(Cite as: 57 FR 24466)

NOTICES

DEPARTMENT OF COMMERCE

(C-351-810)

Preliminary Affirmative Countervailing Duty Determination: Circular Welded Non- Alloy Steel Pipe From Brazil

Tuesday, June 9, 1992

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

EFFECTIVE DATE: June 9, 1992.

FOR FURTHER INFORMATION CONTACT:Paulo F. Mendes or Annika L. O'Hara, Office of Countervailing Investigations, U.S. Department of Commerce, room B099, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone (202) 377- 5050 or 377-0588, respectively.

Preliminary Determination

The Department preliminarily determines that benefits which constitute subsidies within the meaning of section 701 of the Tariff Act of 1930, as amended ("the Act"), are being provided to manufacturers, producers, or exporters in Brazil of the subject merchandise.

Case History

Since the publication of the notice of initiation in the Federal Register (56 FR 52530, October 21, 1991), the following events have occurred.

A. Change of Period of Investigation

On January 22, 1992, we changed the period of investigation ("POI") from calendar year 1990 to calendar year 1991 so that our investigation would cover a more recent time period.

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B. Staging of the Questionnaire

On December 17, 1991, the respondents requested that the Department stage the questionnaire on upstream subsidies. According to the respondents' proposal, the first stage would only request the data necessary for the Department to make a competitive benefit determination, while the second stage would cover alleged subsidies provided to the companies that supplied Persico Pizzamiglio ("Persico") with hot-rolled carbon steel in flat-rolled coils ("flat-rolled steel"), which is the main input product used in the production of circular welded non-alloy steel pipe ("standard pipe"). The respondents argued that staging the questionnaire in this way would save both the Department and the upstream respondents time and expense.

On February 14, 1992, we informed the respondent companies and the Government of Brazil ("GOB") that we would not stage the questionnaire. We explained that if the Department were to find a competitive benefit, and the respondents failed to provide a response regarding subsidies to the companies that supplied Persico with flat-rolled steel (hereinafter: "the flat-rolled steel producers/suppliers" or "the upstream suppliers"), the Department would view the response as incomplete and would resort to best information available ("BIA"). However, if the Department were to find no competitive benefit, it would not use BIA because of a failure to provide a response concerning subsidies to the upstream suppliers.

C. Limiting Respondent Selection

On December 17, 1991, the respondents also requested that the Department only require Persico to respond to the Department's questionnaire because of its share of the exports of standard pipe from Brazil to the United States. On December 30, 1991, we decided that only Persico would be required to answer our questionnaire, because of its share of the standard pipe exports to the United States.

Scope of Investigation

The merchandise subject to this investigation is circular welded non-alloy steel pipes and tubes, of circular cross-section, not more than 406.4 mm (16 inches) in outside diameter, regardless of wall thickness, surface finish (black, galvanized, or painted), or end finish (plain end, bevelled end, threaded, or threaded and coupled). These pipes and tubes are generally known as standard pipe, though they may also be called structural or mechanical tubing in certain applications. Standard pipes and tubes are intended for the low pressure conveyance of water, steam, natural gas, air, and other liquids and gases in plumbing and heating systems, air conditioning units, automatic sprinkler systems, and other related uses. Standard pipe may also be used for light load-bearing and mechanical applications, such as for fence tubing, and for protection of electrical wiring, such as conduit shells.

The scope is not limited to standard pipe and fence tubing, or those types of mechanical and structural pipe that are used in standard pipe applications. All carbon steel pipes and tubes within the physical description outlined above are included within the scope of the investigation, except line pipe, oil country tubular goods, boiler tubing, cold-drawn or cold-rolled mechanical tubing, pipe and tube hollows for redraws, finished scaffolding, and finishing rigid conduit. Standard pipe that is dual or triple certified/stenciled that enters the U.S. as line pipe of a kind used for oil or gas pipelines is also not included in this investigation.

