1 1 BEFORE THE 2 BUREAU OF INDUSTRY AND SECURITY UNITED STATES DEPARTMENT OF COMMERCE 3 PUBLIC HEARING ON: 4 A PETITION FOR SHORT SUPPLY EXPORT CONTROLS AND MONITORING ON RECYCLABLE METALLIC MATERIALS 5 CONTAINING COPPER 6 ___________________________/ 7 8 The above-mentioned hearing was held on Wednesday, May, 19, 2004, commencing at 10 a.m., at the 9 Herbert C. Hoover Building, Auditorium, Department of Commerce, 14th Street and Pennsylvania Avenue, N.W., 10 Washington, D.C. 20230. 11 12 BEFORE PANELISTS: DANIEL O. HILL 13 PETER KLASON BERNARD KRITZER 14 DAVID HENRY DANIEL EDELSTEIN 15 16 17 18 19 20 21 Reported by: Robert A. Shocket 2 1 P-R-O-C-E-E-D-I-N-G-S 2 MR. HILL: Good morning. I am Dan Hill. 3 I'm the Director of the Office of Strategic Industries 4 and Economic Security for the Bureau of Industry and 5 Security here at the Department of Commerce. I have 6 been designated to be the hearing official for today's 7 hearing. I would like to welcome you all to the 8 hearing today. At this time, I would like to ask that 9 all cell phones be put on either vibrator or silent 10 mode, that if you wish to receive or take any cell 11 phone calls that you would please do so in the exterior 12 corridor so that in deference, as a courtesy to our 13 witnesses. For the media, Gene Cotilli (phonetic), I 14 believe has met with you. He will be circulating 15 around today. He's not here right now but he will be 16 available throughout the day to answer any questions 17 that you have. 18 For security, as you all know, we live in 19 different times now than before September 11th. And, 20 as result we are now subject to new security rules. As 21 you wish to visit the facilities or go to lunch, you 3 1 will have to be escorted. We have a number of staff 2 outside that door who are available throughout the day 3 to do escort duty. You will see from time to time, 4 although I have asked them not to come into the hearing 5 room, you will see security guards as well. Do not 6 worry. That's just standard operating procedure. 7 There is no increased level of threat. 8 As many of you know, on April 7th, 2004, a 9 petition was received by the Department of Commerce 10 from the Copper and Brass Fabricator Council, Inc., and 11 its member companies and the Nonferrous Founders' 12 Society and its member companies requesting the 13 imposition of monitoring and export controls on copper 14 scrap and copper-alloy scrap. 15 The petitioners also requested a public 16 hearing on the issue. The review of this petition is 17 being conducted by the Department of Commerce's Bureau 18 of Industry and Security, in accordance with provisions 19 set forth in Section 7C of the Export Administration 20 Act as amended and section 74.7 of the Export 21 Administration Regulations. 4 1 Our objective today is to gather 2 information to assist us in the review of the petition. 3 For our review the Bureau of Industry and Security has 4 assembled an interagency team of experts, many of whom 5 are here today to support this review. The team 6 includes representatives from other bureaus within the 7 Department of Commerce, the Department of State, the 8 Office of the United States Trade Representative and 9 the United States Geological Survey. 10 At this time I would like to also thank 11 members of my staff who have help put this hearing 12 together and most of them are outside doing their work 13 but Bob Nichol, Elsie Carroll, Melissa Green, Lee 14 Frazier, Leah McNoon (phonetic), Eddy Aparicio and 15 Petrina Bean, who will be our timekeeper today. Thank 16 you all for your very hard work. 17 I would like to also acknowledge at this 18 point other staff who are very involved in this 19 exercise, down on the staff table on my right. Pat 20 Huber, senior analyst with the Bureau, Sarah Heidema, 21 Parvin Huda, who is with our Office of Chief Counsel, 5 1 Mike Vaccaro, another one of our senior analysts, 2 Marjorie Pavalochek (phonetic), with the International 3 Trade Administration and Jess Dumagan, an economist, 4 senior economist with the Economic and Statistics 5 Administration here in the Department of Commerce. 6 For our review, we asked, we opened an 7 initial comment period which closed on May 13th. 8 During that period, we received a total of fifteen 9 submissions. These comments can be found on the BIS 10 Web site at WWW.BIS.DOC.GOV, G-O-V. We have asked that 11 written comments to these initial comments should be 12 submitted to us by May 27th, 2004. To do that, you may 13 send them to the e-mail address we set up, which is 14 coppershortsupplypetition -- all one word -- at BIS. 15 DOC.GOV or you may send them to the copper short supply 16 petition in care of the Regulatory Policy Division, 17 Bureau of Industry and Security, Department of 18 Commerce, Post Office Box 273, Washington D.C. 20044. 19 Period for submission of all comments, the final 20 submission will be 5 p.m., June 7th, 2004. At that 21 time, we will not accept any other public comments for 6 1 the record. I would like to also recognize Kent 2 Stokes, senior economist with the International Trade 3 Administration who has just joined us as well. 4 In addition to the written comments, the 5 testimony of today's hearing will be considered in the 6 review of the petition. A transcript of this hearing 7 will be posted on the BIS Web site shortly after the 8 hearing. I would like to note at this time that only 9 oral comments presented by preapproved witnesses will 10 become part of the record. 11 I would like to introduce our panel today. 12 To my immediate left is Peter Klason, who is our 13 counsel for the petition. To his left is Bernie 14 Kritzer, Director of the Bureau's Office of National 15 Security and Technology Transfer Controls. Next to 16 Bernie is David Henry, a senior economist with the 17 Department's Economics and Statistics Administration. 18 And finally, on the end, is Dan Edelstein, who is with 19 the U.S. Geological Survey, the Department of Interior. 20 Today's hearing will be conducted under the 21 following procedures: I will invite each witness to 7 1 come forward and be seated at the table before the 2 government panel over here. Each speaker had been 3 allotted up to ten minutes to deliver their 4 presentation with a subsequent period for questions 5 from members of the hearing panel. Our timekeeper, 6 Trina, if you would raise your hand, Trina will raise 7 her hand at the three minute warning, and she has a 8 sign for three minutes left, one minute left, and time 9 has expired. I would ask our witnesses to keep their 10 comments to the allotted time and as short as possible 11 so that we can spend more time on the questions. 12 At the call of the chair, I will recess at 13 approximately 1 p.m. for a lunch break, depending on 14 where we're at, at that time. We fully intend to 15 complete the hearing today. Without further ado, I 16 would like to at this time call on our first witness, 17 Joseph Mayer, President of the Copper and Brass 18 Fabricators Council, Inc. Mr. Mayer, if you would give 19 your testimony. Thank you. Push the talk button on 20 your thing. Thank you. 21 MR. MAYER: Good morning. I want to thank 8 1 you, Mr. Chairman and members of the panel for the 2 opportunity to appear here today. I am Joe Mayer and I 3 am appearing on behalf of the Copper and Brass 4 Fabricators Council and its 20-member companies. The 5 Council is a trade association which represents the 6 principal copper and brass mills in the United States. 7 These mills together account for the fabrication of 8 more than 80 percent of all copper and brass mill 9 products produced in the United States, including sheet 10 and strip, plate and foil, bar and rod, and both 11 plumbing and commercial tube. These products are used 12 in a wide variety of applications, chiefly in the 13 construction, automotive, electrical and electronic 14 industries. 15 The brass mill industry is one of America's 16 vital basic industries. The industry comprises the 17 mills which melt and cast cathode and copper and 18 copper-alloy scrap into billets and slabs which they 19 then roll, draw or extrude into the various types of 20 mill products I have listed. 21 Under normal market conditions, the brass 9 1 mill industry enjoys a plentiful supply of copper and 2 copper-alloy scrap at prices which encourage the mills 3 to recycle the scrap as a fully acceptable substitute 4 for expensive cathode copper in more than 50 percent of 5 their products. 6 Unfortunately, today's market is far from 7 normal. Currently, brass mills are experiencing steep 8 increases in scrap prices with unprecedented speed. 9 This price volatility is directly related to huge 10 increases in exports of U.S. scrap, particularly to 11 China. 12 As a result, U.S. brass mills, despite 13 improving orders and sales, are enduring severe 14 stresses on operating income in an industry noted for 15 narrow profit margins in the best of times. 16 These adverse economic conditions are a 17 direct result of shortages in the domestic availability 18 of scrap supplies. No other economic factor impacting 19 the operations of the brass mill industry today 20 remotely compares to the current short supply of copper 21 and copper-alloy scrap in its effects. 10 1 This is a broad outline of our case. We 2 will now offer a series of witnesses whose knowledge 3 and experience will provide the data and details which 4 we believe constitute a compelling case on the merits 5 of our petition. 6 Our witnesses today will include: 7 Mr. James L. Mallory, President of the Nonferrous 8 Founders' Society, who will present the views of his 9 members; David Hartquist, our trade counsel; Michael 10 Kerwin, our economist in this matter; Roy Allen, 11 President of Hussey Copper; Thomas Baker, Vice 12 President of Marketing for Olin Corporation's Metals 13 Group; Jeffrey Burghardt, Director of Metals and 14 Stores, Outokumpo American Brass; George Dykhuizen, 15 President of Extruded Metals and Vice Chairman of the 16 Council; and James Rourke, Vice President and General 17 Manager of Mueller Brass Company. 18 On behalf of the co-petitioners, we thank 19 you for this opportunity to present our views in this 20 matter. We thank you, in particular, for your 21 accommodation of all of our witnesses in today's 11 1 proceeding and for your extraordinary efforts in this 2 compressed time schedule to acquaint yourselves with 3 the operations of our complex industry through arduous 4 site visits and other industry contacts. 5 Unless there are any questions, I would 6 call upon Mr. Mallory to continue our presentation. 7 Unless there are any questions I would call upon Jim 8 Mallory to continue our presentation. 9 MR. HILL: We'll have a couple of 10 questions. Let me, I have a couple and then we'll see 11 what the rest of the panel has. Thank you for your 12 testimony. We appreciate all the hard work that you 13 and your association are putting into this effort as 14 well. In your testimony you talked about shortages of 15 domestic supplies. Has that shortage or the 16 availability of copper scrap affected delivery times 17 for the copper-consuming industry for your monthly 18 inventories at this point? 19 MR. MAYER: I think the testimony of our 20 industry representatives will illustrate that point. 21 The answer, the short answer is yes. 12 1 MR. HILL: And you may defer to those 2 people as well. What specific grades of scrap are 3 asserted by your members to be in short supply? 4 MR. MAYER: We consider all grades to be in 5 short supply. There are grades that are particularly 6 of concern to us and again I think our industry 7 representatives will point out those specific grades 8 and, of course, the difficulty really in defining these 9 grades. 10 MR. HILL: Any other questions from the 11 panel? Dave? 12 MR. HENRY: In accordance with your 13 statement in your testimony that you are providing a 14 broad outline of the case and you're going to depend on 15 your remaining speakers to get into details and data, 16 but can you give, could you give the panel and the rest 17 of us the sort of a broad outline of what's going on in 18 the world market? I mean, is the world market 19 experiencing the same sort of price increases in copper 20 scrap, say, in Europe, in Asia, and the world price in 21 copper in general? I'm just trying to get an idea of 13 1 what's going on in the world market as opposed to what, 2 is it any different than in the U.S.? 3 MR. MAYER: Well, the principal sources I 4 think of exports of scrap are the U.S., and the U.S. is 5 by far the leading exporter but Europe exports a 6 substantial amount of scrap also. And it is certainly 7 our understanding that they are experiencing 8 difficulties similar to ours and they have various 9 counterpart organizations in Europe and have asked 10 their governments to take similar actions to the one 11 we've brought to you. 12 MR. HILL: Bernie? Okay. Thank you very 13 much. 14 MR. MAYER: Thank you. 15 MR. HILL: At this time I would like to 16 call James Mallory from Nonferrous Founders' Society. 17 MR. MALLORY: Good morning. 18 MR. HILL: Good morning. 19 MR. MALLORY: As you know, my name is Jim 20 Mallory and I am the Executive Director of the 21 Nonferrous Founders' Society, which we actually 14 1 pronounce as "NFFS." We are a not-for-profit trade 2 association representing the aluminum and copper-based 3 foundry industry. We are one of the co-petitioners in 4 the short supply petition on copper and copper-alloy 5 scrap that was filed with the Commerce Department on 6 April 7th. 7 To begin my comments, allow me to give you 8 some brief background information about our industry 9 and about brass and bronze foundries in particular. 10 Nonferrous foundries operate in virtually every state 11 of the union, producing component parts that are used 12 in virtually every other manufacturing industry. The 13 Nonferrous foundry industry consists of nearly 2,000 14 foundries, most of whom are small businesses but who 15 collectively have almost a quarter of a million 16 employees, contribute more than $20 billion to the 17 domestic Gross National Product and produce something 18 over 100,000 distinct products. Among nonferrous 19 foundries, NFFS estimates that the current U.S. census 20 of the brass and bronze foundry industry, Code 331525, 21 is somewhere around 540 companies employing roughly 15 1 40,000 individuals. 2 Nonferrous castings are essential to the 3 lifestyle we have come to enjoy in the 21st century, 4 and in fact are found in almost everything you come in 5 contact with in your daily life, everything from your 6 kitchen sink to key national defense weapons systems 7 contains nonferrous castings. They are everywhere you 8 look and everywhere you go. I typically tell people 9 you're never more than 25 feet from a nonferrous 10 casting. 11 Nonferrous foundries annually recycle 12 millions of tons of scrap metal into useful components. 13 Without those parts, America's production engine would 14 to a grinding halt. Moreover, the reuse of these 15 materials saves natural resources and decreases waste. 16 More than 95 percent of the feedstock for foundry 17 production comes in the form of alloyed ingot derived 18 from scrap metals. Among ingot-makers in the brass and 19 bronze foundry sector, number two scrap is their 20 principal feedstock. But as I hope my comments today 21 will reveal, and as the petition we filed has clearly 16 1 demonstrated, foundries and their ingot suppliers are 2 facing a critical material supply problem today. But 3 of course that's certainly happened before. 4 The Nonferrous Founders' Society was 5 created in 1943. At that time, and through most of the 6 early 1940's, nonferrous foundries found it 7 increasingly difficult to get material allocations, 8 namely scrap metal for domestic, non-war related 9 production. Most of the metal was rightly being 10 diverted to the war effort, but foundries also needed 11 to get scrap metal for other production needs as well. 12 To find a way to secure those material allocations and 13 to meet those needs, they established the Nonferrous 14 Founders' Society. And part of our initial charter was 15 to work with the National Security Resource Board, and 16 later with the Commerce Department's own National 17 Production Authority Division, to control the flow of 18 scrap metal. In fact, for a period in the early 1950's 19 a member of our Society, who would later go on to serve 20 as one of our presidents, left his own company to serve 21 as the Chief of the Casting & Forging Section of the 17 1 NPAD Office of Price Stabilization here in Washington. 2 So you see, the current short supply 3 petition for copper and copper-alloy scrap isn't the 4 first time that we have gotten involved in petitioning 5 the Commerce Department to intervene in this area. 6 Nearly a half century ago -- and I found this in our 7 archives -- representatives of our Society met with 8 representatives from the Commerce Department to ask 9 that the amount of scrap metal available for export be 10 restricted, both aluminum and copper. Even then, 11 however, there were those who felt that scrap metal 12 wasn't essential to the United States and therefore any 13 and all export controls should be abolished. 14 Let me pause here for just a moment to 15 remind you of something I said earlier. The Nonferrous 16 Founders' Society actually represents both copper and 17 aluminum foundries and their ingot manufacturers. In 18 fact, our membership is almost evenly divided between 19 those two materials. While the petition we filed on 20 April 7th and that we are here at this hearing to 21 address, only addresses the situation as concerns the 18 1 exports of copper and copper-alloy scrap, I feel 2 obliged to note that just a week before the petition 3 was filed one of our aluminum smelter members testified 4 before the House Small Business Committee concerning 5 the situation on aluminum scrap and their export to 6 China. 7 Following that hearing, Chairman of the 8 House Small Business Committee, Don Manzullo, issued a 9 statement in which he stated his believe that the 10 administration should, and I quote, "Immediately begin 11 a study to consider the validity of imposing export 12 controls on U.S. scrap." Now, I admit to taking a bit 13 of license with the Chairman's statement. He 14 specifically referred to steel scrap, not copper. But 15 the Chairman's statement does not fully reflect how the 16 scrap metal market today is operating. Again I refer 17 to the testimony that our aluminum smelter member gave 18 at that March 24th Small Business Committee hearing and 19 I'm sure a copy of that could be made available from 20 the committee staff upon request. At that hearing, our 21 member described visits he had personally made to 19 1 several scrap dealers in the metropolitan Boston area, 2 both small and large. He reported that at every 3 location he visited he saw overseas containers being 4 loaded with miscellaneous aluminum, copper, nickel, and 5 stainless steel crap -- scrap, excuse me. I misspoke. 6 Most of the material that was being loaded would need 7 extensive sorting or processing in order to be turned 8 into useful product. But that sorting was to be done 9 on the receiving end, not on the shipping end. 10 The petition that NFFS and CBFC filed seeks 11 to impose monitoring and export controls on copper and 12 copper-alloy scrap. I'm sure that the Department will 13 be told that sorting out those particular metals might 14 impose additional cost burdens on the scrap industry. 15 But it's important to note that those added costs would 16 only apply to the materials being sent offshore in 17 those mixed containers. The scrap processing industry 18 already incurs sorting costs for materials being sold 19 and consumed in the United States. And frankly I think 20 factoring sorting back into the cost equation for scrap 21 metals might actually have some pass-through effect on 20 1 controlling the export of those other materials I 2 referred to as well. 3 Returning to the subject of the petition, I 4 have often described the situation that foundries today 5 are facing as being cut with both sides of a Chinese 6 sword. On one side, China's appetite for scrap metal 7 has driven prices for those materials up by more than 8 100 percent and dramatically reduced their 9 availability. On the other side, however, when 10 foundries try to pass on those increased material costs 11 to their customers, they're often told that if their 12 component costs go up, those customers will be forced 13 to begin seriously looking at other sources of supply, 14 namely offshore, namely China. 15 In a fair global market, it's nearly 16 impossible to overpay for raw materials and undercut 17 price. And, frankly, even the suggestion of such 18 manipulative behavior I believe warrants the monitoring 19 requested in this petition. I think it will probably 20 be said that other people who have said the situation's 21 only temporary and may resolve itself in six months or 21 1 less, and some people may say it's already starting to 2 correct and there have been reported decreases in the 3 demand for Chinese scrap. I think perhaps it suggests 4 to me, however, if those reported decreases in demand 5 are real and price adjustments that are being seen are 6 real and long-term, it only proves the points in our 7 petition, that China has been playing games with the 8 U.S. market for materials. 9 And I would go on further to suggest that 10 there are a number of defense-related issues that enter 11 into the equation. I know that there was a conference 12 held by the Defense Department in August of 2003, 13 concerning diminishing manufacturing sources and 14 materials shortages at which speakers emphasized the 15 fact that globalization "uber alles" is not a viable 16 policy where national security is concerned. And the 17 representatives of the Commerce Department speaking at 18 that hearing also emphasized the need to look seriously 19 at controlling materials where defense implications 20 occur. I'll let the rest of my written comments stand 21 for the remainder of my testimony and I'll take your 22 1 questions. 2 MR. HILL: Thank you, sir. Your entire 3 written comments will be included in the record and on 4 our Web site. I have a couple questions and then I 5 will turn it over to my colleagues. So I understand 6 the economics and dynamics of your industry and your 7 members, are the increases in price from the rising 8 cost of scrap, copper scrap, in your industry, do they 9 pass those increases up the line to the consuming 10 industry? 11 MR. MALLORY: They try to. We recently did 12 a survey of our members to determine what effect the 13 increases in metal prices were having on our business 14 relationships with their customers and we asked if they 15 were able to pass on those increases through either 16 price increases, in the base price of castings or on 17 surcharges based upon the current metal market prices. 