C-508-810
Investigation
POI: 01/01/99 - 12/31/99
Public Document
M. Brown, Office 1, ext. 4987
MEMORANDUM
DATE: September 14, 2001
TO: Faryar Shirzad
Assistant Secretary for
Import Administration
FROM: Richard W. Moreland
Deputy Assistant Secretary, Group I
Import Administration
SUBJECT: Issues and Decision Memorandum for the Final Determination in
the Countervailing Duty Investigation of Pure Magnesium from Israel
SUMMARY
On February 22, 2001, the Department of Commerce ("the Department")
published the preliminary determination in this investigation. (1) The
Analysis of Programs and Subsidies Valuation Information sections below
describe the subsidy programs and the calculation methodologies used to
calculate the benefits from these programs. We have analyzed the comments
submitted by the interested parties in the case and rebuttal briefs in the
"Analysis of Comments" section below, which also contains the Department's
responses to the issues raised in the briefs. We recommend that you
approve the positions we have developed in this memorandum.
Scope
The scope of this investigation includes imports of pure magnesium
products, regardless of chemistry, form, or size, including, without
limitation, ingots, raspings, granules, turnings, chips, powder, and
briquettes.
Pure magnesium includes: (1) products that contain at least 99.95 percent
primary magnesium, by weight (generally referred to as "ultra-pure"
magnesium); (2) products that contain less than 99.95 percent but not less
than 99.8 percent primary magnesium, by weight (generally referred to as
"pure" magnesium); (3) chemical combinations of pure magnesium and other
material(s) in which the pure magnesium content is 50 percent or greater,
but less than 99.8 percent, by weight, that do not conform to an "ASTM
Specification for Magnesium Alloy" (2) (generally referred to as "off-
specification pure" magnesium); and (4) physical mixtures of pure
magnesium and other material(s) in which the pure magnesium content is 50
percent or greater, but less than 99.8 percent, by weight. Excluded from
this order are mixtures containing 90 percent or less pure magnesium by
weight and one or more of certain non-magnesium granular materials to make
magnesium-based reagent mixtures. The non-magnesium granular materials
which the Department is aware are used to make such excluded reagents are:
lime, calcium metal, calcium silicon, calcium carbide, calcium carbonate,
carbon, slag coagulants, fluorspar, nephaline syenite, feldspar, aluminum,
alumina (Al2O3), calcium aluminate, soda ash, hydrocarbons, graphite,
coke, silicon, rare earth metals/mischmetal, cryolite, silica/fly ash,
magnesium oxide, periclase, ferroalloys, dolomitic lime, and colemanite. A
party importing a magnesium-based reagent which includes one or more
materials not on this list is required to seek a scope clarification from
the Department before such a mixture may be imported free of
countervailing duties.
In the scope description above, we have made certain changes from the
Preliminary Determination (see, comment 10 below). We have also corrected
a scrivener's error that occurred in the Preliminary Determination.
Specifically, in the second paragraph under "(2)" we have replaced the
term "pure" with "primary." This is consistent with the description of the
subject merchandise in the petition.
Background Information
This investigation covers one responding company, Dead Sea Magnesium Ltd.
("DSM"), which was created in December 1995 as a joint venture between
Dead Sea Works ("DSW") and Volkswagen ("VW"). In the POI, DSW owned 65
percent of the shares in DSM (but controlled 67 percent of the vote),
while VW held 35 percent of the shares (controlling 33 percent of the
vote).
In 1993, DSW started building the magnesium plant where the subject
merchandise is produced. The same year, DSW applied to the Government of
Israel ("GOI") for certain grants to help finance the construction and to
defray the costs of providing infrastructure for the magnesium plant. The
GOI approved the grant applications in 1993 and began disbursing the
grants to DSW the same year. In a May 1996 agreement between DSW and DSM,
DSW transferred its
magnesium operation to DSM, which also took over DSW's role as the
recipient of government subsidies. Magnesium production and sales started
in 1997.
Parallel to these developments, Israel Chemicals Ltd. ("ICL"), a then
government-controlled holding company that owns DSW, was gradually
privatized starting in 1992. In early 1993, the GOI owned nearly 75
percent of ICL whereas at the end of the POI (1999), only a minuscule
portion of ICL's shares were under GOI control.
Subsidies Valuation Information
Allocation Period:
Pursuant to 19 CFR 351.524(d)(2), we will presume the allocation period
for non-recurring subsidies to be the average useful life ("AUL") of
renewable physical assets for the industry concerned, as listed in the
Internal Revenue Service's ("IRS") 1977 Class Life Asset Depreciation
Range System and updated by the Department of Treasury. The presumption
will apply unless a party claims and establishes that these tables do not
reasonably reflect the AUL of the renewable physical assets for the
company or industry under investigation, and the party can establish that
the difference between the AUL in the IRS tables and the company-specific
or country-wide AUL for the industry under investigation is significant.
The Department will use the criteria found in 19 CFR 351.524(d)(2)(ii) and
(iii) to decide whether the presumption has been rebutted.
In this final determination, we have allocated DSM's non-recurring
subsidies over the same company-specific AUL as in the Preliminary
Determination, i.e., 21 years. DSM's arguments as well as the petitioners'
rebuttal comments and the Department's position are described in Comment 2
below.
Discount Rates and Grant Allocation Methodology:
In selecting a discount rate to allocate non-recurring subsidies over
time, the Department prefers to use, in this order:
(1) The cost of long-term fixed-rate loans of the firm in question,
excluding any loans that the Secretary has determined to be
countervailable subsidies;
(2) The average cost of long-term fixed-rate loans in the country in
question; or,
(3) A rate that the Secretary considers to be most appropriate.
See 19 CFR 351.524(d)(3)(i).
DSM (and, before 1996, DSW) reported having long-term, variable-rate
loans but no long-term, fixed-rate borrowings. We have found that the only
long-term loans available to private companies in Israel during the time
period 1993-1999 had variable interest rates. There are no indications
that private companies obtained long-term, fixed-rate loans during this
time period. This is consistent with the Department's findings in Final
Affirmative Countervailing Duty Determination: Certain Carbon Steel Butt-
Weld Pipe Fittings From Israel, 60 FR 10569, 10570 (February 27, 1995) and
Industrial Phosphoric Acid from Israel: Final Results of Countervailing
Duty Administrative Review, 63 FR 13626, 13634 (March 20, 1998). Thus, we
lack information on the first two preferred sources for a discount rate.
In the Preliminary Determination, we allocated the non-recurring grants
over time using as the discount rate DSW's reported company-specific
interest rate for 1993 (the only year in which non-recurring grants were
approved, according to the information available to the Department at the
time). DSM reported that this variable interest rate was set at a fixed
percentage above the London Interbank Offer Rate ("LIBOR") and that it was
the rate paid on DSM's (and, previously, DSW's) long-term loans. We
applied this interest rate in our standard allocation formula described in
19 CFR 351.524(d)(1) to calculate the preliminary countervailable benefit
for the POI.
In this final determination, we have concluded that DSM received multiple
grants under the ECIL program, some of which were approved after 1993. For
further discussion, see Comment 4 below. Therefore, we have calculated
separate benefit streams for these later grants. We have also changed the
interest rate used in the allocation formula to reflect the fact that the
only discount rates available are variable interest rates. For further
discussion, see Comment 6 below. Our calculation methodology is further
explained in the September 14, 2001 calculation memorandum.
Creditworthiness:
In the initiation of this investigation, the Department stated that it
would investigate DSM's creditworthiness based on the petitioners'
allegation that the company had been uncreditworthy since its inception
(see Notice of Initiation of Countervailing Duty Investigation: Pure
Magnesium from Israel, 65 FR 68126, 68128 (November 14, 2000)). In the
Preliminary Determination, we did not address DSM's creditworthiness
because, according to the information available to the Department at that
time, the subsidies approved for DSM from its inception in 1996 through
the POI were either expensed in the year of receipt or were so small that
they did not give rise to a benefit during the POI. We did not examine the
creditworthiness of DSW, the subsidy recipient prior to the formation of
DSM, because the petitioners had not filed an uncreditworthiness
allegation with respect to DSW.
However, based on information collected at verification, we have
determined that certain non-recurring grants were approved in 1996 and
1999. Therefore, we have made a creditworthiness determination for DSM for
those years. In this final determination, we find DSM to be creditworthy
during the relevant time period. For further discussion, see Comment 5
below and the September 14, 2001 memorandum from the Team to Richard W.
Moreland, Deputy Assistant Secretary, entitled "Uncreditworthiness
Allegation."
Change in Ownership:
The Department announced its new privatization approach in a remand
determination on December 4, 2000, following the decision of the U.S.
