51 FR 39774

NOTICES

DEPARTMENT OF COMMERCE

[C-351-021]

Certain Carbon Steel Products From Brazil; Preliminary Results of Countervailing Duty Administrative Review

Friday, October 31, 1986

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AGENCY: International Trade Administration/Import Administration, Department of Commerce.

ACTION: Notice of preliminary results of countervailing duty administrative review.

SUMMARY:

The Department of Commerce has conducted an administrative review of the countervailing duty order on certain carbon steel products from Brazil. The review covers the period February 10, 1984 through September 30, 1984 and 22 programs.

As a result of the review, the Department has preliminarily determined the net subsidy for the period of review to be 9.14 percent ad valorem for COSIPA, 39.98 percent ad valorem for CSN, zero for USIMINAS, 38.45 percent ad valorem for Maxitrade, and 21.13 percent ad valorem for all other firms. Interested parties are invited to comment on these preliminary results.

EFFECTIVE DATE: October 31, 1986.

FOR FURTHER INFORMATION CONTACT: Richard C. Henderson or Lorenza Olivas, Office of Compliance, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230; telephone: (202) 377-2786.

SUPPLEMENTARY INFORMATION:

Background

On June 23, 1984, the Department of Commerce ("the Department") published in the Federal Register a countervailing duty order on certain carbon steel products from Brazil (49 FR 25655, June 22, 1984). On September 30, 1985, the Government of Brazil and three U.S. importers, Hansa World Cargo, Isaccson Steel Company and Voest-Alpine, requested in accordance with § 355.10 of the Commerce Regulations an administrative review of the order. We published the initiation of the administrative review on November 27, 1985 (50 FR 48825). The Department has now conducted that administrative review in accordance with section 751 of the Tariff Act of 1930 ("the Tariff Act").
On September 6, 1985, we revoked the order effective October 1, 1984.

Scope of Review

Imports covered by the review are shipments of Brazilian certain carbon steel products. Such merchandise is currently classifiable under items 607.6610, 607.6710, 607.6720, 607.6730, 607.6740, 607.6742, 607.8320, 607.8342, 607.8350, 607.8355, 607.8355, and 607.8360 of the Tariff Schedules of the United States Annotated.

The review covers the period February 10, 1984 through September 30, 1984 and 22 programs: (1) CACEX export financing; (2) an income tax exemption for export earnings; (3) the export credit premium for the IPI; (4) CIC-CREGE 14- 11 financing; (5) incentives for trading companies (Resolution 643); (6) duty-free treatment and tax exemptions on imported equipment ("CDI"); (7) FINEX (Resolutions 68 and 509); (8) government provision of equity; (9) funding for expansion through IPI tax rebates; (10) FINEP; (11) accelerated depreciation for Brazilian-made capital goods; (12) BEFIEX; (13) CIEX; (14) financing for the storage of merchandise destined for export (Resolution 330); (15) FUNPAR; (16) PROSIM; (17) loan guarantees; (18) loan assumptions; (19) labor subsidies for employees of state enterprises; (20) subsidized electricity used in steel production; (21) subsidized port facilities; and (22) PROEX.

The review covers seven firms, made up of three producers and four trading companies. The three producers, Companhia Siderurgica Paulista ("COSIPA"), Companhia Siderurgica Nacional ("CSN"), and Usinas Siderurgicas de Minas Gerais, S.A. ("USIMINAS"), as well as one trading company, Maxitrade, received benefits that are significantly different, as provided for in section 706(a)(2) of the Tariff Act of 1930, from the weighted average benefit for all firms. We have therefore set company-specific rates for those four firms.

Analysis of Programs

(1) CACEX Export Financing

Under this program, the Department of Foreign Commerce ("CACEX") of the Banco do Brasil provides short-term working capital financing to exporters at preferential rates. The loans have a duration of up to one year. During the period of review, producers of certain carbon steel products could obtain CACEX financing for up to 20 percent of the value of their previous year's exports.

Resolution 674, which became effective on June 11, 1983, set a maximum interest rate of 60 percent and required two interest payments, one 180 days after the loan was granted and the other at maturity. Resolution 882, which became effective on January 2, 1984, required the full interest payment at maturity. It also set the maximum interest rate at full monetary correction (calculated by the change in the value of readjustable treasury bonds, "ORTN") plus 3 percentage points. During the period of review, the three producers as well as one of the three firms receiving the country-wide rate used this program.