18 And, in about half of the cases of the responses that 19 we got, our members said that they did attempt to put 20 those price, pass those price increases on to their 21 customers and about half the time their customers would 23 1 accept those price increases with a caveat that if that 2 situation were going to continue, they would look 3 elsewhere to source their castings. In the other half 4 of the cases, the foundries reported that when they 5 tried to put surcharges on their invoices, their 6 customers simply deducted the surcharges from the 7 invoice when they paid their bill. And we asked our 8 members at that point, do you stop selling to that 9 customer and the answer was no, they don't. 10 MR. HILL: Thank you. A couple more 11 questions. For your members has there been any 12 production slowdowns, work stoppages as a result of a 13 shortage of copper scrap? 14 MR. MALLORY: I don't know that I would say 15 that there have been shortages that have resulted in 16 work stoppages exclusively. You have to remember, Mr. 17 Chairman, that we are coming out of a very long and 18 hard economic recession. That economic recession 19 resulted in a lot of work stoppages and employment 20 shortfalls for our industry. What I think has been the 21 case in recent months, however, is that the 24 1 availability of materials has retarded the ability of 2 our industry to recover and to put on additional 3 production in order to meet increases in demand, and to 4 hire people to produce those material or those casting 5 from those materials as a result of the material supply 6 and price increases that they see. So the effect 7 hasn't been one of causation in terms of the actual 8 employment downturn among foundries but I think it 9 certainly had a negative effect on spurring of 10 recovery. 11 MR. HILL: Bernie? 12 MR. KRITZER: You talked in your remarks of 13 several examples of your members saying that if they 14 attempted to pass costs down that their downstream 15 customers would seek out foreign suppliers for 16 comparable products, that they would be priced, you 17 know, somewhat lower. Can you provide some specific 18 examples? 19 MR. MALLORY: Well, I can tell you that 20 there are several of my member companies that have been 21 forced to explore establishing relationships with 25 1 foundries offshore just to maintain a relationship with 2 their customers. I can probably do that as an addition 3 to my testimony in written comments to be cited. I 4 don't have that information available me today. 5 MR. KRITZER: That would be fine. Just one 6 final question. When several of your members have been 7 asked to explore offshore business investment with the 8 foundries, what countries have they occurred in? 9 MR. MALLORY: Principally it's happened 10 with China. 11 MR. KRITZER: Okay. Thank you. 12 MR. HILL: Dave? 13 MR. HENRY: Yeah, just you had in your 14 testimony that it's difficult to determine grades of 15 scrap, in either scrap, in especially a scrap that's 16 being exported. And even in the petition itself, in 17 one of the footnotes in the petition it states that 18 it's hard to discern what portion of the scrap exported 19 could be used by the domestic industry. Is there any 20 way that we could get information by grade of scrap 21 what scrap is being purchased domestically? And then 26 1 later in the field of testimony I plan to ask the scrap 2 exporters if they can give us a better idea of the 3 quantity and value of the grade of scrap that's being 4 exported, to get some idea of the specific type of 5 scrap that you are interested in that can be used in 6 the copper and brass mills. 7 MR. MALLORY: Well, again, my testimony is 8 specifically directed toward the foundry industry, not 9 to the brass mill industry. And the other panelists 10 can certainly address the situation for brass metals 11 much more eloquently than I can. Among brass and 12 bronze foundries, as I testified earlier, the primary 13 feedstock is alloyed ingot that is obtained from 14 secondary ingot production facilities such as were 15 visited by members of this panel as part of this 16 investigation. 17 And I think you got a good sense, some of 18 the panel members got a good sense during that visit of 19 the type of material that's being purchased and 20 recycled among the ingot producer industries. But as I 21 said in my comments earlier, for the ingot suppliers, 27 1 the brass and bronze foundries, that's principally 2 number two scrap. Okay? As far as what materials are 3 being made available for export, again I think perhaps 4 the scrap industry itself will be the best source of 5 information as to the content of those containers and 6 how much of that material is actually subject to the 7 petition that was filed by our association and Copper & 8 Brass Fabricators Council. 9 MR. HENRY: Have there been other factors, 10 price factors that are an issue, freight charges, rail 11 availability, other inputs to production, energy costs, 12 other materials and so on that in addition to the price 13 of scrap have affected the price of your products? 14 MR. MALLORY: I won't say there haven't 15 been other factors that have had an affect but none 16 have been as dramatic or as substantive as the material 17 cost increases for metals. Now, again I refer to 18 metals because we use ingot in the foundry industry 19 which is derived from scrap metal. So the scrap metal 20 increase prices affect our ingot manufacturers and the 21 price of ingot passes to the foundry and the price of 28 1 the castings is passed to our customers. Other costs 2 have gone up as well but nothing has gone up as much as 3 100 percent over a three-month period as has the cost 4 of metal in our industry. We do provide assistance to 5 our members in reducing freight costs and reducing 6 utility costs. 7 As an organization we have discount 8 programs for power consumption and gas and electricity 9 both and discounts for transportation and freight costs 10 for our castings. That discount afforded to our 11 members is substantial and has tried to offset some of 12 the material cost increases. But, I think it's fair to 13 say that in nonferrous casting production the cost of 14 materials represents more than 50 percent of the value 15 of the casting produced. And, so, the change in the 16 market for that material cost will have the most 17 significant increase on the cost of that product to our 18 customers and the impact on the profitability and 19 production of the industry itself. 20 MR. HENRY: And I had one last question. 21 You talked about the recent recovery in the economy and 29 1 that your industry and all other industries seem to be 2 on the upturn. In the petition it talks about decline 3 in consumption of copper scrap but there's nowhere that 4 I have seen in the petition or in the public documents 5 that we received about what's happened in the last year 6 as far as production in the industry. You mentioned 7 that it is coming back off hard times but that, I 8 didn't want to be putting words in your mouth but it 9 would have been better if prices were lower. But, 10 anyway, I wanted to get your opinion whether your 11 production is meeting the demand of industries that buy 12 your products. 13 MR. MALLORY: Again, Mr. Henry, I think the 14 situation for our industry is that we face both sides 15 of this material supply equation. We have higher costs 16 for materials for domestic production. We also have a 17 situation where offshore production is being made 18 available to our customers and prices below, in some 19 cases, the material cost of the component being 20 produced itself. I think that the situation as a whole 21 has retarded our ability to meet our customers' demands 30 1 and, frankly, has forced a lot of our customers to look 2 at reducing their domestic production or consumption of 3 castings and to seek material sources offshore for 4 their castings. 5 Again, I think the games that are being 6 played with the material supply being made available 7 offshore through value-added tax rebates and other 8 forms of subsidization, we have heard stories of, but 9 unfortunately I can't cite specific examples for you 10 today, you today, all enter into our ability to meet 11 customer demand and have a very negative effect on the 12 U.S. ability to produce castings both for commercial as 13 well as defense purposes. 14 MR. HENRY : And again one final question. 15 In the beginning of your testimony you talked about the 16 nonferrous sector and how many billions of dollars that 17 this contributes the nation's GEP. Do you have a 18 figure for the copper portion of that? 19 MR. MALLORY: Unfortunately, I do not 20 because most of my sources come from government 21 statistics and they're not broken down that fine. 31 1 MR. EDELSTEIN: Thank you. As we are 2 certainly well aware, you represent a very complex 3 industry. You represent actually two stages in the 4 production cycle, both the ingot makers and the 5 foundries. Copper scrap is ubiquitous to that industry 6 as well as copper flows first through to ingot-makers 7 and also is directly consumed by your foundries. 8 And, can you address at all the degree of 9 substitutability between the different materials? Can 10 your ingot makers substitute for fine copper, for 11 scrap? I know you indicated that number two scrap was 12 clearly the main material but I know having visited the 13 barrels of barrels of segregated alloy scrap that were 14 also consumed, are those alloy scrap materials in short 15 supply as well and is there substitutability for fine 16 copper and downstream can the foundries substitute 17 materials for the ingots that they may be purchasing 18 from the upstage ingot makers? 19 MR. MALLORY: Let me take the last part of 20 your question first and address the ability of the 21 foundries to substitute refined copper for the alloyed 32 1 ingot. And the answer I think in most cases among 2 nonferrous foundries is no, for a variety of reasons. 3 First of all, castings are produced within the foundry 4 industry based upon specified alloyed compositions 5 required by the customers to meet their particular 6 production requirements. If we were to substitute 7 refined copper or to try to substitute refined copper 8 for the alloyed ingot that we consume as an industry, 9 foundries would be forced to do their own alloy of 10 materials. 11 And in many cases their production 12 facilities aren't set up to allow them to do the 13 specific alloy that are required to meet the alloy 14 composition requirements of their customers, both in 15 terms of the temperature required within the melting 16 technology, the mixing technology, the availability of 17 an on-site metallurgist to perform key materials tests. 18 By depending primarily on alloyed ingot and 19 having a certification of the composition of that 20 material made available upon purchase of that ingot, 21 they can assure to their customer that the castings 33 1 being delivered are in fact what the customer has 2 ordered so that they don't always particularly among 3 smaller foundries have the ability to do their own 4 alloying which would be required if they were to try to 5 substitute refined copper. 6 Within the ingot production industry, yes, 7 there is sorting of materials done by alloy and that 8 sorting makes the ingot maker's job of producing 9 alloyed ingot easier. When they have use scrap that 10 they are not sure what the composition is, they must go 11 through the same alloying process, doing chemical tests 12 and adjusting the chemical balance of those materials 13 in order to produce the ingot that is being required or 14 being demanded by the marketplace. 15 So, the availability of specific grades of 16 alloyed ingot or alloyed scrap metal is a concern to 17 our members. Those materials are also in short supply 18 because the other consumers of scrap metal aren't as 19 sensitive to the need to keep materials segregated. 20 And when a mixed container is shipped, it can contain 21 alloyed ingot, number two copper, number one scrap, 34 1 stainless steel, aluminum, and all those materials have 2 to be sorted before they can be processed on the 3 receiving end. When the materials are being sorted 4 domestically for the scrap maker or the ingot producer, 5 that price, sorting cost is entered, is factored into 6 the price for the materials being made available to the 7 ingot manufacturer. 8 So, I think that the situation with the 9 availability of copper or copper-alloy scrap is that 10 all grades of scrap metal are of concern to our 11 industry. As I said earlier, the primary feedstock, we 12 would call number two scrap. That doesn't mean it 13 isn't sorted by alloy. It does mean that it is not 14 what other parts of the industry might identify as 15 number one scrap. 16 MR. EDELSTEIN: By number two scrap then 17 are you therefore lumping in not just a non-alloy, you 18 know, 96 percent copper but all the various alloys; 19 you're lumping all of that into number two? 20 MR. MALLORY: I think the short answer is 21 yes. 35 1 MR. EDELSTEIN: Thank you. One more 2 question. Regarding price structure, there are lots of 3 series of refined copper prices. There are a series 4 for number one, number two scrap, and various other 5 grades of scrap. But what we don't have any 6 information on hasn't been presented and I'm not aware 7 of a series. What impact did it have on the price of 8 ingot; in other words, is there any way of tracking the 9 alloy ingot either as a collective group, a bellwether 10 price of some sort, through the market and the flow of 11 time, is there any series, can one be generated that 12 would allow us to see what impact this has had on ingot 13 prices? 14 MR. MALLORY: I think the situation with 15 regard to ingot tracks very closely to the published 16 prices for materials in the American Metal Market and 17 on COMEX. I don't know of any specific tracking that's 18 done of ingot prices. Certainly we don't do many on 19 our own as an organization. But the law of supply and 20 demand affects the availability and the price of scrap 21 metal and that has a direct pass-through effect on the 36 1 price of ingot because that is in fact what ingot is. 2 It's scrap metal that has been processed and reformed 3 into a shape and size configuration that's available 4 for use and consumption within the foundry industry. 5 As that price of their material goes up, their prices 6 to foundries goes up accordingly. So, to be able to 7 say this is specifically what's happened as far as the 8 price of ingot is concerned, I don't have that 9 information at my disposal but I think it does track 10 very closely to the other sources that were cited in 11 the petition as far as the cost effect, the 12 availability of scrap metal on the industries as was 13 presented. 14 MR. HILL: Thank you, Mr. Mallory. At this 15 time we would like to call Mr. David Hartquist, counsel 16 to the co-petitioners. 17 MR. HARTQUIST: Good morning. I'm David A. 18 Hartquist of Collier Shannon Scott, counsel to the 19 co-petitioners in this short supply proceeding. We 20 appreciate having the opportunity to appear before this 21 panel today. In my testimony I'm going to address 37 1 three issues, one, certain legal issues raised by the 2 Institute of Scrap Recycling Industries, or ISRI, two, 3 the legal standard applicable to the investigation and 4 three, our request for relief. 5 In the first instance, ISRI asserts that 6 the petition is inappropriate due to its being 7 inconsistent with overall trade policy. That claim 8 overlooks or at least understates the fact that short 9 supply petitions and relief involving exports of 10 metallic materials capable of being recycled are 11 expressly authorized by Sections 7A through C of the 12 Export Administration Act of 1979, the statutory 13 provisions governing this case. Moreover, the 14 legislative history underlying the short supply 15 language for recyclable materials is clear that 16 Congress carefully consider the pros and cons of 17 permitting short supply measures and found on balance 18 that such petitions and relief should be authorized. 19 ISRI has erroneously judged the 20 short-supply relief by the United States for 21 copper-based scrap. They have erroneously judged that 38 1 short supply relief by the U.S. for copper-based scrap 2 would violate the obligations of the U.S. under Article 3 XI of the GATT, the General Agreement on Tariffs and 4 Trade. Article XI:1 of the GATT does broadly proscribe 5 export controls, but Article XI:2(a) explicitly permits 6 export prohibitions or restrictions that are 7 temporarily applied to prevent or relieve critical 8 shortages of foodstuffs or other products essential to 9 the exporting party. The Argentine Leather case cited 10 by ISRI is simply not on point. In that dispute before 11 the WTO, the World Trade Organization, the focus was a 12 provision in Argentine law that permitted Argentine 13 tanners' representatives to be present at the time of 14 inspections by customs officials of hides destined for 15 export. That procedure was found to be a de facto 16 export restriction proscribed by Article 11: 1 of the 17 GATT. Argentina did not establish that its law 18 qualified for the exceptions under XI:2, which is what 19 we're talking about today. 20 In contrast, as demonstrated in our 21 petition, and in our initial comments, our testimony 39 1 today, we do satisfy the criteria of the GATT. One, 2 there is in the United States a critical shortage of 3 copper-based scrap. Two, copper-based scrap is 4 essential to the United States, and three, the relief 5 we seek is temporary and nondiscriminatory and thus 6 consistent with Articles XI:2(a) and XIII:1 of the 7 GATT. Continued exports of huge quantities of 8 copper-based scrap will leave the brass mill industry 9 and the brass and bronze foundries of the U.S. 10 severely, if not irreparably, incapacitated. The 11 repercussions from such a weakening and perhaps loss of 12 this domestic capability and capacity would be very 13 far-reaching. 14 Under the U.S. domestic law and Articles 15 XI:2(a) and XIII:1 of the GATT, the temporary relief 16 that we seek appropriate and warranted. As a result, 17 there is no need to refer to any exception in Article 18 XX of the GATT, also raised by the ISRI, which would 19 come into play only if short-supply relief as to 20 copper-based scrap were inconsistent with Articles 21 XI:2(a) and XIII. As we will underscore in the balance 40 1 of our witness's statements today, the prerequisites 2 for relief under the statute are satisfied: One, there 3 has been a significant increase during a specific 4 period of time in exports of copper-based scrap in 5 relation to domestic supply and demand; two, there have 6 been significant increases in domestic price and a 7 domestic shortage of copper-based scrap relative to 8 demand; three, exports of copper-based scrap are as 9 important as any other cause of this price increase and 10 domestic shortage; four, an increase in the price and 11 domestic shortage of copper-based scrap relative to 12 demand are significantly adversely affecting and will 13 continue to significantly adversely affect the U.S. 14 brass mill industry and the brass and bronze foundry 15 industries; and fifth, monitoring and export controls 16 are necessary in order to carry out the statutory 17 policy of protecting the U.S. economy from the 18 excessive drain of scarce materials and to reduce the 19 serious inflationary impact of foreign demand. 20 Lastly, in our petition, we have requested 21 that exports of copper-based scrap be monitored and 41 1 limited to 380,139 metric tons for a year -- how is 2 that for precision -- or 31,678 metric tons per month, 3 with an option of extending this quota beyond a year in 4 the event of continued supply shortages. The annual 5 average of 380,139 metric tons reflects the five-year 6 period of 1996 through 2000 when exports of 7 copper-based scrap took place at a historically more 8 representative and normal level than in the past 9 several years. 10 I want to refer also to several questions 11 raised by the Department. One, we believe that the 12 restrictions should be implemented on the basis of the 13 Harmonized Tariff Schedule's Schedule B classifications 14 and probably could not be carried out by type or grade 15 of scrap. At the same time, monitoring should include 16 a requirement that the exporter of record and the 17 shipping party also identify clearly on the Shipper's 18 Export Declaration, the SED, each type or grade of 19 scrap by volume being exported, and this information 20 should be aggregated and placed in a regularly 21 published report, hopefully on a weekly basis. 42 1 Two, we believe the export controls we are 2 seeking would result in a domestic market for the 3 copper-based scrap embargoed from export. ISRI asserts 4 that limiting exports would lead to a build-up in the 5 United States of lower-grade scrap that has no U.S. 6 market and would be used for landfill. To the 7 contrary, we believe the annual limit apportioned among 8 all export destinations on a historically grounded pro 9 rata basis, would leave the United States with a 10 greater supply of higher grades of copper-based scrap 11 than we have seen over the past several years. 12 Three, along with the larger supply of 13 higher grades of copper-based scrap, we anticipate that 14 prices for these materials in the U.S. would fall, not 15 rise as ISRI claims. 16 Four, we also expect that the greater 17 availability and lower prices of the copper-based scrap 18 would reduce the costs and thereby improve the 19 competitiveness of our brass mills and foundries' 20 customers. 21 And finally, export controls should also 43 1 assist the processors in the United States that are 2 central to the domestic scrap collection industry. 3 These companies have been suffering due to their being 4 unable to process the increasingly large volumes of 5 copper-based scrap that is being exported. Thank you. 6 MR. HILL: Thank you, sir. I have a couple 7 of questions and I believe you have answered most of 8 what I was going to ask. In the petition you ask for 9 the average, '96 to 2000 average, that we would monitor 10 and impose export controls to that level. But, you 11 have not, and today again, have indicated that it 12 should be for all scrap? 13 MR. HARTQUIST: Yes. 14 MR. HILL: Not just number two, not just 15 number one, and that is your testimony still today, 16 that it should be all copper scrap and copper-alloy 17 scrap? 18 MR. HARTQUIST: That is correct. 19 MR. HILL: Peter? 20 MR. KLASON: Thank you. Mr. Hartquist, as 21 you know, Section 3-2-C of the Export Administration 44 1 Act requires that the Secretary determine that the 2 imposition of any export controls be, and I quote, 3 "necessary to protect the domestic economy." Can you 4 explain to the panel why export controls in this case 5 would be necessary to protect the domestic economy and 6 secondly, what's your understanding of what the term 7 domestic economy is as used in Section 3-2-C? 8 MR. HARTQUIST: This is an elevatedly 9 simple statute, as is the Sherman Antitrust Act, the 10 due process clause, the First Amendment; there's not a 11 lot of meat on the bones in the statute, which 12 incidentally I had the pleasure to helping to draft a 13 long, long time ago. So, we left a lot for the 14 regulators to figure out how to implement this statute. 15 First of all, Mr. Klason, you referred to 16 part of the statutory language. The language refers to 17 an adverse effect on the national economy or any sector 18 thereof including a domestic industry and so it is 19 specific to a domestic industry. In this provision 20 obviously we're talking about simply the copper-based 21 industry. Your second question, if you could repeat 45 1 it, again? 