Court of Appeals for the Federal Circuit ("Federal Circuit") in Delverde
Srl v. United States, 202 F.3d 1360, 1365 (Fed. Cir. 2000), reh'g en banc
denied (June 20, 2000) ("Delverde III"). The Department has applied this
new approach recently in such cases as Grain-Oriented Electrical Steel
from Italy: Final Results of Countervailing Duty Administrative Review, 66
FR 2885 (January 12, 2001) and Industrial Phosphoric Acid from Israel:
Final Results of Countervailing Duty Administrative Review, 66 FR 15839
(March 21, 2001) ("IPA 1998 review").
Under this approach, the first requirement is to determine whether the
person to which the subsidies were given is, in fact, distinct from the
person that produced the subject merchandise exported to the United
States. If the two persons are distinct, the original subsidies may not be
attributed to the new producer/exporter. The Department would, however,
consider whether any subsidy had been bestowed upon that producer/exporter
as a result of the change-in-ownership transaction.
On the other hand, if the original subsidy recipient and the current
producer/exporter are considered to be the same person, that person
benefits from the original subsidies, and its exports are subject to
countervailing duties to offset those subsidies. In other words, we will
determine that a financial contribution and a benefit have been received
by the person that is the firm under investigation. Assuming that the
original subsidy had not been fully amortized under the Department's
normal allocation methodology as of the period of investigation or review,
the Department would then continue to countervail the remaining benefits
of that subsidy.
In making the person determination, where appropriate and applicable, we
analyze factors such as (1) continuity of general business operations,
including whether the successor holds itself out as the continuation of
the previous enterprise, as may be indicated, for example, by use of the
same name, (2) continuity of production facilities, (3) continuity of
assets and liabilities, and (4) retention of personnel. No single factor
will necessarily provide a dispositive indication of any change in the
entity under analysis. Instead, the Department will generally consider the
post-sale entity to be the same person as the pre-sale entity if, based on
the totality of the factors considered, we determine that the entity in
question can be considered a continuous business entity because it was
operated in substantially the same manner before and after the change in
ownership.
Using the approach described above, we have analyzed the information
provided by the GOI and DSM to determine whether the subsidies received by
DSW continued to benefit DSM during the POI. By applying this approach to
the facts and circumstances of the instant investigation and the relevant
privatization of ICL and its subsidiary, DSW, we find that the pre-sale
and post-sale entities are not distinct persons. Specifically, DSM still
maintains its plant and uses the same production facilities to manufacture
and sell the same products. (See Comment 1 below for a complete discussion
of our analysis of ICL's privatization.) Therefore, we determine that the
subsidies provided to DSW during the course of the privatization of ICL
and prior to the formation of DSM, continued to benefit DSM in the POI.
Analysis of Programs
Programs Determined To Be Countervailable
1. Grants under the Law of Encouragement of Capital Investments ("ECIL")
The ECIL program is a regional development program aimed at providing
assistance to enterprises located in disadvantaged regions of the country.
The program seeks to improve the economic situation in such regions by
encouraging population distribution, creating new sources of employment,
aiding in the absorption of immigrants, and developing the production
capacity. For purposes of the ECIL program, Israel is divided into three
zones: Development Zones A and B, and the Central Zone. The level of
benefits differ between the zones with Zone A receiving the highest level
of benefits under this program. DSM's magnesium plant is located in Zone A.
The ECIL program consists of two mutually exclusive parts: (1) investment
grants or (2) an exemption from the corporate income tax during a certain
number of years. A company that opts for the grant part may receive one or
more of the following: (1) a grant equal to a certain percentage of the
total investment approved by the GOI, (2) loan guarantees, and (3) certain
tax benefits. (For a detailed description of the program, see the June 6,
2001 verification report.)
In 1993, the GOI approved an ECIL grant for the construction of the
magnesium plant in the amount of 38 percent of the total approved
investment. The amount of the grant was subsequently increased in separate
amendments in 1996 and 1999. Starting in 1993, the GOI paid the grant
first to DSW and, from May 1996, to DSM in numerous disbursements. See,
also, Comment 4 below.
We determine that the ECIL grant provides a countervailable subsidy
within the meaning of section 771(5) of the Act. The grant is a direct
transfer of funds from the GOI, providing a benefit in the amount of the
grant. The grant is specific within the meaning of section 771(5A)(D)(iv)
of the Act because it is limited to firms located in a designated
geographic region.
In accordance with 19 CFR 351.524(c)(1), we have treated this grant as a
non-recurring subsidy and have allocated the benefit over time. We were
not able to undertake a 0.5 percent test on the portion of the grant
approved in 1993 because the regulations direct us to perform this test
based on the "relevant sales," i.e., the merchandise for which the subsidy
was provided, and DSW did not have any sales of magnesium in that year.
See 19 CFR 351.524(b)(2).
To calculate the countervailable subsidy, we applied a methodology using
variable interest rates because fixed interest rates were not available
and because the variable rates changed significantly between the years of
approval and the POI (see the September 14, 2001 calculation memorandum).
We divided the benefit attributable to the POI by the value of DSM's total
sales during the POI.
On this basis, we determine the countervailable subsidy for this program
to be 16.02 percent ad valorem.
2. Infrastructure Grant
In 1993, the GOI approved an application from DSW for a grant to cover
the company's expenses for building infrastructure around the new
magnesium plant. The grant was disbursed first to DSW and, from 1996, to
DSM. At verification, we were told that although it is a normal government
obligation in Israel to provide infrastructure, the GOI made a special
arrangement with DSW according to which the company would carry out the
infrastructure work through subcontractors after which it would be
reimbursed by the GOI. See, also, Comment 3 below.
We determine that the infrastructure grant provides a countervailable
subsidy within the meaning of section 771(5) of the Act. The grant is a
direct transfer of funds from the GOI, providing a benefit in the amount
of the grant. The grant is specific within the meaning of section
771(5A)(D)(iv) of the Act because it is limited to DSW/DSM.
In accordance with 19 CFR 351.524(c)(1), we have treated this grant as a
non-recurring subsidy and have allocated the benefit over time. We were
not able to undertake a 0.5 percent test on this grant because the
regulations direct us to perform this test based on the "relevant sales,"
i.e., the merchandise for which the subsidy was provided, and DSW did not
have any sales of magnesium in the year of approval. See 19 CFR
351.524(b)(2).
To calculate the countervailable subsidy, we applied a methodology using
variable interest rates because fixed interest rates were not available
and because the variable rates changed significantly between the years of
approval and the POI (see the September 14, 2001 calculation memorandum).
We divided the benefit attributable to the POI by the value of DSM's total
sales during the POI.
On this basis, we determine the countervailable subsidy for this program
to be 0.49 percent ad valorem.
3. Grants under the Law of Encouragement of Industrial Research and
Development ("EIRD")
The EIRD was established in 1984 to encourage industrial companies to
perform research and development ("R&D"). The benefits under this program
include grants, loans, and tax exemptions. The GOI provides grants in the
amount of 30 to 66 percent of the approved R&D expenditures, depending on
the type of project and the location where the proposed R&D will be
undertaken. Companies located in Development Zone A receive a higher level
of benefit than companies in other parts of the country.
Firms applying for an EIRD grant are required to submit information to
the GOI regarding the nature, aims, and budget of the proposed project.
The GOI considers the following criteria in determining whether to grant
EIRD funds: (1) whether the applicant company shows innovation in the
development of new technologies; (2) the management, production and
marketing capabilities of the firm, as well as any marketing strategy for
the new product; (3) whether the product will be able to compete
successfully in international markets; and (4) whether the proposed R&D
project will result in the introduction of new technology or scientific
manpower. Grants provided under the program are subject to repayment,
through the payment of royalties, if the supported R&D yields a
commercially successful product.
Prior to the formation of DSM, there was a magnesium research division
within DSW which applied for and received EIRD grants. Later, DSM's
magnesium research division also applied for and received such grants.
With respect to the grants provided to DSM, one grant was partially repaid
through royalties. See, also, Comment 8 below.
We determine that the EIRD grants are countervailable subsidies within
the meaning of section 771(5) of the Act. These grants constitute a direct
transfer of funds from the GOI. We also determine that the grants, if not
repaid, confer a benefit in an amount equal to the difference between the
non-specific base rate of 30 percent of the approved R&D cost and the rate
at which the GOI reimbursed DSW and DSM for their research expenses. In
instances where the grants were repaid in the form of royalties, the
benefit is the company's interest-free use of money during the time period
between the receipt and the repayment of the grant. The EIRD program is
specific within the meaning of section 771(5A)(D)(iv) of the Act, at least
for R&D undertaken by companies in Development Zone A, because the level
of assistance is greater for companies located in that zone.