To find the interest differential, we compared two effective rates. We made the nominal Resolution 674 rate effective by adjusting for the one interest payment required before maturity. The nominal Resolution 882 rate is the same as the effective rate because the full

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amount of interest is paid at maturity. For our benchmark, we took the national average rate for 30-day discounts of accounts receivable, as reported in Analise/Business Trends. This rate includes the 1.5 percent tax on financial transactions ("IOF"), from which preferential loans are exempt. We then compounded this rate to find the effective annual commercial benchmark.

We consider the benefit, or the cash flow effect, from loans to occur when the borrower makes the interest payments. For Resolution 674 and 882 loans on which interest was paid during the period of review, we compared the preferential rates with the benchmark rates and multiplied the interest differential by the loan principal. We allocated the benefit over each firm's total exports. On this basis, we preliminarily determine the benefit from this program to be 1.28 percent ad valorem for COSIPA, 1.21 percent ad valorem for CSN, 0.55 percent ad valorem for USIMINAS, zero for Maxitrade, and 0.04 percent ad valorem for all other firms.

(2) Income Tax Exemption for Export Earnings

Under this program, exporters of certain carbon steel products are eligible for an exemption from income tax on the portion of profit attributable to exports. The Brazilian government calculates the tax-exempt fraction of profit based on the ratio of export revenue to total revenue. The three firms receiving the country-wide rate used this program in 1983. We calculated the benefit by multiplying the amount of tax-exempt profit by the corporate tax rate and allocating the result over total exports.

The nominal corporate tax rate in Brazil is 35 percent. However, Brazilian tax law permits companies to reduce their income taxes by investing up to 26 percent of their tax liability in specified companies and funds. This tax credit effectively reduces the nominal 35 percent corporate tax rate.

At verification, the three firms did not provide proof that they had made any investments in the specified companies and funds. Therefore, we calculated the benefit using the nominal 35 percent corporate tax rate. On this basis, we preliminarily determine the benefit from this program to be zero for COSIPA, CSN, USIMINAS, and Maxitrade, and 0.20 percent ad valoreum for all other firms.

(3) The Export Credit Premium for the IPI

Exporters of certain carbon steel products are eligible for the maximum IPI export credit premium. The Brazilian government pays exporters in cash a percentage of the f.o.b. price of their exported merchandise. The payment is made through the bank involved in the export transaction. During the period of review, the IPI credit premium was 11 percent. All firms received the premium during the period of review.

We calculated the benefit by dividing the amount of IPI credit premium earned on shipments of this merchandise to the United States by exports of this merchandise to the United States. We

(4) CIC-CREGE 14-11 Financing

Under its CIC-CREGE 14-11 circular, the Banco do Brasil provides short-term preferential financing to exporters on the condition that they maintain on deposit a minimum level of foreign exchange. CSN and one of the three firms comprising the country-wide rate participated in this program during the period of review.

There is no maximum interest rate for this program. Interest payments are normally made quarterly or semiannually, with the full principal to be repaid at maturity. We calculated the benefit based on the interest payment date in a manner similar to that used for CACEX export financing, using the same benchmark rate. We preliminarily determine the benefit from this program to be 0.08 percent ad valorem for CSN, zero for COSIPA, USIMINAS, and Maxitrade, and 0.06 percent ad valorem for all others.

(5) Incentives for Trading Companies (Resolution 643)

Under this program, CACEX declares trading companies eligible to receive loans at preferential rates. Eligible firms have access to a line of credit that can be drawn down to purchase goods for export. These loans are subject to the same interest rates as Resolution 674 loans. Normally, the term of the loan does not exceed 180 days, but the actual length varies, running from the date of receipt of the loan to the date of shipment of the goods. The interest is paid at maturity.

During the period of review, Maxitrade received benefits under this program for the purchase of certain carbon steel products for export. We calculated the benefit in a manner similar to that for CACEX export financing, based on the interest payment date. On this basis, we preliminarily determine the benefit from this program to be 14.18 percent ad valorem for Maxitrade and zero for all other firms.

(6) Duty-Free Treatment and Tax Exemption on Imported Equipment

Under Decree Law 1428, the Industrial Development Council ("CDI") provides for the exemption of up to 100 percent of the customs duties and up to 10 percent of the IPI tax, a value added tax on domestic sales, on certain imported machinery for specific projects in 14 industries approved by the Brazilian government. The recipient must demonstrate that this machinery or equipment is not available from a Brazilian manufacturer.

