NOTICES
DEPARTMENT OF COMMERCE
[C-517-501]
Carbon Steel Wire Rod From Saudi Arabia; Preliminary Results of Countervailing
Duty Administrative Review
Monday, December 3, 1990
AGENCY: International Trade Administration/Import Administration; Commerce.
ACTION: Notice of preliminary results of countervailing duty administrative review.
SUMMARY: The Department of Commerce has conducted an administrative review of the
countervailing duty order on carbon steel wire rod from Saudi Arabia. We
preliminarily determine the total bounty or grant to be 0.43 percent ad valorem for the
period January 1, 1987 through December 31, 1987. In accordance with 19 CFR 355.7,
any rate less than 0.50 percent ad valorem is de minimis. We invite interested parties to
comment on these preliminary results.
EFFECTIVE DATE: December 3, 1990.
FOR FURTHER INFORMATION CONTACT:Philip Pia or Paul McGarr, Office of
Countervailing Compliance, International Trade Administration, U.S. Department
of Commerce, Washington, DC 20230; telephone: (202) 377-2786.
SUPPLEMENTARY INFORMATION:
Background
On February 3, 1986, the Department of Commerce (the Department) published in the
Federal Register (51 FR 4206) the final affirmative countervailing duty determination
and countervailing duty order on carbon steel wire rod from Saudi Arabia. On
February 29, 1988, Georgetown Steel Corporation, Northstar Steel Texas, Inc., Raritan
River Steel Company and Atlantic Steel Company, petitioners in this proceeding,
requested an administrative review of the order. We published the initiation on March 25,
1988 (53 FR 9788). The Department has now conducted that administrative review in
accordance with section 751 of the Tariff Act of 1930 (the Tariff Act).
Scope of Review
The United States, under the auspices of the Customs Cooperation Council, has developed
a system of tariff classification based on the international harmonized system of customs
nomenclature. On January 1, 1989, the United States fully converted to the Harmonized
Tariff Schedule (HTS), as provided for in section 1201 et seq. of the Omnibus Trade and
Competitiveness Act of 1988. All merchandise entered, or withdrawn from warehouse, for
consumption on or after that date is now classified solely according to the appropriate
HTS item number(s).
Imports covered by this review are shipments of Saudi carbon steel wire rod. Carbon
steel wire rod is a coiled, semi-finished, hot-rolled carbon steel product of approximately
round solid cross section, not under 0.20 inch nor over 0.74 inch in diameter, tempered
or not tempered, treated or not treated, not manufactured or partly manufactured, and
valued over or under 4 cents per pound. During the review period, such merchandise was
classifiable under item numbers 607.1400, 607.1710, 607.1720, 607.1730, 607.2200
and 607.2300 of the Tariff Schedules of the United States Annotated (TSUSA). Such
merchandise is currently classifiable under HTS item numbers 7213.20.00, 7213.31.30,
7213.31.60, 7213.39.00, 7213.41.30, 7213.41.60, 7213.49.00 and 7213.50.00. The
TSUSA and HTS item numbers are provided for convenience and Customs purposes. The
written description remains dispositive.
The review covers the period January 1, 1987 through December 31, 1987 and eight
programs. During the review period, there was only one Saudi producer and exporter of
the subject merchandise, the Saudi Iron and Steel Company (HADEED).
Analysis of Programs
(1) Public Investment Fund Loan to HADEED
The Public Investment Fund (PIF) was established in 1971 as one of five specialized credit
institutions set up by the Government of Saudi Arabia. The other specialized credit
institutions are the Saudi Industrial Development Fund (SIDF), the Saudi Agricultural
Bank, the Saudi Credit Bank and the Real Estate Development Fund. These specialized
credit institutions are funded completely by the Saudi government and were the only
sources of long-term financing in Saudi Arabia during the review period.