To calculate the benefit from the EIRD grants, we first tested, where
possible, whether the amounts approved exceeded 0.5 percent of magnesium
sales in the year of approval. If the approved amounts were below the 0.5
percent threshold, we expensed the grant in the year of receipt. If the
grants exceeded 0.5 percent of sales and were not repaid to the GOI in the
form of royalties (because the projects were not successful), we allocated
the excess amount (i.e., the reimbursement above the base rate) over time
using the same discount rate and calculation methodology as we used for
the ECIL and infrastructure grants. If the grants exceeded 0.5 percent of
sales and were partially repaid to the GOI during the POI in the form of
royalties (because the projects were successful), we treated the grant as
a zero-rate loan during the time period between the receipt and the
repayment of the grant. We calculated a benefit using as the benchmark
interest rate the average one-year LIBOR in the POI increased by a certain
percentage (see the "Subsidies Valuation Information" section above). For
further explanation of our calculation methodology, see the September 14,
2001 calculation memorandum.
On this basis, we determine the countervailable subsidy for this program
to be 0.01 percent ad valorem.
Program Determined Not To Provide Countervailable Benefits
1. Accelerated Depreciation
DSM used the accelerated depreciation rules under ECIL for its buildings
in 1998 and 1999. We verified that DSM did not derive a benefit from this
accelerated depreciation during the POI or at any time prior to the POI.
On this basis, we determine that this program did not provide a
countervailable benefit in the POI.
Programs Determined To Be Not Used
1. Tax benefits under ECIL
2. Loan guarantees under ECIL
3. Magnesium Research Institute ("MRI") and Consortium Research Programs
Analysis of Comments
Comment 1: The Department failed to take into account the effects of the
privatization of ICL
DSM argues that in its Preliminary Determination, the Department failed
to take into account the effects of ICL's privatization on the subsidy
benefits received by DSW and DSM. Citing Industrial Phosphoric Acid from
Israel: Preliminary Results and Final Partial Rescission of Countervailing
Duty Administrative Review, 65 FR 53984, 53985 (September 6, 2000), DSM
notes that the Department has previously held that the partial
privatization of ICL represents the partial privatization of each company
in which ICL holds an ownership interest. The respondent also points to
the Preliminary Determination in which the Department stated that the
"privatization of ICL, parent to DSW/DSM, directly and necessarily
resulted in the privatization of the GOI's interest in DSW/DSM."
Therefore, DSM says, the privatization of ICL is directly relevant to
DSW/DSM.
DSM argues that the subsidy benefits originally received by DSW were
extinguished through the privatization of ICL and refers to the decision
by the World Trade Organization's ("WTO") Appellate Body in United States -
Imposition of Countervailing Duties on Certain Hot-Rolled lead and Bismuth
Carbon Steel Products Originating in the United Kingdom, AB-2000-1,
WT/DS138/AB/R (May 10, 2000) ("WTO decision"), wherein the WTO stated that
the privatization of a company that has received a countervailable benefit
serves to extinguish that benefit. DSM also cites Delverde III in which
the Federal Circuit summarized with approval the WTO panel in its finding
that "the privatization of a government-owned company in an arm's length,
fair market transaction eliminates any 'benefit' from pre-privatization
subsidies and, therefore, no 'benefit' from those subsidies can be
attributable to the successor privatized company." DSM notes that the
Department has not found any evidence that the privatization of ICL was
made at less than fair market value.
On this basis, the Department should find that the privatization of ICL
extinguished the benefits that DSW originally received, DSM argues.
However, DSM also recognizes that the Department has already rejected the
WTO decision and, therefore, submits that the ECIL grant and the
infrastructure grant should, at least, be reduced in proportion with the
privatization that occurred from the time the grants were approved in 1993
until the end of the POI. Since the GOI's ownership of ICL decreased from
74.9 percent in 1993 to 0.11 percent by the end of 1999, the
countervailable benefit from the ECIL and infrastructure grants should be
reduced by 74.79 percent (i.e., 74.9 minus 0.11), DSM argues.
With respect to the Federal Circuit's findings in Delverde III, DSM
argues that the privatization of ICL satisfies the criteria set forth in
the Department's final remand determination following Delverde III (see
Final Results of Redetermination Pursuant to Court Remand, issued on
December 4, 2000) ("Delverde Remand"). According to DSM, the "person" that
applied for and received the grants is not the same "person" that operated
DSM during the POI. DSM points out that in 1993, when the grants were
approved, the GOI owned nearly 75 percent of ICL and, thus, exercised
control over ICL's (and, hence, DSW's) business decisions, including those
related to the building of the magnesium plant. But by the beginning of
the POI, the GOI owned only 2.2 percent of ICL (and, by the end of the
POI, 0.11 percent), which had eliminated the government's control over ICL
and its subsidiary companies.
Another important change, DSM argues, is that VW entered into a joint
venture with DSW to own and operate the magnesium plant in 1995, two years
after the approval and initial receipt of the grants. Moreover, DSM
continues, the plant was not transferred to the joint venture until mid-
1996. In sum, the respondent says, the very significant change in the
"person" operating the magnesium plant is not simply the privatization of
ICL, but the new and active participation of VW in the joint venture which
substantially changed the manner in which the plant was operated. Finally,
DSM points to a number of factors in the business proprietary joint
venture agreement, all of which, in DSM's opinion, support the contention
that the "person" that exported the subject merchandise to the United
States during the POI is different from the "person" that received the
subsidies.
The petitioners argue that the Department correctly used its revised
privatization methodology developed as a result of the Federal Circuit's
decision in Delverde III. Based on the Delverde Remand, the Department
correctly determined in the Preliminary Determination that DSM continued
to benefit from subsidies provided prior to the privatization of ICL. The
petitioners also reject the notion that the Department's new privatization
methodology is inconsistent with the WTO Appellate Body's decision and
emphasize that this countervailing duty investigation is controlled by
U.S. law whereas WTO rulings have no direct legal force in the United
States.
The petitioners further argue that DSM is the same "person" before
privatization as it is now. The Department correctly looked at various non-
exclusive factors in the Preliminary Determination when it made its
"person" determination, the petitioners say (see the "Change in Ownership"
section above for a list of these factors). The petitioners note that DSM
was a continuous business entity because it operated in the same manner
before and after the change in ownership. The petitioners also state that
the Department took into account the joint venture between VW and DSW and
correctly found that there was no intention to change the continuity of
DSM's business operations. Furthermore, the petitioners note, DSM was
created to extract minerals from the Dead Sea, which it continues to do.
The company's business strategy has not changed since 1995 and the name
change was only to reflect the addition of a foreign investor, not a
change in company identity. The petitioners argue that DSM held itself out
as the same company, continued with the same production facilities, and,
after production began, employed largely the same personnel and
management.
Department's Position:
As noted by DSM, the Department rejects the notion that a privatization
necessarily extinguishes the benefit from subsidies conferred prior to
privatization. See IPA 1998 review and the Delverde Remand. In this
determination, as in recent countervailing duty determinations involving
changes in ownership, we are applying the "person" methodology described
in the Delverde Remand. As explained in that remand determination, this
new methodology is fully consistent with U.S. law and our WTO obligations.
In order to determine whether the company that exported the subject
merchandise to the United States in the POI, i.e., DSM, is the same
"person" as the company for which the GOI approved countervailable
subsidies in 1993, the Department has examined factors such as (1) the
continuity of the company's general business operations; (2) the
continuity of production facilities; (3) the continuity of assets and
liabilities; and (4) the retention of personnel. This is consistent with
the Delverde Remand and with the methodology used in other recent
determinations involving a change in ownership, e.g., IPA 1998 review. The
evidence indicates that DSW's magnesium operation, subsequently
incorporated as DSM, was a continuous business entity because it was
operated in substantially the same manner before and after the change in
ownership.
Regarding the first three factors, we find that although the ultimate
ownership of DSW and its magnesium division, which later became DSM, has
changed as a result of the privatization of ICL and the formation of the
joint venture, the general business operations, production facilities,
assets, and some of the liabilities of the magnesium operation remained
the same. (See the February 14, 2001 memorandum from the Team to the File
entitled "Change-in-Ownership Analysis in the Countervailing Duty
Investigation of Pure Magnesium from Israel," issued for purposes of the
preliminary determination of this case.) At verification, DSM officials
confirmed that the business operations and the plant were the same before
and after privatization (though they noted that production and sales of
magnesium did not begin until the privatization of ICL was well underway).
See verification report at 3.
It is a fact that DSW applied for and received the ECIL and
infrastructure grants specifically to build a facility to produce
magnesium. In the POI, DSM produced the same product in the same plant,
using the same productive assets with largely the same workforce. The fact
that the May 1996 plant sale agreement stipulates that DSM would take over
for DSW as the beneficiary of various government subsidies further
indicates that DSM for all intents and purposes is the same "person" as
DSW's magnesium division which originally received the grants. Presumably,
the GOI would not have continued to disburse the grants to a new "person,"
i.e., to an entity fundamentally different from the one for whom the
grants originally had been approved, without further review or a formal
decision to do so.