Decree Law 1726 repealed this program in 1979. However, companies whose projects were approved prior to the repeal continue to receive benefits from this program pending completion of the project. COSIPA, CSN, and USIMINAS received benefits under this program during the review period. To calculate the benefit, we divided the total amount of exemptions in 1984 by total 1984 sales. We preliminarily determine the benefit to be 0.28 percent ad valorem for COSIPA and CSN, 0.15 percent ad valorem for USIMINAS, and zero for Maxitrade and all other firms.

(7) FINEX (Resolutions 68 and 509)

Resolutions 68 and 509 provide that CACEX may draw upon the resources of the Fundo de Financiamento a Exportacao ("FINEX") to subsidize short- and long-term loans for both Brazilian exporters and foreign importers of Brazilian goods. The loans are extended to the importer by a bank in the importer's country or to the exporter by the exporter's bank. The loans carry maximum term of 180 days and an annual interest rate of 8 percent.

CACEX provides the lending bank with an "equalization fee," which compensates the bank for the differences between the subsidized interest rate and a commercial rate, calculated as the London Interbank Offer Rate ("LIBOR") plus a spread. In order to encourage bank participation in the program, CACEX also pays the lending bank a commission equal to two percent of the loan principal. Exporters and importers were not able to demonstrate the portion of this commission that was retained by the inermediary bank. Therefore, we have assumed that the full commission was passed through to the firm, thereby effectively decreasing the preferential interest rate. USIMINAS, Maxitrade, and two other firms (or their U.S. Resolution 509 short

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-term loans to importers are given in U.S. dollars. We therefore chose as a benchmark interest rate for comparable loans in the United States the average interest rate for commercial and industrial short-term loans as published by the United States Federal Reserve Board. Resolution 509 financing to exporters are also denominated in U.S. dollars but disbursed in Brazilian cruzeiros. Brazilian firms generally do not have access to direct lending from U.S. banks. Since there is no equivalent commercial dollar-denominated financing in Brazil, we chose as a benchmark the interest rate on U.S. dollar-denominated Resolution 63 loans, which is LIBOR plus a spread, as reported in Analise/Business Trends. Since the documentation available at the firm on each Resolution 509 loan does not enable us to determine when the interest on those loans is paid, we have assumed that it is pre-paid. Therefore, the benefit occurs on the date of receipt. To measure the benefit, we multiplied the value of the loan received during the review period by the differential between the benchmark rate and the preferential interest rate, minus bank commissions. We divided the result by total exports of the merchandise to the United States during the review period. We preliminarily determine the benefit to be zero for COSIPA and CSN, 4.12 percent ad valorem for USIMINAS, 3.18 percent ad valorem for Maxitrade, and 0.18 percent ad valorem for all other firms.

(8) Government Provision of Equity

Siderurgia Brasileira S.A. ("SIDERBRAS") is a government-controlled corporation under the jurisdiction of the Ministry of Industry and Commerce. Pursuant to Decree Law No. 6159 of December 6, 1974, SIDERBRAS became the holding company for federally-owned steel corporations. SIDERBRAS is a majority shareholder of nine Brazilian steel producers and a minority shareholder of one Brazilian steel producer. From 1977 through 1984, SIDERBRAS made equity infusions in COSIPA, CSN and USIMINAS.

In the final determination in this case (49 FR 17988, April 26, 1984), we found government investments in COSIPA and CSN from 1977 through 1982 and in USIMINAS from 1980 through 1982 not to be commerically reasonable. In the final determination on agricultural tillage tools from brazil (50 FR 34525, August 26, 1985), we found government investments in USIMINAS not to be commercially reasonable in 1983. To determine whether COSIPA and CSN represented sound investments in 1983 and 1984, and whether USIMINAS represented a sound investment in 1984, we considered their financial statistics and an analysis of the worldwide steel industry.

We have consistently held that government provision of, or assistance in obtaining, capital does not per se confer a subsidy. Government equity infusions confer countervailable benefits only when provided on terms inconsistent with commercial considerations. When there is no market- determined price for equity, it is necessary for us to determine whether the compay is a reasonable investment. Since COSIPA's CSN's and USIMINAS' shares are not publicly traded, and there is no market-determined price for their shares, we must determine whether they are a reasonable investment. A company is a reasonable commercial investment if it shows the ability to generate a reasonable rate of return within a reasonable period of time, as outlined in the Subsidies Appendix to the notice of "final Affirmative Countervailing Duty Determination and Order" on certain cold-rolled carbon steel flat-rolled products from Argentina (49 FR 18006, April 26, 1984) ("the Subsidies Appendix"). We conclude that COSIPA, CSN and USIMINAS did not have the ability to generate reasonable rates of return within a reasonable period of time. We analyzed their capital structure and long-term solvency ratios and return on investment ratios. Our analysis showed that USIMINAS had just returned to profitability in 1984 and that COSIPA and CSN suffered significant and continuing losses in the review period.