The PIF was established in 1971 to provide financing to large-scale, commercially
productive projects that have some equity participation of the Saudi government. PIF
by-laws exclude firms or projects without Saudi government equity from applying to the
PIF for financing. From 1973 through the end of the review period, the PIF has provided
loans to 18 firms. Of these, 12 (including HADEED) are at least 50 percent-owned by the
Saudi Basic Industries Corporation (SABIC). Of the remaining six borrowers, three are 50
percent-owned by PETROMIN, and three are unrelated: Saudia Airlines, a utility company
and a real estate investment fund. We verified that firms receiving PIF financing represent
less than one-half of all large scale firms, and only a very small portion of all industrial
enterprises, in the Kingdom.
Because only firms with some direct or indirect government equity participation are
eligible for PIF financing, only a few enterprises have received PIF financing. We
therefore preliminarily determine that PIF loans are provided to a specific group of
enterprises in Saudi Arabia, and that the PIF loan to HADEED is countervailable to the
extent that it is given on terms inconsistent with commercial considerations.
The PIF loan to HADEED was part of the initial investment package for construction of a
direct reduction plant, a steel making plant, and a rolling mill at Jubail. The PIF loan
comprised 60 percent of HADEED's total capitalization. The first repayment of loan
principal was not due until 1989, five and one-half years after the October 1983 start-up
of production at the plant. For the period between start-up and commencement of
principal repayment, the loan contract requires that HADEED pay a variable service
charge, or interest, on the outstanding balance based on its profitability in a given fiscal
year. In January 1990, after resolution of a dispute between the PIF and HADEED
regarding the amount of service charge that was due to be paid in August 1987, HADEED
paid the PIF a service charge equal to three percent of the outstanding balance as of
August 1987, the amount that the PIF had determined was due in 1987. There was no
penalty as a result of the delayed payment.
Using the two sources for medium- to long-term industrial financing available in Saudi
Arabia, the commercial banks and the SIDF, we have constructed a composite
benchmark interest rate to determine whether the PIF loan to HADEED was on terms
inconsistent with commercial considerations. Since the PIF loan covered 60 percent of
HADEED's total project costs, for our
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benchmark we assumed that HADEED
could have financed 50 percent of its total project costs with a SIDF loan (the maximum
eligibility for a company with at least 50 percent Saudi ownership) and the remaining 10
percent of project costs with a Saudi commercial bank loan. The SIDF loan portion of the
benchmark was used because, of all the specialized credit institutions, it is the only fund
besides the PIF which lends to industrial or manufacturing projects and, thus, is most
representative of what HADEED would otherwise have to pay for long-term loans in
Saudi Arabia. We used the two-percent flat rate of interest applied to SIDF loans
through 1987. The commercial bank portion of the benchmark was based on the average
rate of interest on HADEED's medium-term commercial borrowings during the review
period.
In order to determine the value in 1987 of the service charge on HADEED's PIF loan, we
discounted the nominal amount of the service charge that HADEED paid by three percent
per annum for the period between August 1987 and January 1990. We then compared the
amount of the discounted service charge with the amount of interest that would have
been due in August 1987 based on our benchmark interest rate. Because the discounted
service charge is less than the amount of interest that would have been due had HADEED
borrowed at the benchmark rate, we preliminary determine that the amount of the
interest savings from the PIF loan provided a counteravailable bounty or grant to
HADEED. To calculate the benefit, we divided the interest savings by HADEED's total sales
in 1987. On this basis, we preliminarily determine the benefit from the PIF loan to be 0.16
percent ad valorem for the period January 1, 1987 through December 31, 1987.
(2) SABIC's Transfer of SULB shares to HADEED
SABIC was established in 1976 by the Government of Saudi Arabia as an industrial
development corporation. SABIC has been the majority shareholder in HADEED since the
steel company's inception in 1979. In 1982, SABIC acquired all of the remaining shares in
the Steel Rolling Company (SULB), a Saudi producer of steel reinforcing bars of which
SABIC had been the majority shareholder since 1979. In December 1982, SABIC decided
to transfer its shares in SULB to HADEED in return for new HADEED stock. Through the
stock transfer, SULB became a wholly-owned subsidiary of HADEED.