The Department recognizes that some changes took place, particularly with
regard to management and supply contracts, as a result of the
privatization of ICL and the formation of the joint venture with the
ensuing presence of VW. There also seems to have been some personnel
changes (the fourth factor listed above) because, as we were told at
verification, it was easier to terminate employees after privatization.
However, we find DSM's arguments regarding changes in control and
management of the magnesium operation not to be persuasive in establishing
that the operation itself was not a continuous business entity. For
instance, the record indicates that early on, DSW was searching for a
business partner in the magnesium venture and may have anticipated, prior
to the change in ownership, that the magnesium plant would be separately
incorporated in a joint venture (at verification, we were informed that
separate incorporation was required by law because one of the joint
venture partners was a foreign company).
In sum, the evidence in favor of finding that DSM is the same "person" as
the company for whom the grants were originally approved outweighs the
evidence against such a finding. On this basis, we find that the ECIL
grant and infrastructure grants originally received by DSW provided
countervailable subsidies to DSM during the POI.
Comment 2: The Department should change the AUL used to allocate non-
recurring subsidies over time
DSM agrees with that the Department's preliminary finding that the IRS's
14-year AUL for the magnesium industry is inappropriate for DSM. However,
DSM argues, the AUL should be longer than the 21 years the Department
incorrectly used in the Preliminary Determination to allocate non-
recurring subsidies.
DSM argues that the Department's first choice should be the company's
actual depreciation period used in its financial records, i.e., 25 years.
DSM notes that technical and economic experts individually and
independently recommended 25 years as the appropriate depreciation period
for DSM and that, based on these recommendations, the company's board of
directors approved an increase in the depreciation period from 20 to 25
years in 1999. DSM points out that the 25-year period was accepted by the
independent auditors who prepared the company's 1999 financial statements.
DSM maintains that using the company's actual depreciation period of 25
years as the AUL satisfies Department regulations because according to19
CFR 351.524(d)(2), the Department will use a period other than that
provided by the IRS if a party can show that (1) the difference between
the IRS's AUL and the company- or country-wide AUL is at least one year;
(2) the company bases its depreciation on an estimate of actual useful
lives; and (3) the company uses straight-line depreciation or,
alternatively, its calculation is not distorted through irregular or
uneven additions to its pool of fixed assets. DSM states that all three
criteria have been met and adds that there is no country-wide AUL since no
Israeli equivalent of the IRS tables exists.
Finally, DSM argues that if the Department determines that it must
calculate the company's average useful life of assets instead of using the
actual useful life of those assets, it must correct the methodology
employed in the Preliminary Determination. DSM states that in the
Preliminary Determination, the Department used the methodology outlined in
19 CFR 351.524(d)(2)(iii) to calculate DSM's AUL, but that it erroneously
excluded a certain time period from the calculation for reasons explained
in the proprietary calculation memorandum for the Preliminary
Determination. (See the February 14, 2001 memorandum from the Team to the
File entitled "Preliminary Affirmative Countervailing Duty Determination:
Pure Magnesium from Israel: Calculation Memorandum for DSM"). DSM argues
that it is longstanding Department practice to use information from as
long a time period as possible to determine a company-specific AUL and
that the Department frequently has used data from 10 years prior to the
period of investigation or review. Therefore, the Department should
correct its calculation to rely on DSM's entire historical experience when
calculating the company's AUL, DSM argues.
The petitioners argue that the Department should reject DSM's proposal to
use the actual 25-year AUL because the use of a time period other than the
average AUL of DSM's assets is inconsistent with the Department's
regulations. In addition, the petitioners say, the Department's
regulations make clear that only under "extraordinary circumstances" will
the Department consider "whether the allocation period other than AUL is
appropriate . . . ." In this case, DSM has not alleged that "extraordinary
circumstances" require the Department to reject its long-standing practice
of allocating non-recurring subsidies over the AUL of renewable physical
assets.
The petitioners argue that the Department's calculation of DSM's company-
specific AUL in the Preliminary Determination was reasonable and
consistent with the Department's regulations and standard practice. The
petitioners point out that while the Department has generally collected 10
years of data to calculate the company-specific AUL, the preamble to the
regulations clearly states that the Department is "still evaluating
whether 10 years of data are necessary or appropriate." In fact, the
petitioners say, in the past, the Department has rejected 10 years of data
when significant changes in the gross book value of respondents' assets
during the period would have distorted the AUL calculation. A similar
distortion would arise in this case if the Department were to include data
for "DSM's entire history," as DSM claims that the Department should do,
the petitioners say. In the final determination, the AUL should,
therefore, be calculated in the same way as in the Preliminary
Determination, the petitioners conclude.
Department's Position:
We disagree with DSM's suggestion that we allocate the company's non-
recurring subsidies over 25 years. We cannot use the 25-year period
because the company did not use this depreciation period during the entire
POI. (3) Nor is the 25-year AUL calculated in a manner consistent with our
usual practice as described in the regulations. See 19 CFR
351.524(d)(2)(iii). We have, therefore, continued to calculate DSM's AUL
by dividing the aggregate of the annual average gross book values of the
firm's depreciable productive fixed assets by its aggregated annual charge
to depreciation, as outlined in the regulations.
Also, as in the Preliminary Determination, we have continued to exclude a
certain time period from our calculation because including DSM's data for
this time period would give an inaccurate depiction of the company's
depreciation practices. Therefore, for the purposes of this final
determination, we have allocated DSM's non-recurring grants over the
company-specific AUL of 21 years. For a more detailed description of our
calculation methodology, see the September 14, 2001 calculation memorandum.
Comment 3: The infrastructure grant is not countervailable
DSM claims that the Department incorrectly found the infrastructure grant
to be countervailable in the Preliminary Determination based on its
finding that the grant constituted a direct transfer of funds from the
GOI, providing a benefit limited to firms located in designated geographic
regions. However, DSM argues, according to the Department's regulations,
"a financial contribution does not exist in the case of government
provision of general infrastructure" which is defined as infrastructure
"created for the broad societal welfare of a country, region, state or
municipality" (see 19 CFR 351.511(d)). DSM maintains that the
infrastructure grant paid for such non-countervailable general
infrastructure.
DSM disputes the Department's finding that these grants are limited to
specific regions. The grant was provided to develop infrastructure to
support commercial activities and included roads, drainage, electric
lines, etc. DSM maintains that these are items that the government
normally provides. However, the GOI sometimes reimburses private companies
for approved infrastructure expenses rather than building the
infrastructure itself.
Finally, DSM claims that the Department's conclusion in the Preliminary
Determination that the grants provided a benefit to DSM is unsupported by
the record. The only "benefit" the company received was access to
infrastructure which, once constructed, was available for all residents
and businesses in the area. DSM argues that this is not a benefit
according to the definitions in the statute (see 19 U.S.C. § 1677(5)).
The petitioners argue that the Department's Preliminary Determination is
consistent with the law and past examinations of the same program in other
Israeli cases, e.g., IPA). The petitioners support the Department's
finding in the Preliminary Determination that the grants were specific
because they were "limited to firms located in a designated geographic
region." The petitioners point to the December 14, 2000, government
verification report from IPA 1998 review, which has been placed on the
record of the instant investigation. According to this report, the
infrastructure grants "are designed to assist in the development of
industrial sites in targeted areas of Israel." On this basis, the
Department found the program to be specific in IPA. The petitioners note
that DSM is located in the Dead Sea area near the IPA respondent and that
both companies are in the Zone A development area. Consequently, the
infrastructure program is countervailable and the Department should,
therefore, reject DSM's argument, the petitioners say.
The petitioners also reject DSM's argument that the grants were received
to build "general infrastructure" because the provision for such
infrastructure in 19 CFR 351.511(d) addresses benefits in the form goods
and services provided by the government and does not apply when the
benefit takes the form of a grant. Moreover, the petitioners argue, there
is nothing to suggest that the specific infrastructure projects for which
the grants were received were for the general welfare of, or were to be
made available to, the general public. On the contrary, the petitioners
say, the preamble to the Department's regulations indicates that the
provision of this type of infrastructure is countervailable.
Department's Position:
We disagree with DSM's claim that the grant was used to build "general
infrastructure" as defined in 19 CFR 351.511(d). The preamble to the
Department's regulations explains that general infrastructure is defined
as infrastructure that is created for the broad societal welfare of a
country, region, state, or municipality. . . . Any infrastructure that
does not satisfy this public welfare concept is not general infrastructure
and is potentially countervailable. The provision of industrial parks and
ports, special purpose roads, and railroad spur lines, to name some
examples . . ., that do no not benefit society as a whole does not
constitute general infrastructure and will be found countervailable if the
infrastructure is provided to a specific enterprise or industry and
confers a benefit. (See Countervailing Duties; Final Rule, 63 FR 65348,
65378 (November 25, 1998).)
