By: Abigail Hunter, Executive Director of the Center for Critical Minerals Strategy, SAFE, and Zubeyde Oysul, Senior Policy Analyst for the Center for Critical Minerals Strategy, SAFE
The House Armed Services Committee’s FY 2027 National Defense Authorization Act (NDAA) proposes an overhaul of the Department of War’s critical materials sourcing requirements. Section 1801 would significantly amend the current sensitive materials restriction in 10 U.S.C. § 4872 with a new tiered sourcing framework that expands coverage to additional materials, establishes phased sourcing requirements through 2031, introduces new domestic content requirements, and forms transition rules for companies seeking waivers.
The proposal arrives as industry is already preparing for a major compliance milestone. Beginning January 1, 2027, under 10 U.S.C. § 4872’s current statutory framework for Defense Federal Acquisition Regulation Supplement (DFARS), restrictions limiting the Department’s ability to procure covered materials produced in a covered nation are scheduled to extend all the way upstream to mined materials. The proposal would strike this requirement and replace it with a tiered framework that regulates upstream materials individually, with sourcing requirements varying by material classification. That shift is especially consequential for rare earth supply chains. Despite more than a decade of U.S. and allied investment, China controlled roughly 85–90% of rare earth separation and refining capacity when these restrictions were enacted, and continues to control a similar share today.
At the center of both the existing restrictions and the proposed reforms is 10 U.S.C. § 4872, the sensitive materials restriction that applies to defense procurement. The existing statute and implementing regulations cover materials including:
- Samarium-cobalt, or SmCo, permanent magnets
- Neodymium-iron-boron, or NdFeB, permanent magnets
- Tungsten metal powder, tungsten heavy alloy, or any finished or semi-finished components containing tungsten heavy alloy
- Tantalum metals and alloys
- Molybdenum
- Gallium and germanium, beginning in late 2027
The covered nations will sound familiar: China, Russia, Iran, and North Korea. For rare earth magnets, the current restrictions focus on whether covered materials are melted or produced in those countries. For NdFeB magnets, that includes melting neodymium with iron and boron to produce alloy, as well as later production steps such as powder formation, pressing, sintering or bonding, and magnetization. For SmCo magnets, it includes melting samarium with cobalt to produce SmCo alloy and subsequent magnet production steps.
Beginning January 1, 2027, the current law and expected restrictions are scheduled to move further upstream. Defense contractors would be restricted from delivering covered materials that were mined, refined, separated, melted, or produced in a covered nation.
Naturally, Congress can move a comma faster than industry can permit, finance, build, qualify, and scale key parts of magnet supply chains. As the January 2027 deadline for 10 U.S.C. § 4872 approaches, that reality has prompted a dynamic negotiation in this year’s NDAA debate. The backdrop to these negotiations is the cumulative effect of delayed rulemaking, long defense contracting cycles, waiver approval processes, ongoing geopolitical disruptions, and supply commitments that were negotiated years before the restrictions take effect. The result is not a new challenge, but the collision of statutory deadlines with the practical realities of reshaping critical mineral supply chains.
At the same time, there is more nuance to the situation than a simple mismatch between policy timelines and industrial realities. The upstream restrictions were enacted in 2021, giving industry several years to prepare, pursue alternative sources, and qualify new suppliers. However, defense demand alone is often insufficient to justify major investments in mining and processing capacity, making commercial markets an essential driver of new supply chain development.
While the United States has made meaningful progress in rare earth mining, separation, and magnet manufacturing, scaling these capabilities to meet defense requirements remains an ongoing effort. Progress is more limited for more recent additions to the sensitive materials list. In the case of gallium and germanium, restrictions are yet to enter into effect, leaving alternative sources at earlier stages of development. Thus, as part of the current NDAA deliberation, Congress must determine how these allowances or extensions should be incorporated.
How the rules got here
The sensitive materials restrictions have evolved through successive NDAAs as Congress, regulators, and industry have worked to advance the policy objective of reducing dependence on covered nations while responding to shifting geopolitical conditions, market dynamics, and the practical challenges of diversifying strategic supply chains. Along the way, certain restrictions have been strengthened, others delayed or adjusted, but the overall direction has largely remained consistent: expand coverage, move compliance requirements further upstream, and reduce dependence on covered nations.