In Final Affirmative Countervailing Duty Determination and Countervailing Duty
Order; Carbon Steel Wire Rod From Saudi Arabia, (51 FR 4206; February 3, 1986), we
determined that HADEED was unequityworthy in December 1982 and that the transfer of
SABIC's shares in SULB to HADEED in exchange for additional shares in HADEED was
inconsistent with commercial considerations.
To determine the benefit to HADEED from the acquisition of SULB, we used our rate of
return shortfall methodology. We determined the amount of the equity infusion to be the
net book value of SULB's equity at the time of the transfer. As best available information
on the national average rate of return on equity in Saudi Arabia, we used the 1987
annual average rate of return on U.S. direct investment in Saudi Arabia. Based on the
most recent data available from the U.S. Commerce Department's Bureau of Economic
analysis, the 1987 average rate of return on equity was 12.39 percent. We computed the
rate of return shortfall by taking the difference between this figure and the 1987 rate of
return on equity in HADEED. We multiplied the rate of return shortfall by the net book
value of SULB' equity, and divided the resulting figure by the total value of HADEED's and
SULB's consolidated sales in 1987. On this basis, we preliminarily determine the benefit
from this equity infusion to be 0.14 percent ad valorem for the period January 1, 1987
through December 31, 1987.
We note that under no circumstances do we countervail in any year an amount greater
than that which would result from treating the government's equity infusion as an
outright grant. We calculated this "grant cap" by using as our allocation period the
average useful life of assets in the steel industry which, according to the "Asset Guideline
Classes" of the U.S. Internal Revenue Service, is 15 years. Using the average weighted cost
of capital in Saudi Arabia in 1982 as a discount rate, our declining balance grant
methodology would yield a benefit in the review period of 0.29 percent ad valorem, if the
amount of the equity infusion were treated as a grant.
(3) Preferential Provision of Equipment to HADEED
Under a lease/purchase arrangement, the Royal Commission for Jubail and Yanbu built
for HADEED two bulk ship unloaders at the Jubail industrial port for unloading iron ore,
and constructed a conveyor belt system for transporting iron ore from the pier to
HADEED's plant in the Jubail Industrial Estate. When construction of these facilities was
completed in 1982, the Commission transferred custody to HADEED under a
lease/purchase agreement.
As originally planned, the bulk ship unloader and conveyor system was built to serve
both HADEED and an adjacent plant in the Jubail Industrial Estate. The second plant was
not built, however, leaving HADEED as the sole user of this equipment. The terms of the
lease/purchase agreement require that HADEED must repay the equipment and
construction costs plus a two-percent fee for the cost of money in 20 annual installments.
The annual payments are stepped, with the lowest payment levels occurring at the
beginning and the highest payment levels occurring at the end of the 20-year period.
In the Saudi Wire Rod (op. cit.), we found that the two-percent cost-of-money fee is the
Commission's standard charge for recovery of costs on other facilities in the Jubail
Industrial Estate. Of the projects examined, a urea berthside handling system built for the
exclusive use of another company located in the Estate was the most comparable to
HADEED ship unloader and conveyor system. Therefore, we compared the repayment
schedule for HADEED's ship unloader and conveyor system to the repayment schedule for
a berthside handling system. Although both agreements carried the standard
cost-of-money fee, we found that HADEED's end-loaded, stepped repayment schedule was
more advantageous than the annuity-style repayment schedule on the berthside handling
system. Therefore, we determine that HADEED's ship unloader and conveyer system was
provided on preferential terms. Moreover, because the equipment is used exclusively by
HADEED, we find that it is provided to a specific enterprise and, thus, confers a bounty or
grant.