At verification, company officials explained that prior to the construction
of the magnesium plant, the area was completely undeveloped. (4) We have,
therefore, concluded that the infrastructure was not built for the benefit
of the general public but for the special purpose of making it possible
for DSW/DSM to build, operate, and have access to the magnesium plant.
We also find the infrastructure grant to be specific within the meaning
of section 771(5A)(D)(iv) of the Act because, as the petitioners have
noted, the Department verified in IPA 1998 review that these grants were
provided to build infrastructure in "targeted areas of Israel."
Furthermore, we disagree with DSM's argument that the grant did not
confer a benefit because the only benefit was access to infrastructure,
which is not identified as a benefit in the Act. We have determined that
this program constitutes a grant. As stated in the regulations, in the
case of a grant, a benefit exists in the amount of a grant (see 19 CFR
351.504). Accordingly, we determine that the infrastructure grant is
countervailable.
Comment 4: The Department should treat DSM's ECIL grant as multiple grants
In the Preliminary Determination, the Department allocated the assistance
DSM received under the ECIL program as if it were one grant, approved in
1993 and disbursed over time.
The petitioners submit that the Department should treat DSM's ECIL grant
not as a single grant, but as multiple grants. According to the
petitioners, the evidence obtained at verification makes clear that after
the GOI approved an initial amount in 1993, it subsequently approved
additional amounts in 1996 and 1999. The petitioners further claim that
viewing DSM's ECIL assistance as multiple grants would be consistent with
the Department's treatment of grants provided to DSW in the countervailing
duty investigation of potassium chloride from Israel (see Potassium
Chloride from Israel: Final Affirmative Countervailing Duty Determination,
49 FR 36122, 36122-23 (September 14, 1984) ("Potassium Chloride")).
Therefore, the petitioners argue that the Department should calculate a
separate benefit stream for each grant amount by applying the allocation
formula to each individual ECIL grant.
DSM disagrees, arguing that the Department correctly treated the ECIL
assistance it received as a single grant in the Preliminary Determination.
According to DSM, it submitted a single application and on that basis its
investment became an approved project. Under the terms of the approval,
the GOI agreed to fund 38 percent of the investment, not an absolute
amount. As with any large investment, aspects of the project changed over
time. Amendments to the original letter of approval were made to reflect
this, but DSM argues that the amendments should not be considered as new
applications.
DSM states that there were 21 amendments to the original letter of
approval given by the GOI. Most of these allowed DSM to shift money from
one part of the project to another. Certain amendments, however, changed
the amount of the grant to reflect inflation or depreciation of the
shekel, and the particular amendments which the petitioners have
identified as new grants are no different in principle from those.
DSM disputes the petitioners' claim that the Department addressed a
similar issue in Potassium Chloride. A careful review of the determination
in that case, DSM claims, reveals that DSW applied for and received
separate ECIL grants in connection with its potassium chloride facility.
Instead, DSM directs the Department to Carbon Steel Structural Shapes from
Luxembourg, 47 FR 39364 (September 7, 1982) ("Structural Shapes"). In that
case, according to DSM, the Department found amounts approved separately
represented portions of a single grant.
Department's Position:
For our final determination, we have treated new amounts granted under
subsequent amendments to the 1993 letter of approval as new grants.
Although DSM is correct that the GOI originally agreed to underwrite 38
percent of the project, the GOI also approved a total investment amount at
the same time. Therefore, except for increasing this nominal amount to
keep up with inflation and the depreciation of the shekel, the level of
the GOI's commitment was set in 1993. The subsequent increases identified
by the petitioners did not simply maintain the real value of the GOI's
contribution level. Instead, they represented a real increase in the
amount of support given to DSM.
Although DSM did not have to file new applications, we do not view this
as dispositive of whether the amounts approved after 1993 should be
treated as new grants. This is because, at various times after 1993, DSM
apparently came to decision points in its project where additional money
was needed and the company decided to turn to outside sources to obtain
those funds. This was achieved under the ECIL program, with the later
approvals giving rise to new flows of assistance at points in time after
1993. As such, these new approvals gave rise to new benefit streams.
We disagree with DSM that our practice in Structural Shapes requires us
to treat the assistance DSM received under ECIL as a single grant. The
decision to treat grants singly or separately will depend on the specific
facts of a given case. For example, in the instant case we have not
treated as new grants those amendments of the GOI's original approval that
dealt strictly with maintaining the real value of its commitment.
Comment 5: The Department should use uncreditworthy discount rates to
allocate benefits
The petitioners argue that if the Department agrees that DSM received
ECIL grants after 1993, then it will be necessary for the Department to
consider DSM's creditworthiness in 1996 and later years in order to
allocate DSM's benefits over time. The petitioners contend further that
the Department should find DSM uncreditworthy in those years.
The petitioners acknowledge that under 19 CFR 351.505(a)(4)(ii), the
Department will normally find receipt of commercial loans, absent
government-provided guarantees, to be dispositive of a company's
creditworthiness. However, the petitioners also claim that the Department
has not relied exclusively on this evidence in certain cases. In support
of this, the petitioners point to the preamble to the Department's
regulations, which states that where a company is owned by the government
or the loan contributes to the financing of a project that is being
undertaken in conjunction with government loans or other types of
government participation such as development grants, there may be an
implicit government guarantee of the loans. The petitioners also refer to
past cases such as Certain Hot-rolled Carbon Steel Products from
Argentina, 66 FR 10990 (February 21, 2001) (preliminary determination)
("Carbon Steel from Argentina"); Certain Cut-to-length Carbon Steel Plate
from Indonesia, 64 FR 40457 (July 26, 1999) (preliminary determination)
("Indonesian Plate"); and Certain Laminated Hardwood Trailer Flooring
(LHF) from Canada, 62 FR 5201 (February 4, 1997) ("LHF from Canada"). DSM
fits within these "exceptions," according to the petitioners, because the
company had received grants to build its magnesium plant from the GOI.
Other arguments raised in this context are proprietary and are addressed
in the September 14, 2001 memorandum from the Team to Richard W. Moreland,
Deputy Assistant Secretary entitled "Uncreditworthiness Allegation."
Once the Department gets beyond DSM's commercial loans and examines the
other factors listed in 19 CFR 351.505(a)(4)(i), the petitioners argue,
the Department must find the company to be uncreditworthy. They point to
several of DSM's financial results to support this claim.
DSM disputes the petitioners' claim that it was uncreditworthy between
1996 and 1999. First, DSM points out that it did not begin commercial
production until 1997. Therefore, in DSM's view, its financial position in
1996 is irrelevant.
Second, DSM states that its commercial lenders have thoroughly examined
the company and have repeatedly found it creditworthy, as evidenced by
their repeated loans. DSM claims that the petitioners' arguments about
implicit government guarantees to DSM are pure speculation. Also, the
cases cited by the petitioners are not on point, according to DSM. In both
Carbon Steel from Argentina and Indonesian Plate, the companies were
government-owned. Government ownership of DSM, in contrast, had dropped to
0.11 percent in 1999. Regarding LHF from Canada, the notice in that case
makes clear that the respondent received commercial loans in only one year
and under unusual circumstances. DSM points to the fact that it received
numerous separate commercial loans.
Finally, even if the Department were to examine the other factors listed
in 19 CFR 351.505(a)(4)(i), DSM urges the Department to find that it was
not uncreditworthy. Citing Structural Shapes, DSM states that several
years of losses are not sufficient to find a company uncreditworthy.
Moreover, DSM is a start-up company and lenders do not expect a profit in
the initial years of operation, according to DSM.
Department's Position:
We have determined that DSM was creditworthy in the years 1996 and 1999
and have used a creditworthy discount rate to allocate benefits approved
in those years. (The ECIL grants discussed in Comment 4 as well as some of
the EIRD grants were approved in those years. As in our Preliminary
Determination, other benefits received during the post-1996 period were
less than 0.5 percent of sales and, hence, expensed in the year of
receipt.) We base our determination on the fact that DSM had significant
borrowings from commercial sources in these years and 19 CFR
351.505(a)(4)(ii), which states that such loans will normally be
dispositive of a company's creditworthiness.
Regarding the petitioners' argument that DSM was able to receive these
commercial loans because of an implicit guarantee given by the GOI, we
agree with DSM that the record does not support such a conclusion. First,
during the 1993-1999 period, the level of government ownership in DSM's
parent, ICL, was decreasing. By 1999, it had fallen to less than one
percent. These decreasing levels of government ownership do not, in this
case, appear to give rise to an implicit guarantee that DSM's commercial
loans would be repaid by the government if DSM were unable to repay them.