Key milestones include:
- FY19 NDAA: Created the original sensitive materials restriction for defense procurement, covering SmCo magnets, NdFeB magnets, tungsten metal powder, tungsten heavy alloy, and semi-finished components containing tungsten heavy alloy. The original restriction applied to material melted or produced in covered nations.
- FY20 NDAA: Extended restrictions to National Defense Stockpile sales and added tantalum to the sensitive materials list.
- FY21 NDAA: Expanded the restriction upstream to include material mined, refined, or separated in covered nations, with a delayed implementation starting in January 1, 2026.
- FY24 NDAA: Pushed the upstream restriction deadline to January 1, 2027 and limited certain non-availability waivers to 36 months.
- FY25 NDAA: Created an additional national security waiver authority.
- FY26 NDAA: Added gallium, germanium, and molybdenum to the covered materials list, with gallium and germanium restrictions scheduled to take effect on December 18, 2027. It also expanded recycling exemptions so that all covered materials can become compliant if recycled in the United States—or in the case of non-magnet materials, countries with which the United States has a reciprocal defense agreement or a defense memorandum of understanding.
This history matters because contractors have had years of notice that sourcing rules would tighten. At the same time, the expansion from finished or semi-finished material restrictions to upstream sourcing rules and the addition of new sensitive material creates a much harder compliance problem.
What the proposed FY27 NDAA changes would do
The proposed FY27 NDAA language would significantly restructure the current framework by creating tiered sourcing restrictions and requirements. Instead of treating covered materials as one broad category and requiring compliance across the entire mine-to-metal (or mine-to-magnet) supply chain, the proposal would split intermediate products at each stage of production into Tier 1 and Tier 2 materials.
Tier 1 materials would include, among other materials:
- NdFeB and SmCo permanent magnets
- Tungsten metal powder, tungsten heavy alloy, and certain tungsten-containing components
- Neodymium oxide and metal
- Praseodymium oxide and metal
- Neodymium-praseodymium oxide and metal
- Relevant ores and concentrates of neodymium and praseodymium
- Tantalum ores, oxides, concentrates, metals, powders, and alloys
- Molybdenum, gallium, gallium nitride, and germanium beginning in late 2027
For Tier 1 materials, the proposal would preserve restrictions on sourcing from covered nations and add a new domestic sourcing requirement: 50 percent of the cost of materials would need to be produced domestically.
Tier 2 materials would include certain upstream or intermediate products, such as:
- Items containing oxides, metals, alloys, or intermediate products of gadolinium, samarium, neodymium, praseodymium, neodymium-praseodymium, and terbium
- Tungsten precursors, including ores, concentrates, ammonium paratungstate, ammonium metatungstate, tungstic acid, sodium tungstate, and tungsten oxides
- Tungsten carbide beginning January 1, 2029
- Items containing niobium oxides, metals, and alloys
For Tier 2 materials, the proposal would phase in minimum sourcing requirements outside covered nations:
- 2028: 25 percent sourced outside covered nations
- 2029: 50 percent sourced outside covered nations
- 2030: 75 percent sourced outside covered nations
- 2031 and beyond: 100 percent sourced outside covered nations
There are no domestic sourcing requirements for Tier 2 materials.
A more dynamic framework
One of the most important changes is procedural. Under current law, Congress generally updates the list of covered materials through annual NDAA legislation. The FY27 proposal would give the Department of War more flexibility to update the framework over time.
Under the proposed approach:
- DOW would review the material tiers at least once every six months.
- The Secretary of War could add new materials or new material categories to either tier.
- Materials could be moved from Tier 2 to Tier 1.
- Tier 1 materials could not be moved down to Tier 2.
- No removal mechanism once added, only waivers.
Consequently, the framework could become progressively stricter, but not weaker, over time. For contractors, this creates a compliance system that is less static and more responsive to supply chain risk. For lawyers, consultants, spreadsheet enthusiasts, and think tanks like ours, it creates a durable employment program.