2 MR. KLASON: Yes. Section 3-2-C of the 3 Export Administration Act, which is the generally 4 policy in short supplies, which says that necessary to 5 protect the domestic economy and what your 6 understanding would be of the term domestic economy as 7 used in that provision. 8 MR. HARTQUIST: Well, as I indicated, while 9 the term domestic economy is a broad term, when you get 10 into Section C-3-A-5, I'm sorry, A-4, it is more 11 naturally defined as beyond the overall economy but as 12 to a sector or an industry within the economy. 13 MR. KLASON: And A5 then goes on to say the 14 effect where it's necessary to, excuse me, necessary to 15 protect the domestic economy as a whole, necessary to 16 protect the domestic economy, which is the word, the 17 term used in A5 as well. 18 MR. HARTQUIST: Well, maybe I'm not 19 understanding your question because it refers to the 20 national economy or any sector thereof including an 21 industry. 46 1 MR. KLASON: A5 refers back to Section 2 3-2-C of the Export Administration Act and Section 3 3-2-C, which is the declaration of policy states that 4 the President may impose export controls when 5 necessary, quote, to restrict export goods, where 6 necessary to protect the domestic economy from 7 excessive drain of scarce materials and reduce the 8 serious inflationary impact before it can act. 9 MR. HARTQUIST: Right. I understand that 10 but you have to take into account that the language 11 that I have cited essentially amends the broad 12 statutory language in 3-2-C and brings the examination 13 of the issues down to a specific industry. 14 MR. KLASON: Okay. 15 MR. HARTQUIST: So we're not making the 16 case, although we do believe that there is an effect on 17 the national economy, broadly, but I don't think we 18 have to show that the severity of the effect is felt in 19 the economy as a whole but your examination rather is 20 directed toward what's happening in this industry. 21 MR. KLASON: Thank you. 47 1 MR. HENRY: Thank you. Your testimony has 2 responded to a number of questions I had, in questions 3 that were posted on the BIS Web site last week but I 4 did have a couple more. One, you talked about the 5 competitiveness of the industry and how it would be 6 improved. You talk about your statements regarding 7 that copper, that scrap regardless of grade of scrap 8 should be controlled, leads me to an issue that we have 9 been facing in this case and we may or may not be able 10 to resolve it. 11 And that's the, we're finding a lack of 12 very specific detailed either economic data or just 13 data in general about the industry and its consumption 14 of scrap by type of grade so that we can have some idea 15 if, really if an export control were imposed, that by 16 controlling the exports to the levels for which you 17 have stated, whether this would alleviate the 18 situation. We would like to know by how much. We 19 would like to know by grade. I mean, there's a lot of 20 things that would like to know to come to a 21 determination that we're finding difficult to get to. 48 1 And, I don't know if this is a question. I 2 probably sound more like I'm whining about lack of data 3 but I was wondering if there is any way within this 4 public comment period that we can either get back to 5 you or co-petitioners about specific requests for data. 6 We do have those on our Web site and we would like to, 7 I guess, scratch out what we could. 8 MR. HARTQUIST: I appreciate that, 9 Mr. Henry, and will be happy to respond further to that 10 request. Let me just make a couple of general 11 comments. And our industry witnesses can be much more 12 specific than I can about this. But, there is a 13 concern about the lack of specificity in the data, on 14 the one hand, and we have asked for more specificity in 15 the way that the export control program would be 16 implemented than exists in the trade statistics that we 17 had overall to examine. But, frankly one of the 18 concerns that we have is a very practical concern and 19 we have anecdotal evidence along these lines that we 20 hope we'll be able to supplement with more specific 21 evidence but we're hearing reports in the marketplace 49 1 about the nature of the shipments that are going 2 abroad, particularly to China. 3 And, we have research that's being 4 conducted right now to try to develop more information 5 along these lines. But one of the concerns is that the 6 shipments which are going to China may not be 7 accurately classified in terms of the value or in terms 8 of the content of the shipments. For example, we hear 9 anecdotal evidence that in some of the shipments that 10 are going to China the good stuff's on the bottom of 11 the container and the bad stuff's on the top, if you 12 will, oversimplifying, so that when it comes into 13 China, it pays a lesser duty because it's valued at a 14 lower level. 15 So, we have concern that the export 16 documents and the import documents going into China may 17 not accurately reflect the quality of the material 18 that's being shipped in or the value of the material 19 that's being shipped in. There are other similar 20 issues that are related to this and that is why we feel 21 that all exports of scrap should be covered by any kind 50 1 of a monitoring or export control program so that 2 regardless of the value of the material and whether 3 it's properly classified at a minimum it will be 4 properly counted. 5 MR. EDELSTEIN: Yes, thank you. I'm not 6 sure if this is a question for you or for your next 7 panelists but since you mentioned it very forcefully in 8 your testimony, your request that export quotas be 9 rolled back to the '96 to 2000 period average. ISRI in 10 their written comments has pointed out that, if I'm 11 correct, some 330,000 tons of secondary smelter 12 capacity has exited from the U.S. in that time period 13 and probably as I understand some of your industry, 14 brass mill industry has restructured away from scrap 15 possibly permanently. What would be the impact on the 16 market of releasing so much scrap when in fact it may 17 not be the same capacity that there once was to process 18 that scrap at that time, using that as the base year? 19 MR. HARTQUIST: I think our other witnesses 20 will be in a better position to comment on that. I 21 would say in general in response to your question, 51 1 Mr. Edelstein, that the reason that we chose the 1996 2 through 2000 period was we were looking back in recent 3 history for a period that we felt was relatively 4 representative of normal times, if you can, and 5 recognizing the difficulty in picking what is normality 6 given the business cycles and the ups and downs we have 7 had in the economy, it wasn't easy. But, it's a recent 8 period. It's a five-year period. Within that period 9 there have been ups and downs in the industry and in 10 terms of demand for scrap and therefore we felt that it 11 was appropriate to pick that period of time. Certainly 12 the last few years have hardly been normal in that 13 respect. But, as to the availability of smelting 14 capacity and the effect that that might have on the 15 situation, I think other witnesses can respond better 16 than I can to that question. 17 MR. HILL: Anything of Mr. Hartquist? 18 MR. HARTQUIST: Thank you. 19 MR. HILL: At this time we would like to 20 call our next witness, Michael Kerwin, of the 21 Georgetown Economic Services. 52 1 MR. KERWIN: I'm assuming all the witnesses 2 will have to share this one bottle of water so I'm 3 going to take a first pick at it. 4 MR. HILL: We're actually are a little 5 better. We have two bottles of water. 6 MR. KERWIN: Either side. 7 MR. HILL: But there's a separate bottle 8 for each witness. 9 MR. KERWIN: I appreciate that. Good 10 morning. I'm Michael Kerwin of Georgetown Economic 11 Services. The petition and supplemental comments that 12 have been submitted to you in this case provide 13 compelling evidence in support of the statutory 14 criteria laid out by Congress. Specifically, U.S. 15 exports of copper-based scrap have increased 16 significantly, both in relation to volume and in 17 relation to domestic supply and demand within a 18 specific period of time. Further, these increases have 19 resulted in domestic shortages and significant price 20 increases for these recyclable materials. Finally, the 21 evidence demonstrates that the growing volumes of 53 1 exports of copper-based scrap have been more important 2 than any other cause of the shortages in supply and 3 price increases and that these conditions have had a 4 significant adverse effect on the U.S. brass mill 5 industry. 6 As you will hear from your industry 7 witnesses this morning, copper-based scrap is a 8 critical raw material to the U.S. brass mill industry 9 accounting for a significant majority of the industry's 10 overall metal input needs. It is no small matter, 11 then, that a growing portion of the available stock of 12 these raw materials is going overseas. 13 Between 1999 and 2003, total exports of 14 copper-based scrap from the United States increased by 15 more than 430,000 metric tons, or 138 percent. In 2003 16 alone these exports grew by nearly 200,000 tons, or 33 17 percent. Because U.S. consumption of copper-based 18 scrap was declining during this period, exports 19 increased their share of U.S. scrap more dramatically. 20 While exports took 16 percent of the total copper-based 21 scrap supply in 1999, that figure jumped to 31 percent 54 1 in 2002 and 40 percent in 2003. In comparison to U.S. 2 consumption of the product, exports of copper-based 3 scrap were equivalent to 19 percent of consumption in 4 1999 and grew to 65 percent in 2003. 5 Nor have exports shown any sign of abating 6 in 2004. In each of the first three months of this 7 year, exports of copper-based scrap reached new 8 all-time peaks for those months in relation to previous 9 years. In fact, the most recently released official 10 statistics show that in March of this year, the last 11 month before the filing of our petition, export volumes 12 of copper-based scrap reached 79,000 metric tons, their 13 highest level in recent history. This volume was 27 14 percent higher than that shown in March of 2003 and 9 15 percent higher than in the previous all-time record 16 month. 17 Thus, the evidence of the official 18 statistics indicates that there have been massive and 19 extremely significant increases in exports of 20 copper-based scrap in recent years, both in volume 21 terms and in relation to U.S. consumption. As laid out 55 1 in our submissions, the result of this growth in 2 exports has been shortages of copper-based scrap in the 3 U.S. market and increased prices for the commodity, as 4 measured by reduced discounts for the product in 5 relation to copper prices on the metal exchanges. 6 Because domestic brass mills have been unable to pass 7 through all of their increased costs, these 8 developments have had a severe impact on industry 9 profitability. 10 Our opposition in this case, the Institute 11 of Scrap Recycling Industries, or ISRI, does not 12 dispute that there has been a massive increase in 13 overall exports of copper-based scrap from the United 14 States in recent years. Rather, ISRI claims that the 15 petitioners have glossed over the distinction among 16 various types of copper-based scrap and that all of the 17 growth in exports has occurred in relation to forms of 18 scrap that cannot be used by the brass mill industry. 19 These arguments fail on a number of accounts. 20 First, ISRI implies that the 21 classifications under the Harmonized Tariff Schedule 56 1 can be interpreted as close representations of grades 2 of copper-based scrap. This is not true. In fact, the 3 HTS distinguishes exports on the basis of the alloy 4 content of the scrap, distinguishing between scrap of 5 pure copper, brass, leaded brass, and other copper 6 alloys. The HTS makes no mention of the grade or 7 quality of these materials. 8 For this reason, ISRI's implication that 9 the main concern of the brass mill industry is in 10 relation to product falling under the single heading of 11 refined copper scrap, while exports classified as 12 "other" copper alloy scrap are essentially solely of 13 interest to secondary smelters, is completely off the 14 mark. The fact of the matter is that a majority of the 15 scrap consumed by the brass mill industry is 16 copper-alloy scrap, not scrap of pure copper. The 17 industry actually consumes scrap that falls under each 18 of the four HTS classifications under which the product 19 is exported. Indeed, even ISRI's claim that brass 20 mills do not consume any number two scrap is not 21 accurate. 57 1 Even if ISRI's claims as to the brass mill 2 industry's consumption being limited to scrap of 3 refined copper were true, ISRI's discussion in this 4 area is misleading. While the ISRI comments note that 5 exports of pure copper scrap declined by 19 percent in 6 2002, their analysis overlooks what happened to exports 7 of this product in 2003. In that year, exports under 8 this subheading increased by 109,000 metric tons or 42 9 percent, the highest of any of the four scrap 10 classifications, both in terms of absolute volume and 11 percentage increase. Thus, even if you accept ISRI's 12 claims as to the true meaning of the HTS 13 classifications and the consumption patterns of the 14 brass mill industry, the data do not support their 15 assertions. 16 Contrary to ISRI's claims that the 17 petition, quote, "attempts to gloss over the important 18 distinction between high-grade copper scrap typically 19 consumed domestically and the low-grade copper scrap 20 for which there is inadequate demand," end quote, our 21 petition provided full data on each of the four 58 1 classifications of copper-based scrap. The simple fact 2 is the HTS descriptions do not distinguish among 3 qualities of scrap, and the petitioners's analysis 4 could not possibly "get behind" the official statistics 5 in order to ascertain the quality of the scrap being 6 exported. Further, the U.S. brass mill industry 7 consumes scrap that falls within each of the four HTS 8 classifications of copper-based scrap. 9 It is true that consumption of U.S. 10 copper-based scrap by smelters and refiners has been in 11 decline in recent years and the petition provided 12 separate breakouts of the U.S. Geological Survey data 13 showing scrap consumption among smelters, brass and 14 wire rod mills and foundries and miscellaneous 15 manufacturers. But these data show that consumption of 16 copper-based scrap by brass mills has long exceeded 17 that of smelters and refiners accounting for roughly 18 two-thirds of all consumption of copper-based scrap in 19 the United States. Further, while ISRI would have you 20 believe that increasing exports of copper-based scrap 21 are attributable to declines in consumption at 59 1 secondary smelters, ISRI's own data show that the last 2 such closure occurred in 2001. Thus, all the effects 3 of smelter closures on U.S. consumption of copper-based 4 scrap would have occurred in the years leading up to 5 2001 and these closures are not of relevance in 6 analyzing the years following 2001. The fact of the 7 matter is that the largest increase in the volume of 8 exports of copper-based scrap occurred in 2003, two 9 years after the last smelter closure. Thus, even if we 10 accept ISRI's claims in relation to the significance of 11 smelter closures in the U.S. market, there is no way 12 that this explains the growth of exports in 2003, the 13 year showing the largest increase in scrap exports and 14 a huge decline in consumption by brass mills, as more 15 and more of this key input material was taken from 16 domestic consumers and sent overseas. 17 Finally, ISRI has argued that if export 18 controls are put into place, this is likely to have the 19 effect of raising prices for copper-based scrap in the 20 United States. We believe that this is highly 21 unlikely, given that there are other sources of copper 60 1 scrap in the world, and that copper cathode can often 2 be used in place of copper scrap. Indeed, if ISRI's 3 claims truly are in earnest, why in the world are they 4 opposing the current petition, given that an increase 5 in U.S. scrap prices would be very much in the interest 6 of scrap dealers? The plain fact is that ISRI opposes 7 the petition because it fears that export controls will 8 result in price reductions for copper-based scrap in 9 the U.S. market, precisely the result that we are 10 trying to achieve through this action. Thank you. 11 MR. HILL: Thank you, Mr. Kerwin. Bernie? 12 MR. KRITZER: Mr. Kerwin, in your remarks 13 and in the work that you have submitted today, you have 14 made mention of exports as being the largest factor 15 affecting the price and availability of scrap copper 16 and scrap copper-alloy. To what extent does the world 17 market for pure copper also influence the prices of 18 copper scrap, is the first question I have. 19 MR. KERWIN: Clearly the exchange prices, 20 the world prices as reflected in COMEX and LME are 21 essentially world prices. And what we have seen in the 61 1 last couple years, well, particularly since 2003, mid 2 2003, is that copper prices have been increasing very 3 dramatically and the price of scrap essentially keys 4 off of the, in the United States, the COMEX price. So 5 there is no question but that as the world copper price 6 increases, the price of scrap will generally track that 7 increase. 8 But, specifically the U.S. supply and 9 demand conditions in relation to copper scrap will be 10 reflected in the discount at which scrap sales in the 11 United States in relation to the COMEX price and it is 12 that, that discount is extremely important, as I'm sure 13 you will hear from our later speakers, to the members 14 of the brass mill industry, who rely on scrap for a 15 very significant proportion of their input needs. And, 16 it is that, that discount that essentially reflects 17 the, that allows them the lower cost of using scrap. 18 And the data indicate that as the supplies have 19 tightened that discount has essentially disappeared and 20 in some cases they've actually had to pay scrap prices 21 that exceed the COMEX prices. 62 1 MR. KRITZER: To what degree have domestic 2 and international actions such as mine openings and 3 mine closings during the last three years, 2001 to 4 present, have they affected supply? 5 MR. KERWIN: Well, from my review of the 6 literature, my understanding is that into the beginning 7 of 2003, there was relatively, relative declines in the 8 price of copper. And, of course, as the price of 9 copper declines or remains in relatively depressed 10 levels, mining companies don't have much of an 11 incentive to open new mines or do they even have an 12 incentive to close existing mines. And, as the price 13 of copper remained depressed, things became, started to 14 become back into balance so that supply will actually 15 start to come more in balance with demand. 16 At that point, you actually get the point 17 where demand starts to exceed supply, price starts to 18 rise, and that gives the incentive to the mining 19 companies to either open new mines or to bring back on 20 stream facilities that have been closed. Currently, so 21 for the past year certainly there has been a relative 63 1 shortage of refined copper in the world and that has 2 resulted in the increased prices as reflected in the 3 COMEX and LME that I just mentioned. 4 MR. KRITZER: With the run-up in prices 5 that you have discussed, do you see new mines, plans 6 for new mines being brought on for deferral of closing 7 of mines to enhance recovery, do you have any list in 8 the next year of what that might be in terms of volume? 9 MR. KERWIN: I don't know the precise 10 volume. My review of the literature indicates that 11 there are facilities within the United States that 12 have, that are in the process of being reopened. 13 Copper mining obviously is a complex business and is 14 timed to the whims of nature. My understanding is one 15 of the major facilities in Asia had a cave-in and 16 something like that that's at the force of nature can 17 have an impact on the world price. So even when mining 18 companies intend to take a specific path and increase 19 supply, it's not always as simple as that. But my 20 understanding is that as a general proposition prices 21 have been high enough over the last year to act as an 64 1 incentive to mining companies to do just that, to 2 increase their output. 3 MR. HILL: Can I just interject a quick 4 question in this context and in the larger context as 5 well? If we were to impose monitoring and/or controls, 6 what would be the impact of such an embargo on that 7 dynamic and the other dynamics to the scrap industry? 8 MR. KERWIN: Well, I think that's a good 9 question. I think the mind-set, the way to examine 10 that question is to look at the global demand, global 11 consumption of what the industry calls copper units, a 12 copper unit being well, you could produce a certain 13 amount of copper whether it be from cathode or from 14 scrap, somehow or another you have to get the raw 15 materials to produce what you need. And, the global 16 demand for copper units would not be changed by any 17 type of export controls that we might put into place. 18 What we think would happen would be that the current 19 pressures, the pressures that consumers of copper scrap 20 in this country have been undergoing over the last 21 couple of years would decline, those types of pressures 65 1 would decline as our export levels declined. And the 2 foreign purchasers who had been purchasing U.S. 3 generated scrap would then be forced to turn to other 4 sources of the material, would be that scrap from other 5 markets or increased purchases of cathode but that 6 overall demand for, global demand for copper units 7 would not be affected. 8 MR. KRITZER: I have just two other 9 questions. To what extent have export control actions 10 of other nations impacted the availability of scrap 11 supply and the second question that relates to this -- 12 and several of your colleagues have made mention of 13 this and I found it very interesting. Foreign actions 14 by governments, actions such as loan subsidies or duty 15 rebates to companies have, how they have impacted the 16 ability of your members to compete for the scrap? And 17 in the case of the latter question, any specific 18 examples you have obviously would be most helpful as to 19 that. 20 MR. KERWIN: Okay. I don't like two-part 21 questions. Could you repeat the first question again? 66 1 I knew the answer and then you threw me off. 2 MR. KRITZER: I think the first question 3 is, is that in looking at factors that are affecting 4 the supply and demand in the market, one always has to 5 take into account what, if any, actions other 6 governments have taken -- 7 MR. KERWIN: Right. 8 MR. KRITZER: -- that have restricted the 9 availability of supply -- 10 MR. KERWIN: Correct. 11 MR. KRITZER: -- to the members, that 12 constitute the petitioner, you know, to buy his imports 13 and bring in. 14 MR. KERWIN: Okay. First of all, in the 15 United States traditionally imports of copper scrap 16 have represented a very, very small proportion of the 17 overall supply of scrap. We have been a major 18 generator of scrap. There has been a sufficient, 19 generally been sufficient scrap generated within the 20 United States that we have not had to import a lot of 21 scrap. That being said, if you do look at the import 67 1 statistics over recent years, small as they are, they 2 have declined in recent years. 