Imports of these products are currently classifiable under the following Harmonized Tariff Schedule ("HTS") subheadings: 7306.30.10.00, 7306.30.50.25, 7306.30.50.32, 7306.30.50.40, 7306.30.50.55, 7306.30.50.85, and 7306.30.50.90. Although the HTS subheadings are provided for convenience and customs purposes, our written description of the scope of this proceeding is dispositive.

A. Analysis of Direct Subsidy Programs

According to the questionnaire responses, Persico did not use any of the following programs during the POI:
1. Exemption from the IPI tax and import duties under the BEFIEX program.
2. Preferential export financing under the FINEX program.
3. Preferential export financing under the PROEX program.
No other programs were alleged by the petitioners or exported in the questionnaire responses.

B. Analysis of Upstream Subsidies

The petitioners have alleged that manufacturers, producers, or exporters of standard pipe in Brazil receive benefits in the form of upstream subsidies.Section 771A(a) of the Act defines upstream subsidies as follows:
The term "upstream subsidy" means any subsidy * * * by the government of a country that:
(1) Is paid or bestowed by that government with respect to a product (hereinafter referred to as an "input product") that is used in the manufacture or production in that country of merchandise which is the subject of a countervailing duty proceeding;
(2) In the judgment of the administering authority bestows a competitive benefit on the merchandise; and
(3) Has a significant effect on the cost of manufacturing or producing the merchandise.
Each of the three elements listed above must be satisfied in order for the Department to determine the existence of an upstream subsidy. The absence of any one element precludes the finding of an upstream subsidy.

1. Competitive Benefit

In determining whether subsidies to the upstream supplier(s) confer a competitive benefit within the meaning of section 771A(a)(2) on the producer of the subject merchandise, section 771A(b) directs that:
* * * a competitive benefit has been bestowed when the price for the input product * * * is lower than the price that the manufacturer or producer of the merchandise which is the subject of a countervailing duty proceeding would otherwise pay for the product in obtaining it from another seller in an arms- length transaction. The Department's proposed regulations (Countervailing Duties; Notice of Proposed Rulemaking and Request for Public Comments (54 FR 23366, May 31, 1989)) offer the following hierarchy of benchmarks for determining whether a competitive benefit exists:
* * * In evaluating whether a competitive benefit exists * * * the Secretary will determine whether the price for the input product is lower than:
(1) The price which the producer of the merchandise otherwise would pay for the input product, produced in the same country, in obtaining it from another unsubsidized seller in an arm's length transaction; or
(2) A world market price for the input product.
Therefore, in determining whether the price the standard pipe producer would have paid in an arms-length transaction exceeds the price it actually paid for its allegedly subsidized input--flat-rolled steel--we first look for the price at which the standard pipe producer could have bought the input from an unsubsidized supplier in Brazil. During the POI, all Persico's flat-rolled steel suppliers received countervailable subsidies and we have no information on other suppliers. Lacking an unsubsidized domestic price, we look to world market prices as a potential benchmark. Since there is no one published world market price for the input product, flat-rolled steel, we constructed such a price for calendar

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year 1991 by averaging the following data:
(a) Prices published in the Metal Bulletin for "hot-rolled coil (dry)" sold by steel companies in the member countries of the European Coal and Steel Community ("ECSC");
(b) Prices published by the Metal Bulletin for "hot coil" traded on the steel trading exchange in Brussels;
(c) Prices published by the Metal Bulletin for "hot-rolled coil (dry)" sold by steel companies in Latin America;
(d) Export prices for U.S. flat-rolled steel as provided by the U.S. Census Bureau (these data and the data from the two sources listed below include only the prices for the three HTS categories of hot-rolled steel in flat-rolled coils which, according to Persico, correspond to the steel it uses in its production of standard pipe);
(e) Export prices for Korean hot-rolled steel in flat-rolled coils as provided by official Korean export statistics; and
(f) Export prices for Japanese hot-rolled steel in flat-rolled coils as provided by official Japanese export statistics.
We collected the prices listed under (a) through (c) on a weekly basis and the prices listed under (d) through (f) on a monthly basis. We then calculated a simple average of these prices for each month, expressed in U.S. dollars per metric ton.

