business estimated.
And if AMPAC is manufacturing 30 percent less, the price for AP could skyrocket, according to the source.
Should the U.S. government begin to turn to a foreign source more frequently for AP, then AMPAC would suffer similarly.
How to fix the U.S. AP industrial base conundrum
Opponents of the legislation say this is an attempt to solve a poor business decision using political leverage, but no one argues that having a U.S. AP industrial base isn’t critical and how to keep it alive and robust should be assessed and studied.
Those that feel the legislation is necessary see the company as vital to U.S. national security and should be supported by the government, especially since the government shaped its current size.
One point of debate is whether the AP business in the U.S. can survive and produce fairly priced product if competition within the U.S. or outside of the U.S. was generated. Opponents to that argue it would result in the same situation that caused the merger of AMPAC and Kerr-McGee back in the 90s. As it functions today, AMPAC needs 100 percent of the U.S.-based business to work.
Others in the business say healthy competition, if the facilities are sized appropriately, could help keep prices down.
Several sources suggested that rather than try to force companies producing rocket motors to only source from AMPAC, the company should independently restructure and right-size its facility, solving a business problem with a business strategy.
The other factor is the price for AP will improve naturally when the government has more demand in roughly six years when NASA's Space Launch System kicks off in full and the nuclear missile fleet is refreshed, so a solution that is more temporary could be in order, several sources suggest.
Several sources said it was possible that in lieu of offering a provision that would restrict U.S. rocket motor manufacturers to using just U.S.-based AP, language in the authorization bill might ask for further study on the issue in order to determine the proper solution to the problem.
Jen Judson is an award-winning journalist covering land warfare for Defense News. She has also worked for Politico and Inside Defense. She holds a Master of Science in journalism from Boston University and a Bachelor of Arts from Kenyon College.