3 And, my understanding is that, I reviewed 4 the statistics in relation to Russia, which had been a 5 relatively significant exporter of copper scrap and my 6 understanding is that Russia did impose some type of 7 system of limiting exports of their own internally 8 generated scrap for, I assume, similar purposes, 9 similar reasons for what we're requesting today, i.e., 10 that their domestic producers did not have a sufficient 11 supply of the product. And because of those controls, 12 the exports from Russia have declined very 13 substantially over, I don't remember the precise period 14 but the last five or six years, I believe. 15 So, that the exports of copper scrap from 16 Russia are almost nonexistent, at this point. Now, the 17 United States was never a large importer, I don't 18 believe, of Russian scrap but of course it is, you 19 know, the product that had been exported from Russia 20 was going somewhere and that may have acted as an 21 incentive for other countries such as China to make the 68 1 United States their major focus in sourcing copper 2 scrap. And my understanding is that I believe the 3 Ukraine also has export controls on copper scrap. 4 MR. KRITZER: Could you provide us 5 separately with some estimates over the last, say, from 6 2001 to 2004 what the decline in those volumes would 7 have been -- 8 MR. KERWIN: Yes. 9 MR. KRITZER: -- for each country? 10 MR. KERWIN: Sure, we would be happy to do 11 that. I don't know what they are right now but, you 12 know, in our next submission we'll be happy to provide 13 that. 14 MR. KRITZER: With regard to my last 15 question, I know I've probably taken a bit too long 16 with these questions. I am very intrigued by the pound 17 that you and several of your colleagues raised about 18 incentives that are given by foreign governments in the 19 form of duty rebates. And we have heard about that in 20 some other areas. And any specific information you 21 could give me on that, how it's valued, how it's taxed, 69 1 what happens when it's turned into a final product. 2 And Mr. Mallory made a very good, 3 interesting point that one of several members of his 4 industry has been faced with the fact that they pay an 5 extraordinarily high price for the scrap but then he 6 said when it comes to the alloy that comes in that's 7 made from the scrap, it comes in at a lower-than or 8 equal-to price over raw material. You know, I think 9 this group would very much appreciate any specific, you 10 know, evidence you could provide us with regard to 11 that. 12 MR. KERWIN: We'll try to do that. I will 13 say that we've been making some efforts in that to try 14 to find out some more information in that regard. 15 China is a kind of a massive black box and it's not one 16 of the more transparent systems in the world. So, a 17 lot of what we have heard to date has been heard 18 through the grapevine as to how things are done. It's 19 an open issue that obviously China has massive reserves 20 of U.S. dollars and that it has to spend those U.S. 21 dollars somewhere. 70 1 And, of course, we have, their currency is 2 tied to our currency and we are the largest source of 3 copper scrap in the world . So, one thing that's 4 beyond dispute is that the Chinese economy has the 5 sufficient dollar resources to come into the United 6 States market and to buy up scrap on that basis. And, 7 in fact, as you will hear from our witnesses to the 8 point where certain scrap dealers may have reported 9 instances of this product being purchased literally in 10 cash, people pulling off hundred dollar bills to buy 11 scrap from U.S. sources to be shipped back to China. 12 And, what we have heard is that, and, Mr. Hartquist 13 mentioned, that there are various ruses that may be 14 going on in terms of what is actually being exported 15 and what is being put into a container, how it is being 16 listed to the U.S. customs authorities, how it is being 17 reported to the Chinese customs authorities, what goes 18 on with the duties that should be paid on that product 19 going into China. 20 And they have a whole system of that 21 rebates, which is again a large black box that nobody 71 1 really seems to a have good answer as to how it works. 2 But that somehow or another, as you a mentioned, people 3 are coming into this, into our market paying top dollar 4 for the product, shipping it back to China, you know, 5 refining it there, and turning it into various 6 manufactured products including brass mill products and 7 those products are being sent to the United States and 8 being sold on the basis of prices that undersell the 9 domestic producers. 10 So, it's a very efficient system and given 11 how small of an element labor is in the overall costs 12 of manufacturing for these items, the cost advantage 13 that the Chinese may have in relation to labor costs 14 doesn't explain this. So, something is not right with 15 this system. It is not a market system and as much as 16 we might like the market to work out its own issues, we 17 don't consider what's going on to be market-based. So, 18 we will try to put together some additional 19 information. The information that we do have we would 20 be happy to forward to you in our next submission. 21 MR. HILL: Dave? 72 1 MR. HENRY: Thank you. In reviewing the 2 petition and listening to the testimony there's a 3 number of statements regarding the economic impact 4 being made, that it's going to be significant, that 5 it's going to be adverse, that it's going to hurt the 6 industry, that it's going to have adverse impacts on 7 consuming industries. However, I don't see anywhere 8 either in the petition or the testimony that I have 9 heard so far to the extent what the actual, what's your 10 best estimate of economic impact on the industry if 11 exports are continued to be increasing and what effect 12 it might have on employment, what effect it might have 13 on closures, what effect it might have on 14 profitability; in other words, I have heard all this 15 but I have not seen anything specific about the 16 industry. 17 MR. KERWIN: Well, one of the limitations 18 of the structure of this action is that there are no 19 provisions for submitting proprietary information. 20 And, many of these brass mills are privately held. 21 They do not publish financial statements and even the 73 1 larger companies that do publish financial statements, 2 in some instances such as Outokumpo American Brass, 3 that company is owned by the larger corporate entity, 4 global corporate entity of Outokumpo. So that the 5 financial statements that are reported for that company 6 are massive and obviously would not would not 7 particularly reflect what's going on specifically with 8 the operations of OAB in Buffalo and how this has 9 impacted their performance. 10 It's a difficult issue to grapple with. 11 You mentioned some factors. I don't think that this is 12 an instance in which would expect that there would be 13 huge employment effects, from what we have seen to 14 date. Obviously, if the situation deteriorates further 15 or deteriorates to the point where you see brass mills 16 closing, that that would have been employment impact. 17 Could you say that those closures were, you know, 100 18 percent attributable to what's going on in the scrap 19 market? That would, even that would probably be a 20 difficult thing to assess. 21 I will note that in reviewing the technical 74 1 report of Janice Jolly, the 2003 version that's put out 2 by the Copper Development Association, she does note 3 that one of the reasons that there may have been 4 closures of secondary smelters in the United States, 5 among other, of course, among other reasons, including 6 environmental costs, but that one of those, one of the 7 reasons that may have tilted the balance toward closure 8 was increased exports of scrap and reduced availability 9 of materials to these smelters. I would think that's 10 evidence that, that that certainly contributed to these 11 closures. What we would like to avoid is that the 12 brass mill industry will end up in the same state as 13 the smelter industry, the brass mill and the foundries 14 industry. 15 So, in terms of, you know, I think that the 16 price effects of the shortages are fairly well 17 documented. There are limitations to the data. 18 Unfortunately, I wish that there were procedures for 19 dealing with proprietary information but there are not 20 in this instance. And, but certainly if you take a 21 step back and look at the big picture and you look at 75 1 the reports that have come out from the U.S. Geological 2 Survey, you look at the reports such as Ms. Jolly's 3 study, you look at the trade reports of the shortages 4 that have been occurring in the U.S. scrap market and 5 the effects on price, and you will hear from the 6 members of the industry, not only have these, have they 7 been forced to pay higher prices for the scrap that 8 they can get, they've also been forced to use more 9 cathode, which is a more expensive material. 10 We did outline that in our, on our second 11 submission, where we noted that the amount of cathode 12 that's being consumed by the producers that were 13 reported information was more than twice as much as 14 what they would have preferred to use under their 15 preferred recipe. And the aggregate statistics I think 16 of the Geological Survey indicate that there is 17 increased consumption of cathode by the brass mill 18 industry and reduced consumption of scrap. 19 Unfortunately, we don't have perfect information and I 20 think we have to go with, but there is very, extensive 21 information that I think shows that there are, there is 76 1 a major issue here and that obviously the exports have 2 increased and that it is having a big impact on the 3 marketplace and on prices and on the ability of the 4 foundry industry and the brass mill industry to source 5 copper scrap. 6 And, there have been instances where there 7 have been production outages, where production has 8 been, we mentioned in our second submission one of the 9 companies noted that in the first three or four months 10 of 2004, that they had had an equivalent of 11 approximately 13 days' worth of production outages due 12 to an inability to source materials. It's been a very 13 difficult thing to sort of put the numbers together in 14 the aggregate to precisely show what the total effect 15 of that is but I think the aggregate information leads 16 in the right direction. 17 MR. HENRY: Continuing in the context of 18 price, in the elasticity of price of copper scrap, do 19 you think in your opinion and/or if you can point to 20 studies or other information, what do you think about 21 the volume of copper scrap in relation to the increase 77 1 in price in scrap; in other words, do you believe it is 2 going to increase? 3 MR. KERWIN: Well, scrap is an unusual 4 product. It's not produced per se. Even in relation 5 to copper cathode, we talked about the mining issue, it 6 takes some time but when the right price signals are 7 there, mining production will increase and ultimately 8 cathode production will increase. Scrap is a different 9 animal. Scrap is essentially a byproduct or in some 10 instances what most people would consider a waste 11 product, i.e., something that's left over when you tear 12 down a building and you have the copper plumbing tubing 13 that's left over. That was not produced. That just 14 happened to be left over and were it not recycled that 15 would end up in a landfill. Well, fortunately most of 16 that product is recycled. 17 But, the largest source of scrap in the 18 United States is not from tearing down buildings and 19 yanking out the copper plumbing tubing, it is what is 20 generated in the production processes of the downstream 21 users of the product. So that if a machine, if a bar 78 1 is, a copper bar, a brass bar is machined into nuts and 2 bolts or hardware or any other such downstream product, 3 a significant portion of the material that was 4 purchased is going to be turned into scrap in that 5 production process and that will either be sold on the 6 open market or sold directly to the mill that created 7 the input product. So, whether you're talking about 8 new scrap, so-called new scrap or old scrap, neither 9 one of those are really produced. You know, 10 specifically they are byproducts. They are leftovers 11 of the production process of something else. 12 So, given that structure, it's difficult to 13 believe that the elasticity of supply would be all that 14 responsive because it's, yes, there's an incentive 15 maybe to, for people who have copper tubing sitting out 16 in the backyard or a piece of copper sheet that's 17 sitting around somewhere to take it down to the scrap 18 yard because it's now worth twice as much as what it 19 used to be but that's not really a large source of 20 scrap. And, again it's, yes, there will be some 21 response to an increase in price but it's just not 79 1 going to be substantial given the structure of how 2 scrap is generated. 3 MR. HENRY: Thank you. Another question on 4 price. In your opinion what's the relationship of 5 price movement of cathode versus price movement of 6 copper scrap and in your opinion which one leads the 7 other? 8 MR. KERWIN: Which one leads the other? I 9 think that the price of copper cathode, the prices 10 reflected in the LME or the COMEX exchange is a world, 11 it reflects a world price, not always exactly the same 12 but reflects a world price. And, that is driven by 13 global supply and demand conditions. But you also have 14 conditions within the United States that are specific 15 to our market. So, the supply and demand within the 16 United States, both of scrap and of cathode will have 17 an effect on, in relative terms what we pay for those 18 products within the United States. And as I mentioned 19 before, it is our opinion that the decreasing discount 20 at which U.S. scrap is sold in relation to COMEX is an 21 indication of a tightness of supply. Difficult to 80 1 really come to grips as to what leads what within the 2 United States. 3 What we have seen, and talking to the 4 members of the brass mill industry, is that as they 5 have been forced to use more cathode as an input 6 because they have not been able to source scrap, that 7 has pushed up demand in relation to cathode, which has 8 had the effect in some instances of pushing up premiums 9 on cathode within the United States. 10 So, the whole market situation is a little 11 unusual at the moment. If these brass mills could 12 source sufficient scrap, that would be very much their 13 preference. They don't really want to scrap source 14 cathode but they have been forced to, which has 15 increased the overall U.S. demand for cathode. And 16 cathode supplies are relatively tight as well within 17 the United States. Cathode is being purchased also in 18 large quantities by China and some producers of the 19 product such as major producers in Chile, for example, 20 may appear to be preferring to send that product to 21 China rather than to the United States. 81 1 So, it's an interesting question as to what 2 pushes what. And it's a very complicated question and 3 I think the answer depends on the period that you are 4 looking at, the market that you're looking at. Clearly 5 there is a world price and I think that the COMEX 6 reflects that and it reflects general, worldwide supply 7 and demand conditions. But, our concern is 8 specifically in relation to the U.S. market and there's 9 something going on here that doesn't really make sense 10 in relation to what's going on with world prices. 11 Certainly the increase in world prices has driven up 12 the cost of the price of cathode and of scrap within 13 the United States, there's no question. But, it's the 14 incremental difference between that sort of world price 15 and our specific market conditions that I think is 16 really at issue. 17 MR. HENRY: Thank you. And another 18 question on price, in your opinion is, well, you talked 19 about it, just a few minutes ago about the industry 20 using more cathode than they would like. In your 21 opinion or if you have information to support this 82 1 opinion, is there at some point where the industry 2 would retool to use more cathode than they would copper 3 scrap in their mix of material inputs in production if 4 they could pass the price along to the consumers of 5 their products? 6 MR. KERWIN: Well, I think that the answer 7 to that would depend on the specifics of the producer, 8 the mill, the product being produced. As you will hear 9 from some of our industry witnesses, they're sort of 10 all over the map. Some of them rely exclusively on 11 scrap for their production needs. Others rely, you 12 know, are more skewed toward cathode. Others can go 13 back and forth, fairly readily. But, there certainly 14 are producers who are solely dependent on scrap. And, 15 you know, in theory I guess that they could retool and 16 reformulate their production process to be set up to 17 use cathode but it would take a substantial investment. 18 These production systems are set up to use scrap 19 exclusively and what would be entailed in modifying 20 that system would be very substantial. So, it depends 21 on the circumstances of the individual company, I 83 1 think. 2 MR. HENRY: Could you give us an indication 3 of the percent of the industry that is totally relying 4 on copper scrap in their production process? 5 MR. KERWIN: Humm, no. I don't think I 6 could give you a number off of top of my head. It 7 would be difficult to gauge because, as I said, even 8 within a given company you may have one production 9 location that uses exclusively scrap and another 10 location that uses scrap and cathode. So, I wouldn't 11 feel comfortable just throwing out a number. I might 12 be able to work up something in a later submission that 13 might be able to estimate that, but -- 14 MR. HENRY: I'd appreciate that. And I 15 have one more question really on supply and demand. I 16 read somewhere on supply and demand that there was a 17 review of determinants of U.S. supply and demand for 18 copper-based scrap. This is on page 18 in the petition 19 which shows that there are no other factors other than 20 increasing exports that have caused the recent supply 21 shortage. I wanted to read that because that's a quote 84 1 in the petition. Could you supply us with that review? 2 MR. KERWIN: Sure. We would be happy to. 3 MR. HILL: Dan? 4 MR. EDELSTEIN: Thank you. One of the 5 things we're going to have to come to terms with is 6 what would be the impact of the proposed remedy of 7 rolling back export levels to the five-year average you 8 proposed. Similar to the question I asked previously, 9 you have made an effort to distinguish what's happened 10 in the 2002, 2003 time period, rising imports as being 11 beyond a period when you would see an impact from the 12 closing of secondary smelters. Have you done -- yet 13 your remedy requires or requests a rollback to a period 14 significantly before that. Have you done any analysis 15 of what quantity of scrap that might be reabsorbed into 16 the marketplace by the brass mill and foundry industry 17 if in fact quotas were implemented? 18 MR. KERWIN: Well, what I can say is that 19 your own USGS consumption figures show that between 20 2000 and 2003, the consumption of copper-based scrap by 21 the brass mill and wire rod mill industry, which 85 1 obviously is a very minuscule percentage of the total, 2 the wire rod mills, that that declined by, I believe 3 the figure is about 240,000 tons, 240,000 metric tons 4 from 2000 to 2003. So, that's almost two-thirds of 5 what we're, of the reduction that we're requesting and 6 in relation to the peak year of 2003. 7 So, clearly that's a pretty substantial 8 proportion of the overall decline in exports that we 9 are requesting. And it's about commensurate with the 10 overall percentage of consumption that brass mills 11 account, of the overall, you know, the overall 12 consumption of copper-based scrap in the United States, 13 approximately two-thirds. We also, of course, have a 14 foundry industry to be concerned with and despite 15 what's going on with the secondary smelting industry, 16 of course, as you well know, the USGS statistics show 17 that there still is a not insignificant amount of 18 consumption by smelters and refiners of copper-based 19 scrap in the United States. 20 So, we think it's a realistic period to 21 look at. Not only has there been a very large decline 86 1 in the consumption of copper-based scrap by brass mills 2 alone in the last couple years, and not by choice, but 3 then you also have the other issue that the years 2001 4 to 2003 were recessionary years and we're seeing signs 5 that manufacturing is starting to pull out of this 6 recession. And, you know, it's certainly likely that 7 the consumption, production of the brass mill industry 8 and other consumers of scrap such as the foundry 9 industry will be increasing in the next year and that 10 rather than looking at a period of a relative 11 recession, we need to think in terms of the longer term 12 trend of, that we may be heading into a significant 13 expansionary period. 14 MR. EDELSTEIN: In your presentation you 15 noted that new manufacturing scrap is the largest 16 single consumable, scrap consumable among the brass 17 mills. Have you seen export competition for this 18 material specifically and the export statistics do not 19 distinguish new scrap from old scrap and led to believe 20 that a lot of this new scrap comes back to prearranged 21 deals, has there been an impact of exports on the new 87 1 scrap? 2 MR. KERWIN: The simple answer is yes. Our 3 discussions with the members of the industry definitely 4 indicate that, that yes, in some instances they have 5 agreements, understandings with their customers. The 6 brass mills have understandings with their customers 7 that the scrap generated in the production of the 8 downstream product will be returned to the brass mill. 9 But, that is not an exclusive structure and it is 10 certainly common for companies that produce scrap to 11 sell it to scrap dealers to put it out on the open 12 market. Yes, it is common, and as that scrap has 13 entered the stream of commerce and the foreign parties 14 that want to source U.S. scrap have bid up the price, 15 obviously that becomes more attractive and more 16 lucrative to what a producer of scrap to sell to a 17 scrap dealer and to walk away from even a traditional 18 relationship of selling back to a supplier. 19 MR. EDELSTEIN: And just one minor 20 technical question, your analysis and the rollback, 21 that period is based on I believe total exports of 88 1 scrap as opposed to domestic exports of scrap. If we 2 were to do, why had you selected that as a series which 3 might affect different transshipments and we see 4 basically a comparable series if just domestic exports 5 were used? 6 MR. KERWIN: I, my recollection is that the 7 differential between the two databases is not massive. 8 The amount of scrap, copper-based scrap that is 9 imported into the United States is very small. I would 10 have to examine the data again but my recollection is 11 that that differential is not particularly significant. 