Second, while commercial loans were received during the years of the ECIL
grants, there is no information suggesting that the loans were in any way
coordinated with or contingent upon the ECIL grants. Instead, in the years
in question, DSM apparently decided it needed investment funds from
outside sources and to obtain them turned to both the government (under
ECIL) and to commercial lenders. Also, as DSM has pointed out, in contrast
to the situation in LHF from Canada, it was able to borrow from commercial
sources over several years and there were no unusual circumstances in a
particular year that gave rise to the appearance of an implicit guarantee.
We note further that even if we were to look beyond DSM's commercial
loans as evidence of its creditworthiness, the analysis of the company's
financial position in 1996-1999 urged by the petitioners is not
appropriate in DSM's situation. When a company is in a start-up situation,
we do not apply the same analysis that would be used for an established
company. See Final Affirmative Countervailing Duty Determination: Steel
Wire Rod from Trinidad and Tobago, 62 FR 55003, 55005 (October 22, 1997).
Comment 6: Use of variable discount rates
The petitioners claim that the Department erred in the Preliminary
Determination when it "froze" the variable interest rate in the year a
grant was approved and used that rate in each year of the allocation
period. Instead, the petitioners urge the Department to adjust the
discount rates used in its allocation methodology to reflect the fact that
long-term borrowing in Israel occurs at variable rather than fixed
interest rates by using the interest rate in the year the grants were
disbursed. By doing this, the petitioners claim, the Department would
obtain a discount rate that reflects DSM's time preference for money. (See
Certain Cold-rolled Carbon Steel Flat Products from Argentina, 49 FR
18006, 18017 (April 26, 1984)).
The petitioners further argue that such an approach would be consistent
with the Department's regulations and past practice. Under 19 CFR
351.524(d)(3)(i), the Department prefers to use fixed rates as discount
rates. However, if there are no fixed rates, the regulations permit the
Department to use a rate that is considered most appropriate. The
petitioners also cite to the methodology used by the Department in
Industrial Phosphoric Acid from Israel: Preliminary Results and Partial
Rescission of Countervailing Duty Administrative Review, 62 FR 47645,
47647 (September 10, 1997) ("IPA 1995 review") where the Department used
an allocation methodology that "conforms with the use of variable rather
than fixed interest rates in the years these grants were disbursed."
DSM objects to selecting a discount rate from the year of grant
disbursement, rather than the year of grant approval, citing to 19 CFR
351.524(d)(3)(i), which states that the discount rate will be set at the
time of approval. According to DSM, the facts that caused the Department
to use the variable rate at the time of grant disbursement in IPA 1995
review are not present in this case. This is because, in practice, firms
closely control their borrowing activities and are able to fix their
interest rates for longer periods through alternate means, like swap
transactions. At verification, the Department saw that DSM had used this
type of financial instrument to lock in its interest rates for longer
periods. Therefore, its actual borrowing rate best represents the actual
long-term options available to DSM at the time the grant was approved.
Department's Position:
Based on our review of the variable interest rates paid by DSM in 1993
and following years, we determine that there was a significant fluctuation
in the rates from year-to-year. For example, the interest paid in 1994 on
loans taken out in 1993 differed greatly from the interest paid in 1995 on
those same loans taken out in 1993. Given these significant movements, we
agree that we should not "freeze" the variable interest rate in the year
of grant approval and effectively treat it as a fixed rate by applying
that "frozen" rate over the entire allocation period.
Instead, for our final determination we have calculated the discount rate
applicable to the POI for each year that a grant was approved. For
example, for a grant approved in 1993, we calculated the interest rate
that would be applied in 1999 (the POI) to loans taken out in 1993. We
then used that 1999 rate for the value "d" in the allocation formula (see
19 CFR 351.524(d)(1)). Similarly, for a grant approved in 1994, we
calculated the variable interest rate that would apply in 1999 to loans
taken out in 1994, and used that interest rate as the discount rate in the
allocation formula.
We believe that this methodology adequately accounts for the facts of
this case, i.e., that long-term fixed rate loans are not available and
that the variable interest rates fluctuated significantly from year to
year. At the same time, it preserves the Department's objective of
selecting discount rates at the time of grant approval. Contrary to the
petitioners' argument, we continue to believe that the allocation formula
should reflect the recipient company's time preference for money at the
time of grant approval because that is closest to the point in time where
the company opts for government funds rather than seeking outside
financing.
Comment 7: The Department should correct DSW's 1993 interest rate
The petitioners argue that the interest rate used by the Department as
the discount rate to allocate non-recurring subsidies in the Preliminary
Determination is incorrect. The petitioners state that, as the discount
rate, the Department used the interest rate reported by DSM as DSW's
average annual variable interest rate for 1993. The petitioners note that
this rate is inconsistent with the interest rate in DSW's 1993 audited
financial statements. Because DSM could not explain this discrepancy at
verification, the Department should use the interest rate shown in the
1993 financials, the petitioners argue.
DSM maintains that the discrepancy referred to by the petitioners is
based on a number that is included in the financial statements only for
informational purposes and which may contain minor errors regarding the
interest rate actually paid on long-term loans. Moreover, DSM argues, the
financial statements show the interest rates in effect on the closing date
for the financial statements rather than the weighted-average rate for the
entire year. DSM also submits that the Department verified that DSM's
questionnaire response accurately reflected the company's borrowing
experience. The Department should, therefore, continue to use 1993 the
interest rate from the response in its final determination, DSM says.
Department's Position:
We have not addressed this issue because the Department only uses the
company-specific mark-up above LIBOR in its calculation of the discount
rate used in the final determination (see Comment 6 above and the
September 14, 2001 calculation memorandum). Also, we note for the record
that the loans we examined at verification were DSM's long-term loans
outstanding during the POI and not old loans held by DSW in 1993.
Comment 8: The Department should change its calculation of the benefits
conveyed by the EIRD grants
The petitioners state that in the Preliminary Determination, the
Department found that the net subsidy rate for the EIRD grants was de
minimis in the POI. The petitioners argue that the de minimis rate was a
result of the Department's finding that only some of the R&D projects for
which DSM received EIRD funding benefitted the production of subject
merchandise. The petitioners argue that the record shows that there were
other EIRD grants which also benefitted the production of the subject
merchandise and that the Department should include these grants in its
subsidy calculations in the final determination.
DSM disputes the petitioners' argument and states that the projects that
the petitioners seek to add involve production processes unrelated to the
subject merchandise. According to DSM, the research conducted under these
projects did not benefit the sales of pure magnesium because it did not
identify new or improved uses for pure magnesium. Further, DSM argues that
the research involved production processes which do not relate to the
process used by DSM. Therefore, the research could not lead to
improvements in DSM's production process.
Finally, DSM argues that the issue is moot because the EIRD grants are
statutorily non- countervailable industrial research subsidies pursuant to
19 U.S.C. § 1677(5B). By definition, DSM says, non-countervailable
industrial research is a planned search aiming at acquiring new knowledge
that may be useful "in developing new products, processes, or services, or
in bringing about a significant improvement to existing products,
processes, or services." The subsidy must not exceed 75 percent of the
cost of industrial research and must be limited to certain types of
expenditures.
According to DSM, the projects at issue satisfy all three criteria listed
in the Act. First, the objective of the grants was to develop an entirely
new process for extracting magnesium. Second, the grants received by DSM
(and, before it, DSW) were below the 75 percent limit. Third, the expenses
were within the categories listed in the statute.
Department's Position:
We agree with the petitioners. After further analysis, we have concluded
that those R&D projects that were excluded from our benefit calculation in
the Preliminary Determination do confer a benefit on DSM's magnesium
production. Although the research involved a production process not
currently used by DSM, that fact in itself does not mean that there was no
benefit to DSM. Valuable knowledge can be obtained even if the research
does not identify new or improved uses for pure magnesium or does not
succeed in discovering new production processes. Therefore, we have added
those grants to our calculation of the benefit from EIRD grants for this
final determination.
At the same time, we are rejecting DSM's argument that the issue is moot
because the EIRD grants are statutorily non-countervailable industrial
research subsidies pursuant to 19 U.S.C. § 1677(5B), "the green light
provision." Under subsection (G) of this section, "the green light
provisions" have terminated.