The trade journals and market studies that we examined in the preliminary results of countervailing duty administrative review of stainless steel plate from the United Kingdom (51 FR 34112, September 25, 1986) offered a pessimistic outlook for the steel industry for the same period. These reports point to several unpromising trends in 1982 that were expected to continue through 1985. Among those trends were a decline in world steel consumption, a low capacity utilization rate in major industrialized countries, and declining prices due to over-capacity and competition from other nations. In addition, the reports warned of worldwide stagnation in demand due to high interest rates. Based on these factors, we find COSIPA and CSN to be unequityworthy in 1983 and 1984 and USIMINAS to be unequityworthy in 1984. Consequently, we preliminarily determine that government investment in these companies in 1983 and 1984 was inconsistent with commercial considerations.

To calculate the benefit, we compared the companies' rates of return on equity with the average rate of return on equity in Brazil for 1984, as reported in Business Latin America. We found that the rates of return for these producers were lower than the national average rates in 1984. We multiplied this "rate of return shortfall," which is described in the Subsidies Appendix, by all purchases of equity (back to 1977) that we have found to be inconsistent with commercial considerations. On this basis, we preliminarily determine the benefit to be 14.49 percent ad valorem for COSIPA, 27.70 percent ad valorem for CSN, 2.63 percent ad valorem for USIMINAS, and zero for all other firms.

(9) Funding for Expansion through IPI Tax Rebates

Decree Law 1547, enacted in April 1977, provides funding for approved expansion projects in the Brazilian steel industry in the form of a rebate of the IPI tax, a value-added tax. Originally, the IPI tax applied to all industries. In 1979, the IPI tax was eliminated except for producers in 14 industries, including steel. For steel products, the IPI tax was 5 percent during the period of review. The rebate, which is not in any way connected to exports, is calculated as 95 percent of the 5 percent tax rebate.

Instead of paying the IPI tax directly to the government, a Brazilian steel company until 1981 was able to deposit 95 percent of the net IPI tax in a special tax-free account with the Banco Do Brasil. When rebated, the firms had to apply the deposits to steel expansion projects. COSIPA, CSN and USIMINAS received direct rebates under this program from 1977 to 1981.

As a result of Decree Law 1843 of December 1980, these three companies must now pay the full IPI tax to the Brazilian government, which then rebates 95 percent to SIDERBRAS in the form of equity infusions. COSIPA, CSN and USIMINAS did not receive direct rebates under this program after 1981. We treated the rebates received between 1977 and 1981 as grants. Using the grant methodology from the Subsidies Appendix, we allocated the rebates received over 15 years, which is the average useful life of capital assets

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in the steel industry according to the U.S. Internal Revenue Service Class Life Asset Depreciation Range System. For a discount rate, we used the average of the maximum real cost of 30-day discounts of accounts receivable in 1984, as reported in Analise/Business Trends, plus a risk premium.

We include a risk premium because we consider the companies to be uncreditworthy. We analyzed cash flow and other measures of each company's ability to meet its long-term debt obligations and conclude that all three companies were uncreditworthy in 1984. On this basis, we preliminarily determine the benefit to be 0.12 percent ad valorem for COSIPA, 0.11 percent ad valorem CSN, 0.11 percent ad valorem for USIMINAS, and zero for all other firms.

(10) FINEP Long-term Loans

Financiadora de Estudos e Projects ("FINEP"), an agency of the government, is charged with promoting scientific and technological development in Brazil. FINEP generally makes loans available to manufacturing firms and universities through state-owned development banks. Borrowers negotiate the terms of each loan with regional development banks. FINEP maintains project oversight throughout the life of the loan. The interest rates on FINEP loans are equivalent to rates charged on long-term loans made by the Banco Nacional de Desenvolvimento Economico e Social ("BNDES"). FINEP loans are either not indexed or partially indexed to inflation, as measured by the variation in ORTN, whereas equivalent BNDES loans are fully indexed to ORTN. Both FI

COSIPA, CSN and USIMINAS received long-term FINEP loans between 1976 and 1983. Using equivalent fully indexed BNDES loans as benchmarks, we compared principal and interest payments due on FINEP loans in 1984 with hypothetical principal and interest payments due on BNDES benchmark loans in 1984. We consider the differential between the total 1984 payments to be the benefit, which we allocated over each firm's total sales. On this basis, we preliminarily determine the benefit to be 0.006 percent ad valorem for COSIPA, 0.015 percent ad valorem for CSN, and 0.04 percent ad valorem for USIMINAS, and zero for all other firms.