12 MR. HENRY: I just have one more question, 13 back to my question on economic impact where you talked 14 about the difficulty of using proprietary information 15 to present economic impact in detail. My question is 16 that if this body, in other words, if the Department of 17 Commerce were able to hold this information 18 company-confidential, if there were some agreements 19 which the lawyers I imagine would have to have to hold, 20 would it be possible to provide us with an economic 21 assessment using proprietary data that you could 89 1 provide this body within the public comment period? 2 MR. HILL: If I could as the Chair just 3 indicate that this is a Department of Commerce 4 rulemaking exercise and on advice of counsel I would 5 like to just remind everyone that everything that is 6 submitted for the record is open to the public and we 7 have no mechanism for protecting the information at 8 this time. We would love to change that sometime in 9 the future but as of today that's not possible. 10 MR. KERWIN: It's a little frustrating. 11 We're not, you know, in other forums, in relation to 12 other cases, obviously, that's a part of the process. 13 So, it's a little frustrating to not be able to get at 14 some of these issues and that, you know, there's just 15 no guarantees as to the protection of this information 16 as proprietary information. So, it's a little 17 frustrating. I will say that some of the things, you 18 know, like employment numbers, I just wouldn't expect 19 to see much of an impact but in relation to financial 20 results, I would expect to see. 21 MR. HENRY: Just thinking along the process 90 1 of what I would employ to look at economic impact, is 2 there any way that you could provide this group with, 3 say, price impacts of products that are sold to 4 consuming industries? 5 MR. KERWIN: Boy, that's very difficult to 6 quantify. That's a tough nut to crack, particularly in 7 the amount of time that we have. You know, I can try 8 and do some kind of review of literature but I'm 9 guessing that's probably not going to be very fruitful. 10 We may be able to come up with some anecdotal 11 information of examples where specific producers of 12 downstream items either turn to foreign sourcing for 13 part of their product line or close down entirely. So, 14 we may be able to provide some anecdotal examples like 15 that. 16 MR. HENRY: Okay. Thank you. That's all. 17 MR. HILL: Any other questions from the 18 panel? Mr. Kerwin, thank you very much and we 19 appreciate your straightforward answers to a very new 20 system. At this point, we would like to dismiss you 21 and call the next witness. Take your bottled water 91 1 with you. 2 MR. KERWIN: Thank you. 3 MR. HILL: I would like to call Mr. Roy 4 Allen, with Hussey Copper, please. 5 MR. ALLEN: I guess it's good afternoon 6 instead of good morning. I'm Roy Allen, President of 7 Hussey Copper, Limited. We're headquartered in 8 Pittsburgh, Pennsylvania and we have production 9 locations in Leetsdale, Pennsylvania Eminence, 10 Kentucky. Together these facilities employ 11 approximately 800 people. Hussey is one of the oldest 12 members of the U.S. brass industry, having been founded 13 in 1848, privately held. Hussey produces copper and 14 copper-alloy, flat-rolled copper products and copper 15 bus bar. These products are applied by our customers 16 in five distinct market areas: electrical and 17 electronics applications; construction; industrial 18 equipment, transportation equipment; and consumer and 19 general products. 20 MR. HILL: Sir, if you could turn your mike 21 on. I'm sorry. Sorry for the interruption. Thank 92 1 you. 2 MR. ALLEN: We are the largest supplier of 3 copper bus bar in North America and our customers 4 include well known manufacture such as General 5 Electric, Siemens Electrical, Eaton Corporation, and 6 Square D Corporation. Copper and copper-alloy scrap 7 are crucial input materials for Hussey, accounting for 8 approximately 80 percent of our raw material needs. 9 Over the past several years, we have seen scrap 10 supplies within the United States become increasingly 11 tight, resulting in shortages of our basic input 12 materials. We have also seen major increases in 13 copper-based scrap prices. 14 While these rising prices certainly reflect 15 general increases in world copper prices that have 16 taken place, as reflected by the commodity exchanges 17 such as COMEX and the London Metals Exchange, they also 18 reflect the specific supply and demand conditions of 19 the U.S. scrap market. As more and more copper-based 20 scrap has been exported out of the United States, 21 demand for the remaining scrap has exceeded supply and 93 1 the discounts at which scrap has traditionally sold in 2 relation to the COMEX index price has evaporated. 3 Let me give you some context as to where 4 our industry has been in recent years and the impact 5 that the ongoing copper scrap shortage has had on us. 6 From 2001 through 2003, our industry suffered a large 7 decline in sales and production, reflecting the 8 substantial downturn in the U.S. economy, particularly 9 manufacturing during this period. Hussey faced 10 declines in sales volumes of approximately 35 percent 11 during this period. This was the most severe downturn 12 suffered by our company in the past 25 years. 13 Toward the end of 2003 and into 2004, we 14 felt like we were beginning to see some light at the 15 end of this long tunnel. Unfortunately, it was during 16 this period that the U.S. market for copper-based scrap 17 became completely out of balance. As you have seen in 18 our petition, exports of copper-based scrap from the 19 United States expanded by nearly 200,000 metric tons in 20 2003, an increase of one-third in relation to 2002. 21 All of this increased volume went to China. Reflecting 94 1 this growth, exports took 40 percent of the total U.S. 2 supply of copper-based scrap, up from 31 percent in 3 2002. 4 As you can imagine, when a buyer increases 5 purchases by a third and takes 40 percent of the supply 6 of anything, the effect will be able to push up prices 7 for that commodity. Exports of copper-based scrap have 8 actually been increasing dramatically since 1999, but 9 because we were in a recession and the brass mill 10 industry's output was down so severely, the impact of 11 the increase in exports was not as severe as it would 12 have been under a healthy economy. However, as the 13 economy and the U.S. manufacturing began to turn around 14 in the second half of 2003, growing exports of 15 copper-based scrap had a huge impact on the U.S. 16 market. Thus, just as we began to turn a corner and 17 pull out of years of recession, we were faced with 18 shortages of copper scrap supply and dramatic increases 19 in the prices we pay for that scrap, our predominant 20 raw material. 21 Simply put, we do not have nearly enough 95 1 raw materials to serve our customers under currently 2 improving business conditions. Because of these 3 problems and our inability to pass through all of our 4 increased raw materials costs, Hussey has suffered a 5 loss of approximately 25 to 30 percent of our 6 bottom-line profit. After three years of poor 7 profitability, we are in a very weak condition to 8 weather the current storm in relation to the short 9 supply of copper-based scrap. 10 After U.S.-generated scrap is purchased at 11 the above-market prices and exported from the United 12 States, most of it is shipped to China, where it is 13 processed and turned into raw materials for brass mill 14 production. Those Chinese brass mill products and 15 downstream products from them are then exported back to 16 the United States. Somehow, despite paying top dollar 17 for our scrap and having to pay for the freight to and 18 from China, these products come back to the United 19 States and are sold at prices that undercut ours and 20 those of our customers. 21 I can tell you from my knowledge of 96 1 Hussey's cost structure and that of my customers that 2 what the Chinese are doing does not add up. It is not 3 based on comparative cost advantages in relation to 4 labor costs, because labor accounts for a very small 5 portion of the overall cost of our finished product, 6 and that is largely true for our customers as well. 7 It is clear to me that the Chinese have 8 fostered a system that is set up to grab as much 9 U.S.-generated copper scrap as possible, and in one way 10 or other the increased costs are written off or 11 subsidized by the Chinese government. Presumably, this 12 practice makes sense from their perspective, because 13 along with the relative price advantage of scrap over 14 cathode, scrap refining allows more value-added in 15 China. Our visits to China have shown us that it is 16 rapidly developing the capabilities to be the world's 17 largest copper and brass mill industry, and the growth 18 of that industry is being based on U.S. scrap. 19 This is not conjecture, as officials 20 China's MinMetals made public pronouncements to that 21 effect at a global conference in Shanghai last 97 1 November. These officials stated that China does not 2 have nearly enough copper or reserves to meet its needs 3 and that copper scrap was preferable to cathode as a 4 source of copper units due to its lower cost. Further, 5 75 percent of China's copper scrap needs come from the 6 United States, despite the fact that Europe as a whole 7 has a greater production volume of copper and 8 copper-alloy products than the United States. 9 Something is not right with this picture. 10 I'm sure the scrap dealers that sell to the 11 Chinese will tell you that this problem is already 12 correcting itself because the Chinese government is 13 attempting to put the brakes on their economy, and the 14 result will be excess supplies of copper-based scrap in 15 China. However, the Chinese brass mill industry is not 16 going away anytime soon and over the long haul, their 17 overall demand for copper units is going nowhere but 18 up. 19 Given that copper cathode prices are 20 forecasted to remain high at least in the 2005, there 21 will remain a huge incentive for the Chinese to source 98 1 scrap from the U.S. market. Indeed, even if copper 2 cathode prices come down significantly, scrap will 3 remain relatively attractive to Chinese buyers because 4 it sells at a discount in relation to cathode. If the 5 Chinese do actually pull back from the U.S. market, the 6 request of the U.S. copper and brass industry for a 7 quota on U.S. exports of copper-based scrap will have 8 essentially no impact on the Chinese industry. On the 9 other hand, if our government does not impose such 10 controls and the Chinese continue to take an increasing 11 share of U.S. supply of copper-based scrap our, my 12 company, and our industry, will not make it over the 13 long term. Thank you. 14 MR. HILL: Thank you very much, Mr. Allen, 15 for your testimony. In your testimony you state that 16 copper and copper-alloy scrap are crucial input 17 materials accounting for about 80 percent of your raw 18 material needs? 19 MR. ALLEN: That's correct. 20 MR. HILL: Two questions on that. Our 21 previous witness had indicated that he thought that in 99 1 his opinion that most of the imports would be home 2 scrap or new scrap. When you talked about copper and 3 alloyed scrap as crucial input materials, what type of 4 scrap are you talking about? 5 MR. ALLEN: We have two types of scrap. 6 One is our self-generated scrap, which we're not 7 talking about. The scrap that we buy on the outside 8 market consists of two types. It's traditionally known 9 as number one copper. We buy a lot of that and we buy 10 a second item that's called number two copper, which is 11 generated from wire and cable that goes through our 12 friends in the scrap industry. So we actually buy one 13 and two. 14 MR. HILL: If you could just give me an 15 estimate for home scrap or new scrap, number one scrap, 16 number two scrap, what are the percentages? 17 MR. ALLEN: We probably buy 70 percent, 18 number one, and 10 percent to 12 percent number two. 19 MR. HILL: And the rest would be home? 20 MR. ALLEN: Yeah. 21 MR. HILL: Okay. Bernie? 100 1 MR. KRITZER: In your comments you talked 2 about the ability of foreign purchasers to pay a 3 premium. Couple of questions I have in this regard. I 4 would assume that a foreign purchaser would pay an FOB 5 price for the scrap in the United States that would be 6 adjusted to transportation so that by the time that 7 scrap was landed five to ten thousand miles away, the 8 two would be equal. Based on the remarks you've made, 9 you are basically saying that a foreign buyer, there 10 have been instances where foreign buyers are paying 11 almost equal to the price the U.S. mill would pay and 12 on top of that a transportation premium to take it five 13 to ten thousand miles to their home country to process. 14 Is than accurate statement? 15 MR. ALLEN: No, not exactly. First of all, 16 they're paying above market. And number two, they're 17 paying cash either in true currency or letter of 18 credit. And on the freight side, my company shipped to 19 China for three years, and when we shipped to China, 20 the freight rate was nine and half cent a pound, which 21 is a lot of money. Today the freight charged to China 101 1 is somewhere near a penny and a half because in our 2 country we have tremendous excess of containers that 3 need to get back from China. So, there are costs to go 4 back. It's costing less than it does for me to ship to 5 Charlotte, North Carolina. 6 MR. KRITZER: Are a number of the firms in 7 China that are purchasing this scrap, are they public 8 or private owned firms or some combination of both? 9 MR. ALLEN: Well, when our people were in 10 China, what we found out -- and I think there will be 11 some information coming out on that -- what we found 12 out when we were there, they were basically all 13 government-owned companies, and there was ten of them. 14 MR. KRITZER: Do you know if any of these 15 firms receive any type of subsidy in terms of operating 16 loans, subsidies in terms of duties, once the product 17 is manufactured; do you have any examples you could 18 provide us with? 19 MR. ALLEN: Well, the only thing I can 20 provide you, and, is that our understanding is that 21 when the material comes in to China, to at least ten 102 1 companies, there's a VAT tax of 17 percent of the value 2 of the contained, material in the container. Of that 3 17 percent, 30 percent is rebated back to the person 4 that's importing it. The whole catch in the whole 5 thing, though, is that when the material comes in, it 6 could be high grade, low grade, and our understanding 7 is it's declared at low grade and rebated at high 8 grade. Our estimate is they're picking up six cents in 9 a pound of what we pay in the United States. 10 MR. KRITZER: Are there any further rebates 11 when a producer takes that ore and turns it into a 12 product at a higher level? 13 MR. ALLEN: I can't, I don't know that for 14 sure. 15 MR. KRITZER: And I have one final 16 question. The price of labor, how much would you 17 estimate the price of labor, figuring the price of your 18 products in the United States? 19 MR. ALLEN: I would say it's 20 approximately -- and I could be off about one 21 percent -- I would say 5 percent. 103 1 MR. KRITZER: Thank you. 2 MR. ALLEN: You're welcome. 3 MR. HENRY: Continuing in on looking at 4 your cost structure, and labor being 5 percent, what 5 percent of that is your scrap cost going into the 6 prices that you charge? 7 MR. ALLEN: Well, our generated scrap goes 8 right back into the furnace, of course. 9 MR. HENRY: Right. 10 MR. ALLEN: And, no, that's hard to 11 calculate. Our scrap price, our metal cost is probably 12 about 78 percent, 76 percent of our total cost. 13 MR. HENRY: And what are some of the other 14 costs? I mean, you mentioned freight, that would be 15 another cost? 16 MR. ALLEN: Well, typically the cost you 17 have in there, you have your labor costs, you have your 18 energy costs, you have your environmental costs, 19 freight, and sales and general administration costs. 20 MR. HENRY: And is there any possibility of 21 retooling to accept cathode only or do you do that now? 104 1 MR. ALLEN: Well, financially it's 2 something you would never want to do but in our 3 operation -- and our operation only, I can't speak to 4 my associates here -- we have four furnaces in our 5 company. Three of them are designated for scrap only. 6 One is designated for scrap and/or cathode. 7 MR. HENRY: And, what proportion of your 8 production is just scrap only? 9 MR. ALLEN: Scrap only is probably about 20 10 percent. 11 MR. HENRY: About 20 percent? And, I 12 thought of something I wanted to ask and it's left me. 13 I'll pass it on to Dan. 14 MR. EDELSTEIN: Thank you. You indicated 15 that your, or a large segment of your industry is bus 16 bars? 17 MR. ALLEN: That's our largest product. 18 MR. EDELSTEIN: Correct, which is very 19 specific product, very specific to the consumer. At 20 the same time, you also indicated that you lost about 21 30 to 35 percent of your market in the recent 105 1 recession? 2 MR. ALLEN: That's correct. 3 MR. EDELSTEIN: Has that in part been due 4 import penetration; are you seeing imports of bus bar 5 competing directly with your product? 6 MR. ALLEN: We have, about 15 percent of 7 all bus bar use in North America is imported. We have 8 about 65 percent, and we have another competitor. 9 MR. EDELSTEIN: Thank you. Also, a lot of 10 the analysis has been done on COMEX price versus number 11 one scrap or number two scrap prices. Is the COMEX 12 price a fair representation of what you pay in tax for 13 your copper cathode that you buy? 14 MR. ALLEN: Well, basically our situation 15 is this. Yes, COMEX is a factor and we pass on to our 16 customer the price of copper off of COMEX. The problem 17 we have is the discounts that we receive from COMEX, or 18 the premium we pay on COMEX, for example, in normal 19 times, if it ever did exist or it would exist again, we 20 paid three and half cent a pound premium on cathode. 21 We paid from three to five cent discount on number one 106 1 scrap. Today, it has been typically we pay two to five 2 cents over on scrap and cathode we are paying 3 four-fifty and if you want to spot, it's nine-fifty to 4 ten cent a pound. 5 MR. EDELSTEIN: And are those premiums 6 passed on to the customer at all or is that to -- 7 MR. ALLEN: It is extremely difficult to 8 date to pass on. We passed on, had very little 9 success. We are floating maybe a up-charge in June. 10 We'll see, but it's very, very difficult to pass on to 11 these large corporations who will simply tell you we 12 are not accepting increases. Very difficult. 13 MR. EDELSTEIN: Thank you. 14 MR. HENRY: Yes, I remember what I was 15 going to ask. You talked about, there have been some 16 delays in production as a result of shortages. 17 MR. EDELSTEIN: Yes. 18 MR. HENRY: Could you expand on that, just 19 how long these delays are and how much of a shortage in 20 terms of quantity that you are missing to meet the 21 demand that you have for recycled scrap products? 107 1 MR. ALLEN: Well, basically, our problem 2 has been getting our material when we need it. And so 3 consequently when you have these big melting 4 operations, you need to run it continuously without 5 stopping. If you stop, cost's still there. So 6 typically we are losing, and up until recently and 7 probably still going on, about 15 percent down time on 8 this melting and casting operation due to not having 9 the raw material on the scheduled time. It's 10 expensive. 11 MR. HENRY: All right. 12 MR. HILL: Thank you, Mr. Allen. 13 MR. ALLEN: You're welcome. 14 MR. HILL: At this time I would like to 15 call Mr. Thomas Baker to the witness stand. 16 MR. BAKER: Good afternoon. My name is Tom 17 Baker, and I am the vice president of Marketing, Metals 18 Group, Olin Corporation, which is headquartered in East 19 Alton, Illinois. Olin Brass is one of the largest 20 producers in the world of copper and copper-alloy sheet 21 and strip. We have been in business since 1914 and 108 1 employ approximately 4,000 people. We also produce 2 high-performance copper alloys, copper-alloy stampings, 3 tubing and, through our subsidiary, Chase Brass, 4 produce free-machining brass rod. 5 Olin Brass produces more than 60 different 6 copper alloys that are used for the manufacture of 7 sheet and strip, thin-gauge treated copper, tubing, and 8 a variety of stamped products. Olin Brass' products 9 have end-uses range from electronic devices for 10 telecommunications, data, and automotive to decorative 11 hardware, coinage, and ammunition. Olin has been a 12 long-time, major supplier to the U.S. Mint and to 13 government-owned arsenals. 14 Copper scrap, copper-alloy scrap, and 15 copper cathode are the primary raw material inputs 16 utilized at Olin's production facilities. Of these 17 inputs, Olin uses a significant amount of copper 18 cathode because of the requirements of the end-use 19 markets in which we participate. 20 Increasingly so since early 2003, Olin has 21 experienced a significant and steady increase in the 109 1 price of our raw material input costs for all 2 copper-based feedstock, whether in the form of scrap or 3 cathode. This raw material price increase has had an 4 impact on Olin's production operations across the 5 board. Surging exports of copper scrap and copper 6 alloy-scrap, triggered by increased Chinese demand for 7 these products, have resulted in decreased domestic 8 availability and have been the driving force behind the 9 price increases for this important primary input. 10 Although Olin relies heavily on copper 11 cathode, the lack of availability of the high grades of 12 copper scrap, such as number one and number two copper 13 scrap, has increased the input cost for our operations. 14 For example, decreased availability of scrap materials 15 forced the closure of a secondary U.S. refinery that 16 supplied Olin with copper ingots produced from number 17 two copper scrap. As a result this secondary 18 refinery's closure, Olin had to switch to use of copper 19 cathode, at a significantly higher cost, as a 20 substitute for the less expensive copper-based scrap 21 raw material input. 110 1 In addition to increasing costs for 2 production operations that typically would utilize 3 scrap, costs have increased for those production 4 processes that depend wholly on copper cathode inputs. 5 Premiums of copper cathode have doubled in the last 6 four months and have tripled over the last 18 months. 7 Importantly, these input cost increases cannot be 8 readily passed on to consumers. For example, we have 9 fixed contracts with the U.S. Mint and the 10 government-owned arsenals. 11 The significant increase in these premiums 12 for raw material inputs, and the difficulty of passing 13 through these added costs, has significantly impacted 14 our profitability. 15 I thank you for the opportunity to speak 16 before you today, and I welcome any questions that you 17 may have. 18 MR. HILL: Thank you, Mr. Baker. I just 19 have a couple and I will turn it over to my colleagues. 20 For your inputs, you talked about copper cathode number 21 one and number two. Are you still using number two 111 1 scrap and number one scrap? 2 MR. BAKER: We use number two in our chase 3 brass, which is a free-cutting brass. They survive on 4 number two. The strip mill, which I have 5 responsibility for, uses number one and cathode. We 6 don't use number two there. 