Comment 9: Reconsideration of industry standing
We received comments on the scope definition from Rossborough
Manufacturing Co. L.P. ("Rossborough"), a U.S. producer of magnesium-based
reagent mixtures and an importer of magnesium products. Rossborough argues
that the Department should recognize that granular magnesium and
nongranular magnesium are not the same class or kind of merchandise, and
constitute two separate domestic like products. Rossborough maintains that
granular magnesium is used principally as a desulfurization agent or in
the production of magnesium reagent mixtures, whereas magnesium ingots
cannot be used for such applications. As such, Rossborough states that
there is no overlap between the domestic producers of magnesium ingot and
the domestic producers of granular magnesium. Citing to past cases such as
Notice of Preliminary Determination of Sales at Less Than Fair Value: Pure
and Alloy Magnesium from Norway, 57 FR 6092 (February 20, 1992) and
Preliminary Determination of Sales at Less Than Fair Value: Pure and Alloy
Magnesium from Canada, 57 FR 6094 (February 20, 1992), Rossborough argues
that the Department has excluded granular magnesium from the scope of
previous investigations, having determined that granular and non-granular
magnesium are "two distinct products appealing to completely different
markets" and that these two products are not the same class or kind of
merchandise. Therefore, Rossborough urges the Department to rescind the
initiation of the investigation with respect to granular magnesium.
Rossborough argues that the petitioners in this case lack standing to
represent the interests of the granular magnesium industry. Rossborough
claims that because one of the petitioners (i.e., MagCorp) has stated
publicly that is does not produce granular magnesium and it does not
intend to do so, it is not a member of the granular magnesium industry and
should not be deemed to represent the interests of that industry in this
investigation.
Rossborough contends that the petitioners do not meet the standing
requirements of the statute. Specifically, Rossborough claims that for
purposes of industry support as stipulated by section 702(c)(4)(A) of the
Act, the petition lacks the support of producers or workers accounting for
at least 25 percent of the total domestic production of granular
magnesium, or at least 50 percent of the total production of the granular
domestic like product produced by that portion of the granular magnesium
industry expressing support for, or opposition to, the petition.
The petitioners argue that as a matter of law, the Department is
prohibited from revisiting the issue of standing. According to the
petitioners, the statute provides that an interested party may challenge
the domestic industry's support for a petition prior to initiation of an
investigation, but may not revisit the issue after initiation. In support
of their argument, the petitioners cite to sections 732(c)(4)(E) and
702(c)(4)(E) of the Act (19 U.S.C. § 1673a(c)(4)(E) and 19 U.S.C. §
1671a(c)(4)(E)), which state that "{a}fter the administering authority
makes a determination with respect to initiating an investigation, the
determination regarding industry support shall not be reconsidered." The
petitioners also cite to the Statement of Administrative Action ("SAA")
accompanying the Uruguay Round Agreements Act, (5) which states that "the
question of industry support will be resolved conclusively at the outset
of a proceeding, thereby eliminating the burden on petitioners under
current law of potentially rearguing this issue after initiation." The
petitioners note that in prior investigations, the Department has
indicated that this statutory language prohibits reconsideration of the
petitioners' standing, even in cases where parties have argued that
petitioners would lack standing as a result of a redefinition of the scope
of the investigation. To illustrate their point, the petitioners cite to
Final Determination of Sales at Less Than Fair Value: Certain Preserved
Mushrooms from Chile, 63 FR 56613, 56616 (October 22, 1998); Notice of
Final Determination of Sales at Less Than Fair Value: Fresh Atlantic
Salmon from Chile, 63 FR 31411, 31419 (June 9, 1998) ("Salmon from
Chile"); and Notice of Preliminary Affirmative Countervailing Duty
Determination and Alignment with Final Antidumping Duty Determination: Low
Enriched Uranium from France, 66 FR 243256 (May 14, 2001).
The petitioners further assert that the scope of the petition was
intended to cover pure magnesium, regardless of chemistry, form, or size,
and was written to include magnesium in both ingot and granular form. The
petitioners maintain that they have already submitted evidence
demonstrating that pure magnesium in ingot and granular form comprise a
single domestic like product, and that under this definition of scope the
petitioners have industry standing. Moreover, the petitioners point out
that challenges to the petition's definition of scope and to the
petitioners' standing have already been submitted by interested parties
prior to the initiation of this investigation. The petitioners cite to the
November 6, 2000, memorandum from the Team to Richard W. Moreland, Deputy
Assistant Secretary, entitled "Like Product and Industry Support
Determinations in the Antidumping Duty Investigations of Pure Magnesium
from Israel, the People's Republic of China, and the Russian Federation
and the Countervailing Duty Investigation of Pure Magnesium from Israel"
("the Like Product Memo"), in which the Department concluded that "pure
magnesium in all forms" constituted a single like product and that the
petition was supported by the requisite share of the domestic industry
according to the Act. The petitioners assert that, since Rossborough
merely references arguments it submitted prior to the Department's
initiation of this investigation and no new evidence or argument has been
placed on the record to support a re-examination of the Department's
determinations of like product and industry standing, the Department has
no reason to change its determinations.
DSM did not comment on this issue.
Department's Position:
Section 702(c)(4)(E) of the Act provides that, after the administering
authority determines that it is appropriate to initiate an investigation,
the determination regarding industry support shall not be reconsidered.
Therefore, consistent with our decision in Salmon from Chile, we have not
reconsidered our determination regarding industry support in this
investigation. We refer interested parties to our notice of initiation and
companion memorandum, which set forth in detail the methodologies followed
in establishing industry support. See Initiation of Antidumping Duty
Investigations: Pure Magnesium from Israel, the Russian Federation, and
the People's Republic of China, 65 FR 68121 (November 6, 2000), and the
Like Product Memo.
Regarding Rossborough's argument that pure magnesium in ingot and
granular forms represent two classes or kinds of merchandise and
constitute two separate domestic like products, the Department determined
prior to initiating this investigation that ingot and granular magnesium
are a single like product (see the Like Product Memo). While Rossborough
contends that ingot and granular magnesium constitute separate classes or
kinds of merchandise, it has not addressed the criteria for determining
separate classes or kinds as set forth in 19 CFR 351.225(k) (i.e., the
physical characteristics of the products, the expectations of the ultimate
purchasers, the ultimate use of the product, the channels of trade in
which the product is sold, and the manner in which the product is
advertised or displayed) to support its claim. Accordingly, since no new
information or argument concerning whether ingot and granular magnesium
constitute separate classes or kinds of merchandise or distinct like
products has been placed on the record since the Preliminary
Determination, we continue to find that ingot and granular magnesium
constitute the same class or kind of merchandise and a single domestic
like product.
Comment 10: Scope
The scope of the investigation currently excludes certain magnesium-based
reagent mixtures. Specifically, the relevant language states the following:
mixtures containing 90 percent or less pure magnesium, by weight,
when mixed with lime, calcium metal, calcium silicon, calcium
carbide, calcium carbonate, carbon (6) slag coagulants, and/or
fluorspar, are excluded.
See the Preliminary Determination, 66 FR at 11145.
We received comments on the scope definition from Rossborough. According
to Rossborough, the Department has defined the reagent mixtures excluded
from the scope too narrowly. Specifically, Rossborough contends that the
Department failed to exclude mixtures made with any of the following
additional additives: magnesium oxide, periclase, ferroalloys, dolomitic
lime, nepheline syenite, feldspar, aluminum, alumina (Al2O3), calcium
aluminate, soda ash, hydrocarbons, graphite, coke, silicon, rare earth
metals/mischmetal, cryolite, colemanite, and silica/fly ash.
Alternatively, Rossborough contends that this issue could be resolved by
excluding from the scope any mixtures containing additional additives used
to make magnesium-based reagents. Specifically, Rossborough proposes that
the Department delete the list noted above and substitute the following
language: "…except that mixtures containing 90 percent or less pure
magnesium, by weight are excluded."
In addition, Rossborough requests that the Department insert an "actual
use" provision into the scope in order to exclude magnesium in granular
form imported for use in producing reagent mixtures. According to
Rossborough, the U.S. granular magnesium industry has been adversely
affected by the provisional measures entered under the antidumping and
countervailing duty laws in response to the current petition. Rossborough
contends that all domestic producers of reagent mixtures depend upon
imports of magnesium (principally granular magnesium) for their grinding
and mixing operations to remain competitive, and that if the antidumping
and countervailing duty orders are put into place, then reagent mixtures
would simply be imported in finished form and the domestic industry
producing those reagent mixtures would be devastated. As a result,
Rossborough argues that the petitioners would, in turn, have no domestic
or export market for future sales of pure magnesium to producers of
mixtures, whether in ingot or granular form.