In developing this benchmark, we used f.o.b. world market prices rather than c.i.f. prices, which differs from our practice in previous upstream subsidy investigations (see Steel Wheels From Brazil; Final Affirmative Countervailing Duty Determination (54 FR 15523, April 18, 1989) ("Steel Wheels") and Certain Agricultural Tillage Tools From Brazil; Final Affirmative Countervailing Duty Determination (50 FR 34525, August 26, 1985)). Based on extensive comments submitted by petitioners and respondents on this issue, we have preliminarily determined that the proper focus of a competitive benefit inquiry is the price that would exist in Brazil if the input suppliers did not receive subsidies. When it is not possible to observe this price directly because all the input suppliers receive subsidies and we are forced to find a surrogate for this price, we turn to a world market price. however, in doing so, we are still attempting to create the price that would exist for the input product in Brazil but for the subsidies. Accordingly, it would be inappropriate to include ocean freight in the benchmark, since such freight charges would not have been incurred by Persico purchasing in the domestic market.

Using f.o.b. prices, we calculated the weighted average price Persico paid each of its suppliers during the POI. (Persico has requested that the names of its suppliers be treated as proprietary information.) We compared these weighted average prices to identically weighted world market prices. We found that during the POI, only one Brazilian steel producer sold flat-rolled steel to Persico at a price below the world market price. Therefore, we preliminarily determine that Persico received a competitive benefit from only one of its steel suppliers. Since we found no competitive benefit arising from purchases from the other steel suppliers, there is no need to analyze these other steel suppliers further.

2. Subsidies Bestowed Upon Input Product

a. Upstream subsidy programs preliminarily determined to be countervailable. We preliminarily determine that benefits were bestowed with respect to flat- rolled steel, a substantial input product used in the manufacture or production in Brazil of standard pipe, under the following programs:
i. Government equity infusions. Historically, the GOB has been the principal owner of the Brazilian steel industry, primarily through the state-owned holding company Siderurgia Brasileira S.A. ("SIDERBRAS"). In March 1990, the GOB decided to liquidate SIDERBRAS and privatize its steel mills, including the one steel producer subject to our analysis in this determination. Since the beginning of the privatization process, which is expected to be completed in 1992 or 1993, this steel producer has operated largely as an independent entity. SIDERBRAS ceased operations following the GOB's March 1990 liquidation decision and did not exercise any operational or financial control over its subsidiary during the POI. According to the questionnaire responses, the one steel producer under investigation has received government equity infusions, mostly from SIDERBRAS, in the form of cash transfers and debt assumptions in return for equity. The equity infusions were made pursuant to two GOB plans:
(1) The Stage III Expansion Project for the state-owned steel mills, which was initiated in 1975 and completed in 1988. The purpose of this project was to expand the Brazilian steel industry's production capacity, improve the quality of its products, and reduce its costs. Only steel companies received assistance under this project; and
(2) The Financial Restructuring Plan for SIDERBRAS, which was approved in January 1987 and completed in 1991. The objective of this plan was to stabilize the financial condition of the steel industry, offset the adverse effects of delays in the implementation of the Stage III Expansion Project, and reduce the steel companies' debt load. Only steel companies were eligible to participate in this plan, which replaced the Stage III Expansion Project.

We have consistently held that government provision of equity does not per se confer a subsidy (see e.g., Steel Wheels). Government equity infusions bestow a countervailable benefit only when provided on terms inconsistent with commercial considerations. Therefore, we examined whether the steel producer was a reasonable investment (a condition we have termed "equityworthy") in order to determine whether the equity infusions were inconsistent with commercial considerations.

A company is a reasonable investment if it shows the ability to generate a reasonable rate of return within a reasonable period of time. To make this determination, we examine the company's financial ratios, profitability, and other factors, such as market demand projections and current operating results to evaluate its current and future ability to earn a reasonable rate of return on investment. The steel producer analyzed in this determination was previously found by the Department to be unequityworthy for a certain period of time. Nothing on the record of this investigation leads us to believe that this determination was wrong. For a subsequent time period, we preliminarily determine that the steel producer continued to be unequityworthy.