7 MR. HILL: For the corporation at large, 8 how would you put down the percentage for number two, 9 number one and cathode. 10 MR. BAKER: In normal times maybe a third 11 for each. 12 MR. HILL: Third for each? 13 MR. BAKER: Yeah, roughly. 14 MR. HILL: When did the U.S., the secondary 15 U.S. refinery close that was supplying you with ingots? 16 MR. BAKER: That was last year. I believe 17 -- I don't know the exact date. I can get that for 18 you. 19 MR. HILL: As a result of the shortage in 20 scrap, have you had any slowdowns, shutdowns or other 21 impacts? 112 1 MR. BAKER: What it's done to our strip 2 operation, it's kind of retarded our cycle time 3 somewhat. You know, we have sixty different alloys and 4 there's a sequence that we go through to cast those. 5 And as we get to an alloy, some of the more 6 commodity-type alloys, we want to use all scrap and if 7 we don't have it, we have a choice, either move on or 8 use cathode for it. So, in some cases we have moved on 9 and kind of got behind on that particular alloy. Has 10 it caused us to miss orders yet? Not yet but we're 11 getting nervous and we're using more cathode in those 12 type alloys just to make sure we don't miss that, 13 deliveries. 14 MR. HILL: Are you also burning in your 15 furnaces home scrap and new scrap? 16 MR. BAKER: Sure. 17 MR. HILL: Do you export any of that? 18 MR. BAKER: No. We have had requests to do 19 so but we haven't done it, obviously. We need it all. 20 MR. HILL: I know you can't speak for the 21 industry but what's your sense in the industry, is 113 1 there a lot of firms like yours who are exporting home 2 scrap and new scrap? 3 MR. BAKER: I don't think anybody is 4 export. 5 MR. HILL: I'm sorry? 6 MR. BAKER: You asked me if our 7 competition, if we or our competition are exporting 8 scrap. I don't know of anybody who is. 9 MR. HILL: Okay. Thank you. Bernie? 10 MR. KRITZER: You talked of some downturns, 11 in production cycle time with the strip mill? 12 MR. BAKER: Right. 13 MR. KRITZER: Could you talk a little bit 14 about impacts, have you had to do any layoffs, at this 15 point? 16 MR. BAKER: No, we have not. 17 MR. KRITZER: How about your sales volume, 18 has it increased, decreased? 19 MR. BAKER: Our sales volume is up this 20 year. The economy has picked up. Our volume has 21 picked up. 114 1 MR. KRITZER: How about your profit as 2 relative to the increased sales? 3 MR. BAKER: Well, it's better than it was 4 last two years but those were record lows, so, we're a 5 long way from being where we used to be, you know, in 6 the late nineties. 7 MR. KRITZER: So there's a recovery going 8 on, you're still short, scrapped to meet expanding 9 orders? 10 MR. BAKER: Yes. The cost of raw materials 11 is impacting our profitability at this point or it 12 would be a lot better than it is right now. 13 MR. KRITZER: How much is the increased 14 cost of raw materials having an impact if you had to 15 measure in percentage? 16 MR. BAKER: Millions and millions. I have 17 to stop doing -- just say millions and millions right 18 now. It's what the impact was to us last year. 19 MR. KRITZER: Okay. Thank you. 20 MR. HILL: Dave? 21 MR. HENRY: You have indicated that you 115 1 converted some operations to cathode only. And can you 2 tell us a little bit more about that, what factors 3 other than, well, other than the price increase of 4 course but what factors led you to convert to cathode; 5 do you see it in your future that you will be using 6 more cathode than you will scrap. 7 MR. BAKER: We have two casting facilities. 8 One is on the rod side and they cannot convert without 9 a great deal of cost and they have converted. Okay? 10 They have to rely on scrap. The strip operation, the 11 conversion to be able to cast scrap is not that great 12 in terms of equipment or retooling, as you asked 13 earlier. The cost, big expense really is just the 14 difference in what cathode costs you from what scrap 15 costs you. 16 And our cathode consumption is up 17 significantly from where it should be because we don't 18 have the scrap available to us to use it. And for 19 example, an alloy, very commodity-type alloy is 260 20 brass. It goes to the government-owned arsenal in 21 Kansas City. Just buy them either strip or per shell 116 1 case and for light and medium gauge ammunition. Okay? 2 That in the past would be a hundred percent scrap, we 3 would put into that product. It's not anymore. So, 4 the actual retooling in our strip operation doesn't 5 cost much. It's the cost of making the product. And 6 we're trying to pass that on to the government and 7 haven't been successful so far. 8 MR. HENRY: In earlier testimony there was 9 an allusion made to the imports of scrap into the U.S. 10 from foreign countries. Is that an option for your 11 company, to import? 12 MR. BAKER: Import scrap? 13 MR. HENRY: Import scrap. 14 MR. BAKER: I don't think so. I don't 15 think so. I'm not an expert but I think Europe's got 16 their own issues. And I'm not sure who, and obviously 17 China is paying some premiums for it. You know, if we 18 wanted to bring it back from China, we'd have to, they 19 don't have it available, so, no, I don't think 20 importing from other countries is an option. 21 MR. HENRY: That's it. 117 1 MR. EDELSTEIN: Thank you. As a company 2 that's both a consumer of scrap and cathode, I'm 3 hoping, you've been around along enough to possibly 4 address the difference between this upward cycle in 5 copper costs and its impact, the cathode costs on your 6 company versus previous cycles. Cathode has been as 7 high, as we know, a dollar-sixty a pound, above where 8 we are today. And in previous cycles, have you run 9 into the same cost issues and costs vis-a-vis scrap; 10 can you possibly address that? 11 MR. BAKER: Sure, I'll try. I'll try to 12 answer that. When a previous run-up in COMEX got to a 13 dollar-sixty, there's a difference between a run-up in 14 COMEX and a run-up in a premium we pay for the cathode. 15 When they got to a dollar-sixty, three or four years 16 ago, and it's there, a dollar-forty, dollar-fifty, over 17 previous, you know, going back twenty years, we have 18 had these kind of run-ups, premiums for cathode did not 19 get to nine cents. Okay? It may have -- I don't even 20 know if we got much above three and half cents. Okay? 21 So this is, from my perspective -- and I've got 26 118 1 years in -- I think this is uncharted waters paying 2 that kind of a premium for cathode. And I think, and 3 it's the same kind of unchartered waters we're paying 4 for scrap. 5 So, when COMEX ran up before sometimes it 6 was related to supply and demand things. Sometimes it 7 was the Sumatomo (phonetic) issue, you know, but the 8 premium that you paid for the cathode didn't escalate 9 up to nine cents nor did you pay a premium for number 10 one at that time. You're still paying a discount for 11 the scrap. So, did I answer your question? 12 MR. EDELSTEIN: Yes, you did. Thank you. 13 Now, do you have any feeling as to whether that relates 14 to a reduction in our own domestic production of 15 cathode, that we're now much more highly import 16 dependent on cathode and therefore you are going more 17 to brokers rather than domestic suppliers, producers? 18 MR. BAKER: Yeah, I think there's got to be 19 some impact on the supply side of the cathode but I 20 think a bigger impact on that is everybody is moving up 21 the food chain. People who were buying number two are 119 1 now buying big number one. People who were buying 2 number one are now buying cathode. And as they move up 3 the food chain, demand is pushing that premium more 4 than I think the supply side of it. 5 MR. EDELSTEIN: Nothing further. 6 MR. HILL: Thank you, Mr. Baker. 7 MR. BAKER: Thank you. 8 MR. HILL: At this time I would like to 9 call Mr. Jeffrey Burghardt to the witness stand. 10 MR. BURGHARDT: Thank you. Good afternoon. 11 I'm Jeff Burghardt of Outokumpo American Brass, or OAB 12 for short. We produce a wide variety of semifinished 13 brass mill products, including copper and copper-alloy 14 sheet, strip and tube. I have 27 years of experience 15 in the brass mill industry and have been involved in 16 metal procurement for approximately the last 20 years. 17 I am responsible for all the metal procurement at OAB's 18 facility in Buffalo. In addition, I am responsible for 19 coordinating metal procurement for all of Outokumpo's 20 copper operations in the U.S. 21 In the brass mill industry, a steady 120 1 availability of copper-based scrap at reasonable prices 2 is critical, so much so that, as you heard, some of our 3 production processes are designed to need 100 percent 4 scrap. Those operations that can alternately use 5 copper cathode incur a segmentally greater production 6 cost to do so. 7 It is important to understand the basic 8 pricing structure for copper units, as copper cathode 9 and copper-based scrap are often called. 10 On the one hand, copper cathode, which is 11 the end product of the mining, smelting and refining 12 process, is traded on three major exchanges: the New 13 York Mercantile's COMEX division, or COMEX for short, 14 the London Metal Exchange, or LME, and the Shanghai 15 Commodity Exchange. The price for copper cathode as a 16 fungible commodity is essentially a global price. 17 COMEX is the benchmark for establishing the price of 18 copper in the U.S., while the LME serves this function 19 in Europe and much of the rest of the world. These 20 COMEX and LME prices are close to one another and track 21 each other. The price for copper cathode in China is 121 1 set by the Shanghai Commodity Exchange. How that 2 exchange is structured and operates are not clear to 3 me; however, its prices for cathode typically are 4 significantly higher than those of the COMEX and LME. 5 In the United States, prices for copper 6 cathode are negotiated to reflect the COMEX price plus 7 a premium that includes freight and insurance for 8 delivery to the buyer's location, overhead and a market 9 adjustment. The market adjustment is determined by the 10 availability of supply. 11 On the other hand, there is copper-based 12 scrap of various grades of purity, such as number one 13 copper scrap, which is the highest grade of scrap and 14 is the most common form purchased for OAB's operations. 15 There are other lower grades of copper-based scrap, 16 some of which are processed by the U.S. scrap industry, 17 upgraded to number one, and then purchased by the brass 18 mill industry. As ISRI points out, we recognize there 19 are some lesser grades of scrap that are no longer 20 processed in the U.S. and that are exported. 21 As far as metal pricing is concerned, while 122 1 copper-based scrap is not itself traded on the COMEX, 2 LME or Shanghai exchanges, the prices of copper-based 3 scrap are determined with reference to the price of 4 copper cathode. Thus for example, copper-based scrap 5 in the U.S. is priced at a negotiated discount or 6 premium relative to the COMEX price for copper cathode. 7 The pricing of copper-based scrap varies by grade, but 8 is almost always priced below that of copper cathode. 9 The amount by which the price of 10 copper-based scrap is discounted from the COMEX price 11 is extremely important. As would be expected, the 12 discount decreases and the price of the copper-based 13 scrap increases -- both absolutely and vis-a-vis the 14 COMEX price -- as the supply of scrap dwindles. When 15 is recalled it that a brass mill's production is 16 measured in many millions of pounds a year, it is 17 evident that a price differential of even a penny per 18 pound or less in the price paid for copper-based scrap 19 has a considerable impact on the brass mill's total 20 cost of manufacture. 21 Over the past several years and carrying 123 1 forward to the present, the U.S. brass mill industry 2 has seen a dramatic drop in the volume of available 3 copper-based scrap, especially number one copper scrap. 4 The adverse repercussions of this trend have been felt 5 throughout the U.S. brass mill industry. All 6 indications are that the higher prices and reduced 7 availability of copper-based scrap are due principally 8 to the burgeoning exports of these materials to China. 9 The Census Bureau's official export data and my own 10 experience confirm this conclusion. 11 In personally visiting and speaking with 12 many of our suppliers, I have learned directly that the 13 copper-based scrap that previously was sold to the U.S. 14 brass mills such as OAB has been going to China. While 15 China had already been purchasing considerable 16 copper-based scrap prior to 2003, I believe that most 17 of this scrap was of lower grades. In roughly the last 18 year and a one half, China mass has also been targeting 19 number one copper scrap and other grades that have been 20 and can be processed in the U.S. into number one scrap. 21 Insulated copper wire is a prime example of such 124 1 material. These higher grades are the type of material 2 on which U.S. brass mills historically have relied to 3 source many of their copper units in lieu of copper 4 cathode. 5 The increased demand for U.S. copper-based 6 scrap, particularly from China, has seriously disrupted 7 our ability to secure a steady supply of this critical 8 raw material at reasonable prices. We are not only 9 unable to purchase as much volume of copper scrap as we 10 have historically, but what amount we are able to buy 11 is at prices with less of a discount from the COMEX 12 price. Moreover, we are being forced to rely more on 13 higher-priced copper cathode than we would otherwise. 14 In this last regard, the premiums in certain parts of 15 the U.S. for copper cathode have nearly tripled over 16 the last 18 months and now up to as much as nine and 17 nine and a half cents a pound. 18 In conclusion, the increasing exports from 19 the United States of copper-based scrap, especially to 20 China, have been having a debilitating effect on the 21 U.S. brass mill industry. The shortage of this scrap 125 1 has resulted in the striking jump in OAB's cost and has 2 caused OAB to rely on copper cathode more than would be 3 the case were copper based scrap not in short supply 4 and at a time when premiums for copper cathode are at 5 or near historic highs. This situation is not 6 sustainable for OAB and the U.S. brass mill industry. 7 Thank you very much for your time today. I'll be glad 8 to take any questions. 9 MR. HILL: Thank you. Again, the same 10 question for your company, what types of scraps do you 11 use as inputs and what's the percentages? 12 MR. BURGHARDT: We use several different 13 types of scrap. The largest, as I mention understand 14 my testimony, is what we would consider a number one 15 copper scrap. Besides that, we also consume 16 copper-alloy scrap. The percentages, probably the 17 majority, maybe two-thirds are more of the copper, 18 number one copper, with the minority being the 19 copper-alloy scrap. 20 MR. HILL: And the shortages, have you seen 21 an equal proportion of the shortages for number one and 126 1 the copper-alloy scrap? 2 MR. BURGHARDT: I would say what we've 3 seen, the largest impact has been on the number one. 4 MR. HILL: And, what's the percentage for 5 copper-alloy scrap, number one scrap and cathode for 6 your inputs? 7 MR. BURGHARDT: Those vary quite a bit with 8 the availability and alloys. We would like to run over 9 50 percent scrap in our operations and we're well below 10 that today. 11 MR. HILL: Have the shortages caused any 12 slowdowns or other disruptions in your production? 13 MR. BURGHARDT: The world market I believe 14 is in significant short supply of copper in total, 15 particularly in the U.S., and while we have not been 16 forced to curtail operations because of this issue, I 17 believe particularly in the second half of the year 18 that is certainly a reality, not only for ourselves but 19 for much of the rest of the industry because of the 20 shortage of copper that we have seen throughout the 21 world and throughout the U.S. in particular. And I 127 1 think it's going to get worse in the second half of 2 this year. 3 MR. HILL: Bernie? 4 MR. KRITZER: I have two questions for you. 5 With regard to the cost increases, could you explain in 6 the last couple of years, 2003 and to year to date, in 7 2004, how much of an increase as a percentage there has 8 been in your material acquisitions cost for scrap? And 9 my second question is with these cost increases, have 10 you been able to realize any ability to pass through 11 any of that and higher product prices to your 12 downstream customers? 13 MR. BURGHARDT: Let me take the first one. 14 As far as the scrap increase, we've really, with the 15 cost increase we've really been hit very hard in our 16 material cost in total. What we have seen is, number 17 one, we're buying less scrap than we have been able to 18 in the past, and the scrap that we are buying, we're 19 having to pay significantly more for. So, less volume 20 of scrap and the small amount we're getting is at high 21 prices. Second, because we're getting less scrap, we 128 1 have had to buy more refined, and we have had to buy 2 that refined, as you have heard from myself and others, 3 at a time one when we are looking at maybe all-time 4 high premiums. So this has had a very, very dramatic 5 impact on our cost. 6 As far as the second part, as far as 7 passing it on, you know, for last year basically we 8 absorbed all of that, and I think even if we are 9 successful in passing that on, it's an increased cost 10 that's absorbed by U.S. manufacturing. And I say "if" 11 with a major "if" because we haven't been able to do 12 that. But if we were, that's still increasing the cost 13 to U.S. manufacturing; we're just pushing it 14 downstream. 15 MR. KRITZER: Thank you. 16 MR. HENRY: Do you perceive this problem as 17 a short-term spike or a long-term trend; do you 18 anticipate this is going to continue into the future? 19 MR. BURGHARDT: I think first all the data 20 we have shows that it is continuing. I think second, I 21 believe it is going to continue because I think one of 129 1 the issues behind it is that China is short of copper 2 units and I don't see that changing in the months or 3 years to come. I see them being very aggressive. I'm 4 not sure how their market operates in total but they 5 certainly seem to have built in a system where they 6 want to utilize our scrap over here. I believe they're 7 going to need substantial copper units, that they're 8 not going to be able to produce by mining in their own 9 country. So I do see this as a long-term problem, not 10 a short-term situation. 11 MR. HENRY: Do you think that in 2004 or 12 2005 that the world supply of copper inputs, both 13 cathode and recycled copper would increase as a result 14 of increased demand worldwide and that eventually 15 copper inputs, both cathode and recycled copper prices 16 would come down? 17 MR. BURGHARDT: I think as far as 18 availability on the scrap side is certainly tied to 19 industrial activity so I would expect to see that scrap 20 generation should increase as industrial activity 21 increases. I would think at the copper prices we're 130 1 seeing today I certainly hope that there's more 2 production worldwide because we're in a significant 3 deficit last year and all indications that I see is 4 that that deficit is continuing into the first half of 5 this year. So, I do expect, we have had some restarts 6 in mines. I do think that there will be more 7 production. 8 MR. HENRY: How long do you think that 9 might take? 10 MR. BURGHARDT: I am concerned that because 11 we have had low copper prices, and low being mostly in 12 the seventies, okay, I think most producers would 13 consider those to be low prices, really even back into 14 the late nineties when things were fairly good for, you 15 know, much of manufacturing, I think during that time 16 period we had low investment by the mining industry 17 because of the low prices. So, I am concerned that 18 because we have had this lag in capital expenditure and 19 exploration that there could not be significant new 20 projects coming downstream until maybe even 2007 or '8. 21 MR. HENRY: Thank you. 131 1 MR. EDELSTEIN: Historically in a growth 2 market, which you are in now, hopefully a sustained 3 growth market -- 4 MR. BURGHARDT: I agree with that. 5 MR. EDELSTEIN: -- and, in fact with a lot, 6 large part of your scrap coming back as new or 7 manufacturing scrap, historically have there been, has 8 there been a lag, essentially, since in fact your 9 demand for raw materials increases leads to generation 10 of new scrap; have you seen shortages before in growth 11 markets of scrap? 12 MR. BURGHARDT: No, scrap, what you say is 13 correct and we have seen shortages but nothing that 14 compares to what's going on today. You know, in the 15 past the scrap availability may remain steady for a 16 short period of time, as business picks up, okay, and 17 that we have seen and for the reason that you stated. 18 But here what we have seen is that with business 19 remaining the same, the scrap availability has 20 deteriorated dramatically. So, as I mentioned, I have 21 been involved for 20 years. I have never seen 132 1 anything, you know, to this magnitude, where business 2 remains steady and the scrap availability to ourselves 3 an the industry has basically declined by a dramatic 4 percentages. 5 MR. EDELSTEIN: Asking a similar question 6 to previous, we have seen a shift in this country from 7 a, either a net exporter or certainly a more balanced 8 self-sufficiency for copper cathode, with a fall-back 9 on our domestic mining industry and we're now, I think, 10 importing more than 30 percent or a third of our 11 refined copper. Do you think with your 20-year history 12 have you seen that impact, that shift from producer 13 pricing possibly or producer supplier, you may be more 14 dependent on traders or brokers even in refined copper; 15 has that affected your costs in this current run-up? 16 MR. BURGHARDT: No, we've certainly seen, 17 you know, what you have described on the refined side. 18 Certainly I think the fact that we're more, much more 19 dependent on imports has hurt us. We're now competing, 20 if you look at the major consuming areas, U.S., Europe 21 and Asia, we're all essentially major importers of 133 1 copper cathode competing with one another. So, I think 2 the fact that we have less domestic production here has 3 certainly impacted the premiums that we're paying for 4 copper negatively, you know, as for us there . 5 MR. EDELSTEIN: Thank you. 6 MR. HILL: Thank you, sir. At this time, 7 in a couple minutes we're going to take the lunch 8 break. I have a clarification from counsel on the 9 confidential information issue, Mr. Kerwin, that came 10 up earlier. If you are able to aggregate information 11 up to a certain level, that would be useful to us, 12 again, we are not able to protect the confidentiality 13 of the information that's provided to us as we set 14 forth in our Federal Register notice but if there's a 15 way to aggregate that information up so you cannot 16 track it back to individual companies, that would be 17 very helpful to us in our review and I would ask for 18 that to be done. 19 At this point we are going to take a break 20 for lunch. I apologize that we have had to go straight 21 through but it's been a good morning and we want to 134 1 continue in the afternoon. For the break, we will have 2 people outside to escort groups to the cafeteria, 3 downstairs, one floor. I suspect we'll be going 4 through the front elevator down here, Bob? 5 MR. NICHOL: I prefer that we go around the 6 corner. 