Waivers would become more conditional
Current rules include several exemptions, as well as broad waiver authorities—although the Trump administration has signaled some opposition to waivers. Existing rules also allow waivers when compliant material cannot be sourced in sufficient quantity or quality at a reasonable price.
The proposed FY27 framework would tighten this approach. Most exemptions would remain, but the broad availability-based exemption would be replaced with a more structured waiver process. Under the proposal:
- Waivers could be granted when there is insufficient compliant production in the required quality and quantity.
- “Reasonable price” would no longer be an explicit basis for a waiver.
- DOW would also need to determine that denying the waiver would significantly affect defense production and readiness.
- Waivers would last up to two years, though they could be renewed.
- Waiver requests would need to include a transition plan.
- Transition plans would need quantifiable milestones to reduce reliance on foreign nations for Tier 1 materials or covered nations for Tier 2 materials.
- Contractors would be required to enter into at least one binding agreement with compliant suppliers during the waiver period to obviate the need for a future waiver or renewal.
That last requirement is especially important. It would shift waivers from a simple compliance escape hatch to a forcing mechanism for supply chain transition. In theory, a contractor could receive time-limited relief only if it is actively moving toward compliant sourcing. In practice, the hard part will be determining whether compliant suppliers exist at the quality, quantity, timeline, and qualification levels that defense programs need.
Preferred domestic manufacturers
The FY27 proposal would also create a preferred domestic manufacturers list, addressing a long-standing industry request for clearer identification of compliant suppliers.
Preferred domestic manufacturers could receive benefits such as:
- Credit in source selection, allowing contractors to receive more favorable evaluations during the procurement process
- Priority in qualification processing
- Opportunities to participate in pilot programs
That kind of list could help reduce uncertainty for primes and subcontractors trying to identify compliant sources. It could also help emerging domestic suppliers demonstrate credibility to defense customers, assuming the list is implemented clearly and not buried so deep in bureaucracy that it becomes decorative.
The larger policy shift
It’s appropriate and necessary that U.S. defense critical minerals policy moving from a relatively narrow model based on prohibiting covered-nation sourcing toward a broader model built around affirmative supply chain development—but policymakers need to ensure administrability, accuracy, and commit to consistency in the regulatory framework. Effort needs to focus on achieving national security goals, rather than creating policy whiplash.
The pending framework would:
- Create differentiated obligations for Tier 1 and Tier 2 materials
- Add domestic sourcing requirements for Tier 1 materials
- Phase in covered-nation restrictions for Tier 2 materials
- Require additional conditions like transition plans and binding supplier agreements to receive waivers, adding more burden to defense contractors to establish off-takes for compliant suppliers
- Create a preferred domestic manufacturer list
- Require annual reporting to Congress on compliance, waivers, sourcing progress, and false certifications
The proposed domestic sourcing requirement for Tier 1 materials represents one of the most significant departures from the current framework. It shifts the policy from one focused on reducing dependence on adversaries to one that actively seeks to cultivate U.S.-owned production capacity for strategically important materials. While the United States is the most secure jurisdiction from which defense contractors could source sensitive materials, the requirement also raises important questions about scale. Because defense programs account for a relatively small share of consumption for many critical minerals, implementation will likely require continued consideration of the extent to which defense procurement can best support the development of domestic capacity alongside broader commercial markets.
Compliance requirements alone will not build new supply chains. Ongoing efforts to support financing and commercialization, including through the DOW’s Office of Strategic Capital, will remain essential to mobilize private investment into dual-use supply chains where commercial markets ultimately determine scale. Continued interagency coordination and improved visibility into supply chains and industrial capabilities will be critical to targeting resources and accelerating capacity growth in strategic supply chain gaps.
Another challenge is whether policy can move in step with industrial reality. Stronger rules can create demand signals, but they do not automatically solve permitting or rulemaking delays, qualification timelines, financing gaps, processing bottlenecks, or the lack of scaled non-covered-nation capacity.
Finally, policymakers will need to maintain a stable and credible regulatory framework that provides certainty for long-term investment decisions. The implementation timeline for Tier 2 materials has already been extended to 2031. Repeated delays, new exceptions, or shifting requirements risk undermining confidence in the durability of demand and discouraging investment.
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