Therefore, based on our analysis of the information on the record and a previous determination, we conclude that the company was unequityworthy in each year it received an equity infusion. Accordingly, we determine that the equity infusions made into this steel company by the GOB were inconsistent with commercial considerations and may confer a subsidy.

To the extent that we find government investment to be commercially unreasonable and the government's rate of return on its investment less than the national average rate of return on investment, we consider the investment to provide a countervailable benefit. We examine the "rate of return shortfall" for the POI, which is the difference between the national average rate of return on equity during the POI and the steel

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company's rate of return on equity. If no shortfall exists for the POI, there is no countervailable subsidy for that year. If a shortfall does exist, we multiply the rate of the shortfall by the amount of the original equity infusion to find the benefit for the POI.

Due to inflation, the nominal values of the original equity infusions have increased substantially. We have, therefore, used the indexed values of the equity infusions in our calculations. In its response to our questionnaires, the steel producer used the following indices when correcting the monetary value of the equity infusions:
(a) For 1977-1990: the values of the BTN (Brazilian Treasury Bill) as provided in notice RF 45/90 issued by the GOB; and
(b) For 1991: the FAP (Equity Adjustment Factor) index as published by the Brazilian Treasury.
For each equity infusion, the nominal amount received was converted into a BTN or FAP equivalent by dividing the nominal amount received by the value of the BTN/FAP. To obtain the 1991 value of the equity infusions, we multiplied the BTN/FAP equivalents by the value of the FAP on December 31, 1991, in order to correct the value of all equity infusions to this date.

We measured the rate of return for the steel producer by dividing its net result in 1991 by its total capital. We then compared the result with the national average rate of return on equity in Brazil in 1991, as reported in the January 1992 edition of Exame, a Brazilian business publication. This national average rate of return on equity is only based on the first three quarters of 1991. Since the rate of return for the whole year was not available at the time of this preliminary determination, we used the data for the first three quarters of 1991 as the best information available. We will use the average rate of return for the entire year in our final determination if it is available by then. The steel producer's rate of return on equity was lower than the national average of 1.8 percent. The difference between the company's rate of return on equity and the national average rate of return on equity constitutes the rate of return shortfall. We multiplied the rate of return shortfall by the December 31, 1991, value of all equity infusions provided to the company that we have found to be inconsistent with commercial considerations. Finally, we divided this benefit amount by the December 31, 1991, value of the steel producer's total sales for 1991.

On this basis, we determine that the subsidy to the steel producer from the government equity infusions was 10.09 percent ad valorem.

ii. IPI incentives. This program, which consists of a rebate of the IPI tax (Imposto sobre Produtos Industrializados, a value-added sales tax paid on domestic sales of industrial products), was established by Decree-law 1.547 in 1977. Law 7.988 of December 28, 1989, lowered the rebate from 95 percent to 47.5 percent, effective retroactively to January 1, 1989. However, projects which had been authorized before December 28, 1989, would still be granted a 95 percent reduction of the IPI tax. Steel producers are eligible to receive IPI rebates under this program, provided that they meet the following conditions:
(a) They must have an ongoing capital investment project originally approved by the Conselho do Desenvolvimento Industrial ("CDI"; the Industrial Development Council);
(b) They must also receive quarterly approval from the Industry and Commerce Department of the Ministry of Economy, Finance and Planning which ensures that capital investment in the approved project is continuing; and
(c) They must have a net IPI tax obligation in each quarter.
After several amendments to Decree Law 1.547, the program was suspended on April 12, 1990, by Decree Law 8.034. Pursuant to this law, only companies with projects approved prior to April 1990 are eligible to continue to receive benefits from this program. The steel producer received residual benefits under this program during the POI.

Because only steel producers are eligible to receive IPI rebates, we preliminarily determine that this program is limited to a specific enterprise or industry, or group of enterprises or industries. To calculate the benefit, we divided the total amount of the IPI rebate received during the POI by the steel producer's total sales in 1991. On this basis, we determine the subsidy provided to the steel producer under this program to be 0.69 percent ad valorem.
b. Upstream Subsidy Programs Preliminarily Determined Not To Be Used by Persico's Steel Supplier.
i. Long-term loan guarantees.
ii. Government privatization assistance.
iii. Government provision of operating capital.
iv. Fiscal benefits by virtue of a project approved by CDI.