7 MR. HILL: Okay. Bob's in charge of that, 8 or if you would like to go across the street, the 9 Reagan Food Court is on the concourse level of the 10 Ronald Reagan building. And both places have excellent 11 food. Commerce's cafeteria is rated one of the top 12 three in the government. So, feel free to go either 13 place on that recommendation. We will convene back 14 here promptly at 2 o'clock. We have five remaining 15 witnesses. I fully intend to finish the hearing this 16 afternoon. So, we will move quickly and we will begin 17 promptly at 2. I would ask all the witnesses to be 18 available about ten minutes before. With that, the 19 hearing is in recess. 20 (There was a break in the proceedings.) 21 MR. HILL: Good afternoon. Welcome back. 135 1 I would like to call the hearing to order. As this 2 morning we will proceed with the witnesses, we have 3 five remaining. I fully intend to finish this 4 afternoon and to proceed expeditiously. With having 5 said that, I would like to call our next witness, 6 Mr. Dykhuizen. 7 MR. DYKHUIZEN: Thank you. Excuse me. My 8 name is George Dykhuizen. I am the president of 9 Extruded Metals, which is located in Belding, Michigan. 10 Extruded Metals produces several alloys of high quality 11 brass rod and bar for a wide array of manufacturers. 12 We have been processing brass for our industrial 13 customers since 1938. Our large facility, which is big 14 enough to house to 13 football fields, utilizes 15 state-of-the-art continuous casting, indirect 16 extrusion, drawing, straightening and material handling 17 equipment. 18 The brass rod and bar that we produce is 19 used by a multitude of international manufacturers to 20 create several types of brass products, including 21 industrial fittings and valves, electrical equipment, 136 1 lock components, decorative fasteners and a wide 2 variety of faucet parts. Extruded Metals has long been 3 known as a dependable source for high quality brass 4 products. That reputation, however, is being 5 threatened due to the current out-of-the ordinary U.S. 6 market conditions with respect to the supply of our 7 primary raw material input, copper-based scrap. 8 This point should go without saying, but it 9 is important to note that copper-alloy scrap as used in 10 the production of brass rod and bar, is not a waste 11 material. Rather, it is 100 percent recycled metal 12 that is of significant value to those of us who use it 13 as a raw material input. Extruded Metal's current 14 brass rod and bar production facilities are designed to 15 utilize copper-alloy scrap inputs only. This means 16 that copper-alloy scrap cannot be replaced with prime, 17 or higher end material, such as copper cathode due to 18 the physical structure of our production facilities. 19 Based on Extruded Metal's sole reliance on 20 copper-based scrap as a key material feedstock, we are 21 particularly sensitive to any market disruptions 137 1 involving the price or supply of this product. Having 2 said that, the current market situation has given us 3 cause for tremendous concern. 4 It is a well-known fact that the price of 5 copper scrap and copper-alloy scrap has increased 6 dramatically over a relatively short period of time. 7 In 2004, the cost of our copper-alloy scrap has 8 increased to 175 percent of the price we paid just a 9 year ago, in 2003. This price increase, in our 10 opinion, was triggered by shortages, which in turn were 11 caused by abnormal purchases of this product for 12 export. In particular, as several of my colleagues 13 have already noted, we have experienced situations 14 where purchases of U.S. scrap were made by Chinese 15 buyers in cash. These purchases were reportedly made 16 at the point of delivery and at prices well above the 17 market average. Given that metal values account for 18 over 80 percent of the cost of rod and bar, it has been 19 difficult, it if not impossible, for Extruded Metals to 20 compete on these same terms. 21 Unlike other similarly situated copper and 138 1 brass mills, Extruded Metals has been fortunate in that 2 it has been able to pass on at least part of these 3 increases to customers. It is unclear, though, how 4 long or how much of this price increase our customers 5 in the end will be willing to accept. What is certain, 6 however, is that this practice is not sustainable 7 because it also increases the material input costs of 8 our customers who produce downstream copper-based 9 products from our rod and bar. Thus, overall, the 10 current market situation is having a negative impact on 11 the overcall competitiveness of American made products. 12 Very interestingly, we have observed that 13 the high price of U.S. copper scrap and copper-alloy 14 scrap has not had a similar effect on the price of 15 imported copper-based products that were formerly, some 16 of which were formerly made by our customers. For some 17 reason imported products from China that have been 18 manufactured from the same expensively priced U.S. 19 copper-based scrap are underselling similar U.S. 20 products. Some have attributed this phenomenon to 21 subsidies provided by the Chinese government for 139 1 copper-based scrap. We believe that there is some 2 credibility to this theory, at least from our 3 perspective as a rod and bar producer, because other 4 factors, such as the cost of labor cannot possibly 5 explain the inconsistency. In rod and bar production 6 direct labor costs are a relatively low proportion of 7 the end market price. 8 For our products we are talking about less 9 than 5 percent for labor and over 80 percent for raw 10 materials. Therefore, cheap foreign labor, as in the 11 case of China, or even free labor, would have very 12 little effect on the comparative values of imported 13 versus domestic-made products. For copper-rod and bar 14 based products, the driving force is the cost of the 15 raw material metal input. Only by forcing domestic 16 U.S. prices to the high levels that we are currently 17 experiencing, can foreign products leverage an 18 advantage. This is what we believe is happening in the 19 present market. 20 I thank you for the opportunity to present 21 these comments and look forward to answering any 140 1 questions that I can. 2 MR. HILL: Thank you, sir, for your 3 testimony. I have a few questions. In your testimony 4 you state that the majority of your input if not 100 5 percent of your inputs are from copper scrap. By grade 6 what types of copper scrap does your company use? 7 MR. DYKHUIZEN: It's all number two. 8 MR. HILL: It's all number two, no number 9 one? 10 MR. DYKHUIZEN: It's two. No number one. 11 That, occasionally in the past when a load or two might 12 have come in, that might have been number one but it is 13 essentially all a hundred percent number two except 14 there's some prime zinc that goes into this mix, too, 15 to make up for real losses. 16 MR. HILL: So is it that you cannot use 17 number one scrap or cathode because -- 18 MR. DYKHUIZEN: We cannot use cathode. We 19 could use number one. It's just a more expensive input 20 than number two. But, I mean, we can use number two to 21 make this product. 141 1 MR. HILL: I'm sorry. For your customers 2 you would, the products that you are making and selling 3 to your customers, the number two scrap is sufficient? 4 MR. DYKHUIZEN: I'm sorry. Is -- 5 MR. HILL: The number two scrap is 6 sufficient -- 7 MR. DYKHUIZEN: That's correct. That's 8 correct. 9 MR. HILL: If we were to place export 10 controls on all scrap, do you believe there would be a 11 sufficient U.S. market appetite for that, for the extra 12 scrap that would not be exported? 13 MR. DYKHUIZEN: Oh, absolutely, absolutely. 14 It's metal values again. Although we are disconnected, 15 if you will, from the cathode market in the rod and bar 16 end of this, of this manufacturing process, because we 17 don't use cathode but there's a home for all that now 18 for sure. 19 MR. HILL: What percentage of the scrap you 20 use would be characterized as home scrap or new scrap 21 versus number two scrap? 142 1 MR. DYKHUIZEN: Well, we would have about, 2 of the end product, center of brass plant, roughly 3 customer in the machine, process, will turn about 60 4 percent of it into scrap. Some of that comes back 5 through the open market. They will sell it to dealers 6 or sell it on the open market. We'll buy it from that 7 channel. The majority of that probably comes back 8 directly to us as a mill return from our customers. 9 So, in the end 40 percent -- 60 percent of the metal 10 has to come back; 40 percent ends up in parts. 11 MR. HILL: Bernie? Dave? 12 MR. HENRY: Yeah. In your testimony you 13 just gave you mentioned that your facility operates on 14 copper scrap only. Is that typical of all rod and bar 15 manufacturers? 16 MR. DYKHUIZEN: Yes. The rod and bar 17 portion of, some of the operations, some of the 18 companies have, you know, more than rod and bar in 19 their facilities but of mills that are strictly rod and 20 bar mills, we'll use 100 percent scrap and almost all 21 of it is number two. 143 1 MR. HENRY: Of the total production of the 2 industry, just the brass mill industry, what portion of 3 that is rod and bar. 4 MR. DYKHUIZEN: Round numbers, off the top 5 of my head, 30 percent to 33 percent, something like 6 that. 7 MR. HENRY: In the process of getting 8 copper scrap, is there a bidding process that goes on 9 for that scrap with the recyclers and is it an auction 10 type? I'm just trying to get my head around the 11 Chinese buying it. You're claiming that the Chinese 12 are buying it at higher than market rates and that you 13 apparently don't wish to go to the price that they're 14 paying. 15 MR. DYKHUIZEN: Well, as I say, the price, 16 the scrap comes back in two different ways, one, 17 directly from customers who are machining the rod that 18 we sell and a lot of that is done at the negotiation at 19 the time that the rod is sold. The roughly maybe 30, 20 40 percent of it doesn't come back in that way and we 21 have to buy it on the open market. And it's not an 144 1 auction process. It's indirectly, it is I guess 2 because, we tried to find the dealers or the sources 3 that have free market scrap available and you will 4 quote a price and if it's good enough, you will get the 5 metal but a certain percent you won't. And most of 6 this metal is bought on roughly the 30-day cycle and 7 since there is none in the futures market, you're not 8 in a situation where you can hedge on the financial 9 gain that will protect you from these increases. 10 MR. HENRY: Are you given the opportunity 11 to outfit the Chinese for copper scrap? 12 MR. DYKHUIZEN: In some cases, yes. But, 13 there are many cases where it's not. For example, we 14 sell customers in two different ways. We do toll for 15 some accounts and, for example, we have had cases in 16 the last few months where customers have called and 17 said we're unable to buy metal, can you buy for us and 18 in some cases we have been able to do that, in other 19 cases we haven't been able to do that and they have to 20 go off and total it at that point or do business with 21 somebody else. 145 1 MR. HENRY: Thank you. 2 MR. EDELSTEIN: Now, first I have a 3 definitional question. You said that you used number 4 two scrap and you are, in fact, heavily dependent on 5 returned scrap and you are a brass producer. I guess 6 there's a traditional definition of number two scrap 7 that I grew up with, is based on the history 8 classification where number two scrap refers to 9 basically an unalloy copper, you know, above 96 percent 10 copper, not quite number one scrap. I assume when you 11 refer to number two scrap you are using the broader 12 definition, that you refer to alloy copper scrap. 13 MR. DYKHUIZEN: It's a mixture. Basically 14 we define it by what it isn't. We define it when we're 15 bidding as a copper-based product with the maximum 16 impurities of A, B and C and they put together a 17 package which we refer to and they refer to as number 18 two-based package. It's not straight copper all the 19 time. Sometimes it is alloy in these, maximum limits 20 on aluminum or, you know, impurities. 21 MR. EDELSTEIN: Okay. But in fact if 146 1 you're getting return scrap, if you're producing, you 2 know, a 60 percent copper or, you know, an alloy that 3 has 30 percent zinc in it and you are getting returned 4 scrap for 30 percent zinc in it, you are considering 5 that a number two copper? 6 MR. DYKHUIZEN: No. That's no return. I'm 7 talking about free market purchases. 8 MR. EDELSTEIN: Okay. So that's the 9 confusion then. So it's free market purchases? 10 MR. DYKHUIZEN: Right. 11 MR. EDELSTEIN: For number, or close or all 12 number two? 13 MR. DYKHUIZEN: Right. 14 MR. HILL: Could you turn on your mike, 15 please? 16 MR. DYKHUIZEN: Oh, I'm sorry. Yes. The 17 major portion of our scrap because in the process of 18 machining generated such a high percentages of scrap 19 comes back from our customers. We sell a rod. We cut 20 it up. They return the scrap to us. So that's a 21 circular run-up. But in addition to that, of course, 147 1 we have to make up for the amount of metal that they 2 leave in their parts which is about 40 percent. So the 3 40 percent in looking at the overall picture, 40 4 percent is purchased on the open market. 5 MR. EDELSTEIN: Okay. Thank you. Also, in 6 terms you said that when you, in terms of returned 7 scrap when you sell a rod product or bar product, you 8 negotiate it at the time, you know, what you're paying 9 for the return scrap; is that a correct interpretation? 10 MR. DYKHUIZEN: No. We'll negotiate with 11 them for what, for the percentage that we will allow 12 them the return. There's a published price for the 13 price of the mill return scrap which is not related to 14 the COMEX. That's an additional complication but 15 basically it's a price at which you see, it's based, 16 there's an artificial or a mill published selling price 17 to a metal and a mill published buying price to a 18 metal, for those customers who we deal with and who are 19 allowed to return metal to the mill and that buy and 20 selling arrangement. This is not related to the free 21 market price of metal. 148 1 MR. EDELSTEIN: When you say published, is 2 it published by you or -- 3 MR. DYKHUIZEN: By us. Every mill has just 4 a different, different arrangement, a different price 5 for that buying arrangement, buy-sell arrangement, if 6 you will. 7 MR. EDELSTEIN: And does that take effect 8 at the time the scrap is returned or at the time -- 9 MR. DYKHUIZEN: Usually the price at the 10 time the scrap is returned and that price may change 11 over time but the arrangement for the returns is done. 12 It's advantageous for the customer who has that 13 arrangement to return it to the mill. 14 MR. EDELSTEIN: Okay. So I guess the time 15 lag between, what I'm getting at, or trying to 16 ascertain is if the time lag between shipment of the 17 product out of the mill and the return of the scrap is 18 effect -- if you're caught up in a volatility issue 19 with copper prices being highly volatile, and so do you 20 ever get caught behind the eight ball because of the 21 volatility of the cathode which is the driving force or 149 1 does your pricing account for that volatility? 2 MR. DYKHUIZEN: We don't get caught up in 3 the cathode issue at all because we don't use any 4 cathode except to the extent that it would reflect back 5 on this, on the type of scrap that we do buy on the 6 open market. And, there are two issues here. One is 7 the relative value of those copper units and the second 8 issue is what is the supply-demand situation for the 9 pile of scrap that's out there itself. And, for us the 10 price is more related to the supply-demand that's there 11 in that pile of scrap. But, because scrap has been in 12 such short supply, because it's all going out of the 13 country, that pile is very small, and the price has 14 gone up dramatically. 15 MR. EDELSTEIN: So, at least in one aspect, 16 if I'm correct, then your customers actually get to 17 benefit to a certain extent from the high value of 18 scrap because they get a higher value for their return 19 so they're paying more for the initial rod, are they 20 benefiting from the high value of return? 21 MR. DYKHUIZEN: No. Because, they bought 150 1 the rod in the first place to make parts out of it and 2 the metal value in the parts, 80 percent stayed in the 3 parts, they, no, the cost of their parts has gone up 4 dramatically. That's why they're doing this and 5 they're in the main competing with the imported parts 6 that are coming back from the same people that are 7 buying the scrap in the first place. 8 MR. EDELSTEIN: And just one follow-up. 9 Are you able to use any of the scrap that was formerly 10 used by the secondary smelters? I don't know if you -- 11 MR. DYKHUIZEN: To the extent that it's 12 number two scrap, yes. 13 MR. EDELSTEIN: Okay. Thank you. 14 MR. HENRY: Are you an exporter of rods and 15 bars? 16 MR. DYKHUIZEN: No. Well, let me just 17 correct that. We service North America. We export to 18 Mexico and to Canada but not, not, nowhere else. 19 MR. HENRY: And do you find the market to 20 be growing, you know, abroad or even domestically? I'm 21 just trying to get an idea of the demand versus what 151 1 you're able to produce. Is there a gap there. 2 MR. DYKHUIZEN: A large gap. The market 3 peaked in 2000, about a billion, two hundred million 4 pounds. Last year was 800 and some odd million and 5 this year the demand is I would say up slightly from 6 last year but there's a good 30 percent capacity. And 7 interestingly enough, I comment, at least our 8 projections and our analysis which we have done for, 9 going back to into the 1970's would indicate our 10 product is largely used in home construction and 11 plumbing industry and the industries that we're tied to 12 have been extremely accurate in terms of being able to 13 predict the market size for the last 25 years. And all 14 of a sudden back in 2001, these things went haywire. 15 It's not because the housing was curtailed. Housing 16 and construction has been up for the last three years, 17 but, and it's also that they're not putting plumbing 18 and faucets and fittings into those homes; they are. 19 It's just increasingly not being made in the United 20 States. 21 MR. HENRY: Thank you. 152 1 MR. HILL: Thank you, sir. At this time I 2 would like to call to the witness table Mr. James 3 Rourke. 4 MR. ROURKE: Thank you. My name is Jim 5 Rourke. I am the Vice President and General Manager of 6 Mueller Industries, Inc., Industrial Products Division. 7 I would first like to thank the Department for the 8 opportunity to speak before this panel on a topic that 9 is of most urgent concern to my company. That, of 10 course, is the alarming rate at which copper scrap and 11 copper-alloy scrap have been leaving the United States 12 and the impact this has had on the cost and 13 availability of the type of scrap we consume. Mueller 14 Industries is a leading manufacturer of copper tube and 15 fittings, brass and copper-alloy rod, bar, and shapes, 16 and also copper impact extrusions, among many other 17 products. Our manufacturing operations are located in 18 the United States and Canada, in Mexico, and also in 19 Great Britain. As I will describe in more detail, the 20 success of Mueller's facilities depends on a steady, 21 reasonably priced supply of copper-based scrap 153 1 materials. 2 Mueller's brass rod facility, which is 3 located in Port Huron, Michigan, has been in operation 4 since 1917. The Port Huron mill produces a broad range 5 of brass rounds, squares, hexagons, and special shapes 6 in free machining, tread rolling, and forging alloys. 7 The brass rod manufactured at Mueller's Port Huron mill 8 has a variety of end uses that include plumbing 9 products, hardware, valves and fittings, just to name a 10 few. 11 Mueller's brass mill operations in Port 12 Huron are designed to use copper-based scrap as the 13 primary feedstock. In fact, all the copper units used 14 to produce brass at Mueller begin as scrap. We use 15 scrap in many forms and grades to produce our product. 16 The type of material we use is determined by what's 17 available in the marketplace. 18 Mueller also has two domestic copper tube 19 mills that produce copper water tube in straight 20 lengths and coils, copper refrigeration and air 21 conditioning tube in dehydrated coils and nitrogen 154 1 charged straight lengths. We also produce industrial 2 tube and line sets. Our tube mill in Wynne, Arkansas 3 is designed to run utilizing copper scrap as its 4 primary feedstock. Our mill in Fulton, Mississippi, 5 however, is designed to run either on copper scrap or 6 copper cathode or a combination of both. 7 Over the past several years, we have seen a 8 sizeable and growing amount of scrap being exported 9 from the United States to China. Will the increase in 10 exports was certainly an anomaly based on historic 11 trading patterns for similar economic periods, it was 12 common knowledge that China's appetite for copper scrap 13 was growing rapidly. As U.S. stocks of copper-based 14 scrap began to dwindle, we recognized that this 15 shortage was causing serious upward pressure on the 16 availability of this scrap. As exports increased, our 17 normal sources of supply could not support us, 18 discounts declined and we sought other, higher-cost 19 sources of supply. This has had an increasingly 20 negative impact on Mueller and its customers from year 21 to year. Indeed, the strong demand from China for 155 1 these strategic metals has structurally changed the 2 marketplace. 3 In particular, since 2003, our rod mill has 4 experienced an increase in the cost of its copper scrap 5 feedstock, and the discounts for the high-grade scrap 6 we use have decreased in relation to the COMEX price. 7 It is our understanding that the Chinese government 8 applied a value added tax or VAT tax of 17 percent on 9 imports into China of copper-based scrap but then 10 refund 30 percent of that tax, and it is our 11 understanding that this is on product that is exported 12 back to the United States. This arrangement has 13 enabled Chinese scrap purchasers to bid and pay higher 14 prices for U.S. copper-based scrap. In some instances, 15 Chinese buyers have been able to pay U.S. scrap sellers 16 a premium on unprocessed copper-based scrap that 17 oftentimes has been equal to what domestic consumers 18 previously paid after processing. 19 As a result, previous forms of 20 higher-quality, what we call a select number two scrap 21 such as wire chops and pucks that were that we 156 1 previously used in large volumes to produce our 2 products are no longer available. In 2002 and 2003, 3 some of these processors ceased to operate, and the 4 feed profile for our mill has changed in two 5 significant ways -- discounts for the copper-based 6 scrap has decreased and also the availability and the 7 quality of the scrap we're able to acquire has 8 declined. 