To calculate the benefit, we compare the principal and fees being paid in each year by
HADEED to the principal and fees that would be paid under the repayment schedule used
for the berthside handling system. We allocated the sum of the present values of the
differences in the two repayment schedules over 20 years, using a two-percent discount
rate. The resulting benefit for 1987 was then divided by the value of HADEED's sales
during the review period. On this basis, we preliminarily determine the benefit from the
preferential provision of the unloader and conveyor system to be 0.02 percent ad
valorem for the period January 1, 1987 through December 31, 1987.
*49934
(4) Income Tax Holiday for Joint Venture Projects in Saudi Arabia
Under Article 7 of the Foreign Capital Investment Code of January 1, 1979, a 10-year
income tax holiday may be granted for economic development projects. The following
three conditions must be fulfilled to obtain approval by the Saudi Foreign Investment
Committee: (1) Saudi participation is not less 25 percent of total capital; (2) the foreign
capital shall be invested in nontraditional development projects which, for the purposes
of the Foreign Capital Investment Code, do not include petroleum related and/or mineral
extraction projects; and (3) the investment shall be accompanied by foreign technical
know-how and expertise. This tax holiday applies only to income taxes that are owed by
the foreign share of the enterprise.
Companies with foreign capital comprised less than one-fourth of all companies operating
in the Kingdom during the review period, of which those companies in nontraditional
industries are a further subgroup. Because the application of these criteria limited
benefits under this program to a discrete class of beneficiaries and a relatively small
number of enterprises, we determine that it is specific and countervailable.
In 1987, HADEED reported a profit for fiscal year 1986. Thus, DEG, HADEED's foreign
partner, would have been liable for income tax during the review period had it not still
been eligible for the income tax holiday.
At verification, we examined income tax calculations for HADEED and found what DEG's
tax liability for 1987 would have been if it had not been entitled to the income tax
holiday. To calculate the benefit from the tax holiday, we divided the amount of tax DEG
would have paid absent the tax holiday by HADEED's total sales for 1987. On this basis, we
preliminarily determine the bounty or grant from the income tax holiday to be 0.11
percent ad valorem.
(5) Other Programs
We also examined the following programs and preliminarily determine that HADEED did
not benefit from them during the review period:
1. SABIC loan guarantees;
2. Preferential provision of services by SABIC;
3. Government procurement preferences; and
4. Issuance of preferential government bonds.
Preliminary Results of Review
As a result of the review, we preliminarily determine the total bounty or grant to be 0.43
percent ad valorem for the period January 1, 1987 through December 31, 1987. In
accordance with 19 CFR 355.7, any rate less than 0.50 percent ad valorem is de minimis.
Therefore, the Department intends to instruct the Customs Service to liquidate, without
regard to countervailing duties, all shipments of this merchandise exported on or
after January 1, 1987 and exported on or before December 31, 1987.
The Department also intends to instruct the Customs Service to waive cash deposits of
estimated countervailing duties on all shipments of this merchandise entered, or
withdrawn from warehouse, for consumption, on or after the date of publication of the
final results of this review.
Parties to the proceeding may request disclosure of the calculation methodology and
interested parties may request a hearing not later than 10 days after the date of
publication of this notice. Interested parties may submit written arguments in case briefs
on these preliminary results within 30 days of the date of publication. Rebuttal briefs,
limited to arguments raised in case briefs, may be submitted seven days after the time
limit for filing the case brief. Any hearing, if requested, will be held seven days after the
scheduled date for submission of rebuttal briefs. Copies of case briefs and rebuttal briefs
must be served on interested parties in accordance with 19 CFR 355.38(e). Any request
for disclosure under an administrative protective order must be made no later than five
days after the date of publication.
The Department will publish the final results of this administrative review, including the
results of its analysis of issues raised in any case or rebuttal brief or at a hearing.
This administrative review and notice are in accordance with section 751(a)(1) of the
Tariff Act (19 U.S.C. 1675(a)(1)) and 19 CFR 355.22.
Dated: November 26, 1990.
Marjorie A. Chorlins,
Acting Assistant Secretary for Import Administration.
[FR Doc. 90-28313 Filed 11-30-90; 8:45 am]
BILLING CODE 3510-DS-M