(11) Other Programs

We also examined the following programs and preliminarily find that exporters of carbon steel products did not use them during the review period:
a. Accelerated depreciation for Brazilian-made capital goods;
b. Fiscal Benefits for Special Export Programs ("BEFIEX");
c. Tax Reductions on Equipment used in Export Production ("CIEX");
d. Financing for the storage of merchandise destined for export ("Resolution 330");
e. Export Financing under the Fundo Nacional de Participadoes ("FUNPAR");
f. Benefits from Import Substitution ("PROSIM");
g. Loan guarantees;
h. Loan assumptions;
i. Labor subsidies for employees of state enterprise;
j. Subsidized Electricity used in steel production;
k. Subsidized port facilities; and
l. Export Promotion Financing ("PROEX").

Calculation of Net Subsidy

During the review period, trading companies and producers exported this merchandize to the United States. Even though trading companies may have purchased the manufactured merchandise from the producers at arms length, certain subsidies to producers also benefit the merchandise exported by trading companies. See, "Final Affirmative Countervailing Duty Determination" on live swine and fresh chilled and frozen pork products from Canada (June 17, 1985, 50 FR 25097). We added the producers' benefits from all domestic subsidies and from the following export subsidies: CACEX export financing, income tax exemptions for export earnings, and CIC-CREGE 14-11 financing, because producers received benefits from these programs on the basis of total export sales, i.e., those made directly by the producer plus those made by trading companies. The total was 19.34 percent ad valorem, which we added to each trading company's ad valorem subsidy rate.

On March 13, 1984, the Government of Brazil imposed a 27.42 percent tax to offset the subsidies on exports of certain carbon steel products to the United States. During verification, we found that, except for one trading company, which paid offset taxes on only part of the shipments of certain carbon steel products, all firms paid the offset taxes either in a timely manner or, if late, with appropriate monetary correction, penalties, and interest. We allocated the total offset taxes paid by each firm during the review period over that firm's exports of this merchandise to the United States during the review period. We preliminary determine the ad valorem amount of offset to be 17.99 percent for COSIPA, 21.25 percent for USIMINAS, 9.03 percent for Maxitrade, and 9.69 percent for all other firms. We substracted each firm's ad valorem amount of the offset from its ad valorem subsidy rate.

Preliminary Results of Review

As a result of our review, we preliminarily determine the net subsidy to be 9.14 percent ad valorem for COSIPA, 39.98 percent d valorem for CSN, zero percent ad valorem for USIMINAS, 8.45 percent ad valorem for Maxitrade, and 21.13 percent ad valorem for all other firms. We consider these rates to be significantly different, as provided for in section 706(a)(2) of the Tariff Act of 1930. The Department intends to instruct the Customs Service to assess countervailing duties of 9.14 percent for COSIPA, 39.98 percent for CSN, zero, for USIMINAS, 38.45 percent for Maxitrade and 21.13 percent for all other firms of the f.o.b. invoice price on all shipments of this merchandise entered, or withdrawn from warehouse, for consumption on or after February 10, 1984 and on or before September 30, 1984. Because the Department revoked this order effective October 1, 1984, we do not intend to instruct the Customs Service to collect deposits of estimated countervailing duties on this merchandise.

Interested parties may submit written comments on these preliminary results by November 10, 1986 and my request disclosure and/or a hearing within 10 days after the date of publication. Any hearing, if requested, will be held on November 10, 1986. Any request for an administrative protective order must be made no later than five days after the date of publication. The Department will publish the final results of this administrative review including the results of its analysis of issues raised in any such written comments or at a hearing.

This administrative review and notice are in accordance with section 751(a)(1) of the Tariff Act (19 U.S.C. 1675 (a)(1)) and § 355.10 of the Commerce Regulations (50 FR 32556, August 13, 1985).

Dated: October 28, 1986.

Josehp A. Spetrini,
Acting Deputy Assistant Secretary, Import Administration.