The petitioners assert that they have agreed to a clarification of the
scope that results in the exclusion of all known magnesium-based reagent
mixtures. (7) The petitioners specifically state that they agree to
Rossborough's proposed revision that will result in the exclusion of all
known magnesium-based reagent mixtures. (8)
While the petitioners agree with the specific reagent exclusions proposed
by Rossborough, they oppose alternative scope language proposed by
Rossborough which would make the list of additives illustrative rather
than comprehensive. The petitioners also oppose Rossborough's proposal
that all granular magnesium, if imported for use in producing reagent
mixtures, be excluded from the scope of the order. The petitioners argue
that the very purpose of including granular pure magnesium in the petition
against the PRC was to obtain relief from such imports, which have
unfairly displaced domestic pure magnesium, primarily in the production of
magnesium-based reagent mixtures for the desulfurization segment of the
market. Moreover, the petitioners note that granular magnesium has been
included in the scope of the petitions against pure magnesium from the
Russian Federation and Israel to prevent circumvention of the orders
through the simple mechanical process of grinding the subject ingot into
granular form. (9) The petitioners contend that any alteration of the
scope of the investigation to exclude granular pure magnesium imported for
use in magnesium-based reagent mixtures would directly contradict the
express intent of the petition.
Citing to the decision reached in Mitsubishi Heavy Industries, Ltd. v.
United States, 986 F. Supp 1428, 1432-33 (CIT 1997) ("Mitsubishi
Electric"), the petitioners assert that, although the Department has the
authority to alter the scope of an investigation, the Court of
International Trade has recognized that any alterations must reflect the
intent of the petition. Based on that finding, the petitioners argue that
the Department may not alter the scope in the manner suggested by
Rossborough, because it would contradict the express intent of the
petition.
DSM did not comment on this issue.
Department's Position:
It is well established that the Department has the ultimate authority
under the statute to define the class or kind of merchandise subject to
its proceedings. (10) Thus, the Department has the authority both to limit
and to expand the class or kind alleged in the petition. (11) This
authority notwithstanding, it has generally been the policy of the
Department to accept the class or kind of merchandise alleged in the
petition absent some overarching reason to modify that class or kind. This
policy stems from the fact that the domestic industry is in the best
position to identify the imports that they compete against and believe to
be unfairly traded.
In letters dated January 30, June 20, and August 27, 2001, the
petitioners stated that they had no objection to clarifying the scope to
exclude mixtures made using each of the additives noted by Rossborough,
given that their intent was to exclude all legitimate magnesium-based
reagent mixtures from the scope of the investigation. Therefore, we have
added each of these materials to the list contained in the existing scope.
(12)
Moreover in their August 27, 2001 submission, the petitioners stated that
they did not object, in theory, to the idea that the list of excluded
magnesium-based reagents is "illustrative only" and not comprehensive, as
originally intended. The petitioners agreed that legitimate reagent
mixtures should be excluded from the scope of the orders, but expressed
concern about possible circumvention through the importation of non-
legitimate reagent mixtures. Thus, the petitioners agreed that the
Department did not have to limit the exclusions to reagent mixtures
explicitly identified in the above list under the condition that the
Department revise the scope language to require that importers seek a
scope ruling from the Department regarding reagent mixtures composed of
materials not specifically provided for in the scope.
The petitioners noted that this language has three advantages: 1) it will
protect against circumvention through the importation of non-legitimate
reagent mixtures; 2) it is enforceable by Customs; and 3) it creates a
transparent process in which all parties are accorded due process. To
accomplish this, the petitioners proposed that the Department insert at
the end of the list of reagent mixture substances the following additional
scope language:
and/or any other non-magnesium granular material(s) to make
magnesium-based reagent mixtures, are excluded. If an imported
mixture contains 90 percent or less pure magnesium, by weight,
and any other non-magnesium granular materials not identified
in the above list, the importer is required to seek a scope
clarification from the Department of Commerce before such a
mixture will be excluded from the scope of this order.
According to the petitioners, as long as the reagent mixture imported is
a legitimate mixture used in specific applications, it should be
considered a downstream product which should be excluded from the scope of
this investigation.
Because the petitioners' position is in accordance with the intent of the
petition (i.e., it provides for the exclusion of magnesium-based
reagents), we are amending the scope to account for this. We note that the
addition of language instructing importers to request scope rulings by the
Department in cases where the mixtures in question contain additives other
than those specifically identified above addresses the petitioners'
concern that the Department might otherwise be improperly delegating to
Customs the authority to determine the scope of the order.
Regarding Rossborough's proposed "actual use" provision, we disagree with
Rossborough's proposal that we exclude granular magnesium imported for use
as an input into the production of magnesium-based reagents. In this case,
we find that such an exclusion is not only contrary to the intent of the
petition, but it is particularly inappropriate because it would allow
companies to circumvent the intent of the dumping order (should one be
issued). Specifically, we find that Rossborough's argument in its simplest
form is that the U.S. reagent industry needs a continuous source of
cheaply-priced (i.e., dumped) magnesium in order to survive. This argument
fails because U.S. antidumping law does not allow the Department to
consider the effect of dumping duties on downstream industries. Indeed,
given its remedial nature, we find that the Department's active
sanctioning of dumping of products intended to be covered by the scope of
a petition would be contrary to both the spirit and the letter of the law.
The purpose of the antidumping law is to allow domestic industries to
compete for sales at prices that are fair. This allows companies to
maintain employment and profit levels that they would otherwise not
achieve, which benefits the U.S. economy as a whole. For this reason, the
Department generally follows the intent of a petition in determining what
products are covered, and this practice has been upheld by the courts.
See, e.g., Mitsubishi Electric. Because the intent of the petition is
clear in this case, we have continued to include granular magnesium in the
scope, regardless of the use for which it is imported.
Recommendation
Based on our analysis of the comments received, we recommend adopting all
of the above positions and adjusting all related net subsidy calculations
accordingly. If these recommendations are accepted, we will publish the
final determination in the Federal Register.
AGREE ____ DISAGREE ____
______________________
Faryar Shirzad
Assistant Secretary for
Import Administration
______________________
(Date)
____________________________________________________________________
footnotes:
1. Preliminary Affirmative Countervailing Duty Determination: Pure
Magnesium From Israel, 66 FR 11144 (February 22, 2001) ("Preliminary
Determination").
2. The meaning of this term is the same as that used by the American
Society for Testing and Materials in its Annual Book of ASTM Standards:
Volume 01.02 Aluminum and Magnesium Alloys.
3. See note 6c to DSM's 1999 financial statements submitted in DSM's
January 3, 2001 response, Exhibit 7.
4. Verification report at 18.
5. The petitioners refer to the SAA, H.R. Doc No. 103-316, Vol. I, 103d
Cong., 2d Sess. 861-63 (1994).
6. Rossborough notes that the comma after "carbon" which was included
in the petitioners' scope language was excluded from the preliminary
determination notice. This error has been corrected.
7. On June 20, 2001 and August 27, 2001, the petitioners filed
submissions in this investigation and in the companion antidumping duty
investigations of pure magnesium from Israel, the People's Republic of
China, ("PRC") and the Russian Federation confirming that they agreed to
the exclusion from the scope of the magnesium-based reagents proposed by
Rossborough in its June 21, 2001 case brief.
8. In the antidumping investigation of pure magnesium from the PRC, the
ESM Group requested that melamine and silicone oil be in the list of
excluded magnesium-based reagent mixtures. In their August 27, 2001,
submission, the petitioners object to the inclusion of both melamine and
silicone oil in this list because they may easily be separated from
granular pure magnesium by being "burnt-off" from the granular pure
magnesium. According to the petitioners, once burnt-off, they would leave
little residue that would alter the chemical composition or purity of the
pure magnesium. The petitioners assert that, because this would allow
these mixtures to be used in place of pure magnesium in applications where
pure magnesium is normally used, with little cost consequences, there
would be the potential for easy circumvention of any resulting order
through mixing of the subject merchandise with these substances.
9. The petitioners cite to arguments contained in their October 17,
2000 Petition, Vol. I at pages 31, 33, and 78-79, and Exhibit 24.
10. See Mitsubishi Elec. Corp. v. United States, 898 F.2d 1577, 1582
(Fed. Cir. 1990); and Diversified Products Corp. v. United States, 572
F.Supp. 883, 887 (1983). See also Smith-Corona Group v. United States, 713
F.2d 1568, 1582 (Fed. Cir. 1983), cert. denied, 465 U.S. 1022 (1984).
11. See Mitsubishi Elec. Corp. v. United States, 700 F.Supp. 538, 555
(1988), aff'd, 898 F.2d 1577 (Fed. Cir. 1990); and Torrington Co. v.
United States, 745 F.Supp. 718, 721 n4 (CIT 1990).
12. We have not included melamine or silicone oil in this list (as
requested by ESM in the companion antidumping duty investigation from the
PRC), however, because: 1) the petitioners' object to their inclusion; and
2) sufficient information does not exist on the record at this time to
evaluate whether these materials are used to make legitimate magnesium-
based reagents.