3. Significant Effect

For purposes of determining whether the upstream subsidies have a significant effect on the cost of manufacturing standard pipe, we multiplied the total ad valorem subsidy rate on the steel input by the proportion of the total manufacturing cost of standard pipe accounted for by the steel input.

In Final Affirmative Countervailing Duty Determination; Certain Agricultural Tillage Tools From Brazil (50 FR 34525, August 26, 1985), we established thresholds regarding the existence of a significant effect. We presume no significant effect if the ad valorem subsidy rate on the input product multiplied by the proportion of the input product in the cost of manufacturing the merchandise accounts for less than one percent. If the result of the calculation is higher than five percent, we presume that there is a significant effect. If the result is between one and five percent, we examine the effect of the input subsidy on the competitiveness of the merchandise. Since in this case, the steel input subsidy allocated to standard pipe yields a rate in excess of five percent, we presume that there is a significant effect. Therefore, based on the above analysis, we preliminarily determine that Persico received an upstream subsidy.

D. Calculation of the Upstream Subsidy to Persico

As discussed above, the weighted average world market price exceeds the weighted average price charged by one of Persico's suppliers. For the same supplier, the difference between the world market price and its price is higher than the amount of the domestic subsidies the supplier received. Therefore, we conclude that there is a full pass-through of the subsidies from this steel supplier to Persico. To calculate the benefit to Persico we multiplied the value of the steel purchased from this supplier by the subsidy received by the supplier and divided this amount by the value of Persico's sales of standard pipe during the POI. Using this methodology, we determine the upstream benefit for Persico to be 9.53 percent.

Verification

In accordance with section 776(b) of the Act, we will verify the information used in making our final determination.

Suspension of Liquidation

In accordance with Section 703(d) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all entries of standard pipe from Brazil which are entered or withdrawn from warehouse, for consumption on or

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after the date of the publication of this notice in the Federal Register and to require a cash deposit or bond for such entries of the merchandise in the amount of 9.53 percent ad valorem. This suspension will remain in effect until further notice.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the International Trade Commission ("ITC") of our determination. In addition, we are making available to the ITC all nonprivileged and nonproprietary information relating to this investigation. We will allow the ITC access to all privileged and business proprietary information in our files, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Deputy Assistant Secretary for Investigations, Import Administration. If our final determination is affirmative, the ITC will make its final determination within 45 days after the Department makes its final determination.

Public Comment

In accordance with 19 CFR 355.38 of the Department's regulations, we will hold a public hearing, if requested, on July 29, 1992, at 9:30 a.m. in room 3708, to afford interested parties an opportunity to comment on this preliminary determination. Interested parties who wish to request or participate in a hearing must submit a request within ten days of the publication of this notice in the Federal Register to the Assistant Secretary for Import Administration, U.S. Department of Commerce, Room B-099, 14th Street and Constitution Avenue, NW., Washington, DC 20230. Requests should contain: (1) the party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the issues to be discussed. Parties should confirm by telephone the time, date, and place of the hearing 48 hours before the scheduled time.

In accordance with 19 CFR 355.38(c) and (d), ten copies of the business proprietary version and five copies of the nonproprietary version of the case briefs must be submitted to the Assistant Secretary no later than July 22, 1992. Ten copies of the business proprietary version and five copies of the nonproprietary version of rebuttal briefs must be submitted to the Assistant Secretary no later than July 27, 1992. An interested party may make an affirmative presentation only on arguments included in that party's case or rebuttal brief. If no hearing is requested, interested parties still may comment on these preliminary results in the form of case and rebuttal briefs. Written argument should be submitted in accordance with Section 355.38 of the Department's regulations and will be considered if received within the time limits specified in this notice.

This determination is published pursuant to section 703(f) of the Act (19 U.S.C. 1671b(f)).

Dated: June 2, 1992.
Francis J. Sailer,
Acting Assistant Secretary for Import Administration.