9 In addition to price increases for 10 feedstock, we're also experiencing more melt loss and 11 increased material handling because of the type of 12 packages of scrap we're able to procure. For example, 13 wire chops and pucks are dense. When they're loaded in 14 a Gaylord container, they have a lot of weight. They 15 take up a lot less space than many of the forms of 16 lower-quality product that are available to us today. 17 When we can find a reasonable supplier of feedstock, 18 reliable supplier, it's usually of lower quality, we 19 feel overpriced for its grade and it's available in 20 looser packages that increases our handling costs. 21 Mueller attributes these rising costs and 157 1 shortages to a combination of increased exports and 2 Chinese buying practices, which typically include 3 either one or a combination of both. One, paying on 4 delivery to U.S. shipping points, in effect paying 5 cash, and paying at higher than market-value prices. 6 This has been especially true with respect to the forms 7 designated as number two or low grade, which are used 8 by processors to produce the more desirable grades and 9 more compact packages sold as select number two or even 10 can be number one bare bright that we have used in the 11 past. 12 Mueller's rod mill has been hurt 13 significantly as well by import penetration of 14 downstream component parts and products that were 15 previously produced by brass rod consumers in the 16 United States. Most of the components and assemblies 17 lost to imports are of a high-volume nature and were 18 produced by numerous "job shop" machining companies, 19 screw machine houses located across the country. Our 20 customers expect to be under continued pressure due to 21 the difference in labor costs. They should not, 158 1 however, be disadvantaged by China's apparent subsidies 2 for copper-based scrap that is imported into China and 3 returned to the U.S. as finished product. These 4 policies put our U.S. downstream customers and us at a 5 disadvantage relative to the availability and the cost 6 of the raw material, namely, copper-based scrap. 7 As George Dykhuzien alluded previously, our 8 cost of goods sold is highly impacted by a material 9 cost, over 80 percent. Our customers' material costs 10 range from 50 to 75 percent of their products selling 11 prices. With these levels of material content, it is 12 difficult to compete when the Chinese manipulate the 13 marketplace through the use of tariffs and VAT rebates. 14 The volume of brass rod sold in the U.S. in 2003 was 15 over 20 percent below industry norms at a time when 16 traditional markets that consume our products were 17 strong. 18 In our industry, the availability of 19 competitively priced quality scrap is vital to our 20 success. The viability of our industry is dependent 21 also on our customer's ability to compete on a 159 1 worldwide basis. When the Chinese employ tariffs and 2 rebates that allow them to secure a disproportionate 3 share of the scrap available in the U.S., and turn that 4 material into finished products for sale in our markets 5 with a material cost reflecting the VAT rebate which 6 lowers their material cost, it puts our customers and 7 the domestic rod producers at an unfair disadvantage. 8 The advantages in raw material costs the 9 Chinese have been able to provide themselves has 10 allowed them to sell their products into the U.S. 11 market at prices lower than our customers' materials 12 costs. This advantage all starts with scrap. If this 13 continues, the impact on employment at brass mills and 14 screw machine shops and people producing these types of 15 parts will continue to worsen. 16 The increasing price and copper-based scrap 17 has had a similar negative impact on our tube mills. 18 The shortage of scrap during the last three years has 19 caused Mueller to use a higher percentage of cathode in 20 its tube operations at Fulton, Mississippi than it 21 normally would. Since cathode is more expensive than 160 1 scrap, this shift has resulted in an increase in our 2 raw material costs. Thank you for the opportunity to 3 address this issue. 4 START8 5 MR. HILL: Thank you, sir. And, my record 6 goes on. What, can you tell me what types of copper 7 scrap you use as inputs, number two, number one? 8 MR. ROURKE: We, our feed profile is made 9 up approximately of 55 to 60 percent of the scrap we 10 get returned from our customers and we call that 11 turnings or borings. The balance is made up of what we 12 call a select number two or internally we refer to it 13 as grade B. We do purchase some number one but I would 14 say it's about four to five to one, the select B versus 15 number one. And we define select B or select number 16 two or B more by, it's high copper content, it's 17 high-quality material but it's defined by the 18 impurities. It can only have a certain amount of 19 aluminum, a certain amount of tin, a certain amount of 20 other elements. But it's, that's basically the way we 21 define it. And most of the people that we do or the 161 1 people that we do business with know the kind of scrap 2 that we expect and that's what they supply us. 3 MR. HILL: Thank you. If export controls 4 were imposed -- let me ask the question a different 5 way. Have you in the last four or five years or in the 6 last two years when there has been a run-up in price in 7 the exports, have you had an inventory shortage issue 8 that has prevented you from supplying your customers? 9 MR. ROURKE: We haven't had any supply 10 limit. We haven't had any limitations that have 11 prevented us from supplying our customers. We have had 12 some days where we haven't been able to cast when we 13 would have intended to cast because of lack of material 14 and we have had concerns about material and have 15 operated at very low inventory levels, mostly in the 16 fourth quarter of last year. 17 MR. HILL: Thank you. Do you export your 18 product? 19 MR. ROURKE: Only to Canada. 20 MR. HILL: And, finally, do you export 21 copper scrap? 162 1 MR. ROURKE: No, we do not. 2 MR. HILL: Thank you. Bernie? 3 MR. KRITZER: You mentioned the premia. 4 How high have some of the premia gone for the purchase 5 of the scrap by foreign competitors; have they been 120 6 percent of the price that your company would pay, has 7 it been more than that? 8 MR. ROURKE: I'm not sure. I'm not sure. 9 I think, it seems to me that we were not always offered 10 the opportunity to buy some of the material that's 11 available and the better material that we used to 12 secure, the people that supplied that to us no longer 13 either have that product or they're not in business 14 anymore. 15 MR. KRITZER: You also mentioned on the 16 other side that the high price scrap is sent to foreign 17 countries. It comes back, remanufactured products that 18 display some of your former customers. Could you 19 elaborate on that in terms of, you know, company 20 examples, product lines, what trends have occurred? 21 MR. ROURKE: I would say it's, where we 163 1 have seen it most often is with our screw machine 2 customers. And many of these companies are still in 3 business and they've lost some of their work primarily 4 in the plumbing area, high volume, easy to manufacture, 5 commodity-type products where they may have run a job 6 for several years, their customer went offshore, sought 7 bids on these products and were able to procure them at 8 prices similar or the same as or lower than what our 9 customers' material costs would be. And this is, I've 10 seen this primarily in the Chicago area, two or three 11 large screw machine operations there, some in Michigan, 12 companies that produce part products for the 13 large-faucet OEMs. 14 MR. KRITZER: To the extent it would be 15 possible, would you at later date be able to provide 16 some written information? 17 MR. ROURKE: Yeah. I would talk to these 18 companies and if they agreed I certainly would. I have 19 talked to a couple of them and they would. 20 MR. KRITZER: Then my last question would 21 be, as a percentage of your costs, the increases in 164 1 price that you discussed very eloquently in your 2 written testimony, would you rate those as 20, 30 3 percent increase in costs over the last year, 40 4 percent increase? How would you -- 5 MR. ROURKE: Well, the material has gone up 6 over 30 percent. And our, the rest of our costs have 7 been very flat for the last two or three years, labor, 8 energy. Freight has seen some increase because of the 9 fuel crisis but metal is by far and away the cost 10 leader. 11 MR. KRITZER: Have you been able to recover 12 through a pass-through or surcharge any of these 13 increased costs or have they gone to your bottom line? 14 MR. ROURKE: No, we have been able to pass 15 through some. In a rising market it's difficult to 16 pass them on and keep up with the increases that you 17 are receiving but we have been able to pass through a 18 lot of the costs. It's difficult. It's difficult for 19 our customers to pass through the costs, especially to 20 their customers, the larger OEMs, of the automotive 21 OEMs, plumbing OEMs. They have a lot of buying power 165 1 and can exert a lot of pressure on these companies, 2 especially smaller companies that lack leverage to 3 fight against them. 4 MR. KRITZER: Thank you. 5 MR. HENRY: I just have a question or two 6 regarding claims about Chinese subsidies. And in your 7 testimony you go on to say, it is our understanding 8 about this. Is there any way to substantiate the 9 understanding of Chinese actions regarding copper scrap 10 purchases? 11 MR. ROURKE: The numbers I referenced I've 12 seen published in the American Metal Market, in 13 articles. One of the difficulties as has been 14 mentioned previously, how they do things is not very 15 transparent so it's hard to determine exactly what's 16 going on and how they operate. They have talked about 17 rebates. They announced last fall that the rebate was 18 going to, I had heard was going to go away and then I 19 heard was going to decline and that seemed to stimulate 20 a lot of buying of scrap on their part. And I 21 attributed that to an effort procure this material 166 1 before the rebate either decreased or was modified in 2 some manner. But specifically, you know, just based on 3 what I hear in the marketplace and what I read. 4 MR. HENRY: I'm just trying to get my mind 5 around it then. If, what you have in your testimony, 6 whether it can be verified or not and it's based on 7 your limited knowledge of what's going on in China, 8 your understanding is that 17 percent, there's this 17 9 percent value-added tax on the value of product going 10 into China. So say if we have a million dollars worth 11 of scrap -- just to use a round, easy number -- going 12 into China, then the tax, the import tax on that scrap 13 would be $170,000, which their importers would have to 14 pay. And then according to the rest of the statement 15 in your testimony, 30 percent of that tax is provided 16 back in forms of subsidies or rebates or somehow gets 17 back to the industry. So, that would mean if 30 18 percent of the $170,000 then is put back into their 19 pockets, that would be close to around $50,000, so the 20 net on the industry would still be a negative $120,000. 21 MR. ROURKE: I agree with the math. I'm 167 1 not sure the value that's declared when the scrap 2 enters the country and how the tax is assessed. Those 3 are things we don't know. Because if you look at the 4 numbers that are reported on the value of the scrap 5 that goes into their country, they pay less than 6 anybody in the world. But they are able to acquire 7 more; they're terrific buyers. 8 MR. HENRY: Are the other foreign 9 countries' purchases of scrap other than China at this 10 higher rate than China is paying, in other words, is 11 this somewhat of a world price? I mean, if China is 12 paying a premium for their, for the scrap purchases, 13 there are other countries buying the U.S. scrap, are 14 they paying the same rate, to your knowledge? 15 MR. ROURKE: I can't, I can't, I can't 16 answer that. I really don't know. I mean, if you look 17 at numbers that we have seen, what the other countries 18 are paying is a more reasonable price relative to our 19 perception of the world values, where the data you look 20 at, the Chinese appear to be paying a lower price, 21 based on data that's collected, I think by the Commerce 168 1 Department. 2 MR. HENRY: Further in your testimony you 3 talk about price and that metal is 80 percent of your 4 cost. And that's not, is it 80 percent of your cost or 5 80 percent of your price that you're talking about? 6 MR. ROURKE: It's 80 percent of our selling 7 price. 8 MR. HENRY: Okay. What are the other 9 factors, price, in, what's the other 20 percent 10 composed of? 11 MR. ROURKE: Labor, utilities, overhead, 12 SG&A. 13 MR. HENRY: Have those factors caused any 14 alarm over the last six months as far as increases in 15 price? 16 MR. ROURKE: No. Increase in cost, no. I 17 mean, our labor has been very stable. Our utility 18 costs have been reasonably stable. 19 MR. HENRY: And, finally, you go on to 20 claim that your customers' materials cost range between 21 50 and 75 percent of their total selling price, is your 169 1 input to their product; what customers are you talking 2 about? 3 MR. ROURKE: People that are fabricating 4 valves, fittings, hardware parts, just everyday brass 5 components that you might see that are used in 6 construction and industry. 7 MR. HENRY: Thank you. 8 MR. EDELSTEIN: Thank you. Just a 9 follow-up, similar vein. Have you seen any impact on 10 your productivity because of material supplied and 11 therefore would that possibly have boosted your 12 nonmaterial costs? 13 MR. ROURKE: We have seen, there's, the 14 scrap that we're able to acquire today is not as good 15 as the scrap that we were able to acquire two or three 16 years ago, for approximately the same value. And that 17 has had some impact on our operations because it 18 doesn't melt as quickly, it takes more handling, but 19 it's very difficult to define the impact of that. I 20 would say it's a marginal, it's not a material 21 difference. 170 1 MR. EDELSTEIN: You have indicated that you 2 have not been able, you have not seen your industry 3 benefit from the recent strength or the strength over 4 the last several years, the construction, housing 5 market, in large part because of import competition for 6 the downstream customer product, if I'm correctly 7 interpreting what you're saying, and we have heard that 8 from other presenters. 9 MR. ROURKE: I would say that's over the 10 last couple of years. 11 MR. EDELSTEIN: Yes, a similar sort of 12 situation from some of the other presenters. And I 13 guess the question to help us understand and ferret 14 this out, it may be more of a question for Mr. Kerwin 15 but are there trade statistics or industry statistics 16 from downstream that would sort of indicate this 17 greater import penetration and in fact is putting the 18 squeeze on your customers? 19 MR. ROURKE: I think there are statistics 20 available that would support the theory that our 21 products are continuing to be used when you look at the 171 1 average size of a home and the number of bathrooms per 2 home and that would support that the demand should be 3 there. We've struggled as an industry over the past 4 couple of years, through various trade organizations we 5 belong to, to determine what the impact on our industry 6 has been, the economic conditions versus the amount of 7 material imported and taking work from our downstream 8 customers. And, because of the variety of our 9 customers and the variety of industries they're in and 10 the parts they produce, we haven't been able to figure 11 out a way to do that. But I think we could provide 12 data that would support that the demand continues to 13 exist for the products we produce in this country based 14 on housing starts and the things I mentioned earlier. 15 MR. EDELSTEIN: Thank you. And once again, 16 I guess I'm a stickler for definitions and I want to 17 understand what I'm talking about here. When you refer 18 to the Chinese paying higher than market price, aren't 19 they, in fact, establishing the market price, any more 20 than pushing up the market price, and not actually, I 21 mean, stable -- 172 1 MR. ROURKE: I think that's a fair way to 2 look at it but I also think they're buying products 3 that in the past stayed here, were processed and put 4 back in the supply chain here, that now are going over 5 there. And, we are, because we're a step or two 6 removed from that, we are not, we don't have the 7 opportunity to bid on that material. But your point, I 8 understand where you're coming from. 9 MR. EDELSTEIN: I guess one final question. 10 We were introduced to something, I'm not sure we have 11 quite heard before, now you're actually having to use 12 lower-grade scraps and sorting them, doing sorting and 13 manipulating yourself? 14 MR. ROURKE: Well, that's, sorry to 15 interrupt. 16 MR. EDELSTEIN: Okay. You can correct me. 17 We've only been talking about substituting higher-grade 18 material like cathode for scrap. Is there a 19 possibility of going the other direction within your 20 industry, actually taking on the ability to deal with 21 lower-grade scrap within your industry that's 173 1 available? 2 MR. ROURKE: I suppose you could do that 3 but speaking from Mueller's perspective, we're not 4 interested in getting into the scrap processing 5 business. Our business is to make brass rod and copper 6 tube. That's not an area we would, a direction we 7 would go. And we wouldn't, it seems to me that if you 8 use cathode in place of some of these other grades, 9 it's an inefficient use of cathode as a resource to 10 make products that don't require the purity that you 11 can produce products that require that with cathode. I 12 just think it's an inefficient way to manage these 13 resources that are limited. And our products, the 14 specifications permit a certain level of impurities and 15 you need to produce those products from scrap, to take 16 advantage of that, and conserve the cathode to be used 17 to produce the tube and the plate and the sheet and the 18 things that require that level of purity. 19 MR. EDELSTEIN: Okay. Thank you. 20 MR. HILL: Thank you, Mr. Rourke. 21 MR. ROURKE: Thank you. At this time I 174 1 would like to call Robin Wiener to the witness table. 2 MS. WIENER: Good afternoon. My name is 3 Robin Wiener and I'm the President of ISRI -- the 4 Institute of Scrap Recycling Industries. Chairman 5 Hill, panelists, I wish I could say I'm pleased to here 6 today but unfortunately I'm not. The copper and brass 7 industry has wasted precious time and money on the part 8 of industry and government alike on a frivolous 9 petition in an attempt to shortcut the more appropriate 10 means of gaining relief for alleged unfair trade 11 practices through a Section 301 action because. Some 12 in the copper and brass industry can't or really won't 13 deal effectively with foreign competition, this 14 exercise will likely cost the scrap recycling industry 15 over a quarter million dollars in unneeded research and 16 legal expenses. 17 Allegations of a shortage of copper and 18 copper-alloy scrap and that the price of scrap is 19 threatening the existence of the copper and brass 20 industry are completely without merit. Further, we 21 believe that the industry's efforts to short-circuit 175 1 the proper channels and to have the U.S. government 2 artificially interfere with a long-established 3 marketplace is not only misguided but it is dangerous 4 with respect to the future trade of the commodities at 5 issue today. 6 For the record, ISRI has publicly stated 7 and does so again today that we would support a 301 8 action to address documented unfair trade practices. 9 ISRI is an organization founded upon both free and fair 10 trade. When we were advised last spring of alleged 11 unfair trade practices being conducted by the certain 12 foreign countries, ISRI came to the Commerce Department 13 seeking ways to help some of our ingot-maker and wire 14 chopping members address unfair trade years. We also 15 sent a delegation to China to discuss these issues 16 directly with the Chinese government. 17 I would like to begin answering questions 18 posed by the government this afternoon by first 19 discussing the scrap recycle industry's role in the 20 nation's economy. Our industry directly employs over 21 30,000 individuals and processes over 125 million tons 176 1 of recyclable materials each and every year, including 2 more than two million tons of copper. ISRI members 3 process and/or produce products worth at least 30 4 billion dollars a year. The use of these recycled 5 materials generates tremendous environmental benefits 6 and energy savings, a crucial point given the current 7 energy situation. Last year the industry contributed 8 more than 5 billion dollars to the U.S. balance of 9 trade. 10 But scraps contribution to the economy goes 11 much deeper since the feedstock that our industry 12 provides to the mills, foundries, refiners and others 13 does not originate in our facilities. Tallying the 14 economic impact of the scrap industry requires 15 consideration of peddlers and collectors who provide 16 materials to our processing yards each and every day. 17 For many of these tens of thousands of individuals, 18 selling their wares to the scrap recycling industry 19 keeps them from dependency on welfare and other social 20 programs. Please keep in mind the potential for 21 calamitous ripple effects for determining what, if any, 177 1 actions to take on this petition. 2 Now, as I mentioned at the outset, the 3 copper and brass industry's petition should be denied 4 and we believe the reasons are clear. Section 7C 5 allows for consideration of controls due to price or 6 shortage of materials caused by exports. Neither 7 applies at this time. First and foremost, there is no 8 shortage of copper scrap in the United States. The 9 petitioners have offered no evidence of shortage. In 10 fact, many processors are reporting to us that mills 11 are currently delaying receipt of purchased scrap for 12 as much as eight weeks due to excess inventories of raw 13 materials on hand. In its comments, the copper and 14 brass industry state their belief the copper-based 15 scrap supply is unresponsive to price increases; 16 however, the opposite is true. History shows a 17 significant amount of elasticity of supply based upon 18 price. 19 As prices for scrap materials increase, the 20 volume of material brought to our yards increases as 21 the cost of recovery and collection of these materials 178 1 becomes more cost-effective at these higher prices. We 2 have seen this phenomenon time and time again. But the 3 key point with respect to supply concerns the domestic 4 industry's capability to consume all of our 5 domestically produced copper scrap. The petitioners 6 incorrectly contend that exports have lead to 7 diminished consumption of scrap in the United States, 8 while the data shows the exact opposite to be true. 9 The petitioners state that exports of 10 copper began their rise in 1999. They acknowledge that 11 the demand for brass mills has been flat -- not 12 growing -- since 1999, but they fail to note that the 13 secondary copper smelting industry had been in 14 significant decline for several years prior to that 15 point, accelerating in 1997 and resulting in a complete 16 shutdown by 2001. In fact, the loss of this domestic 17 capacity, which amounts to nearly 450,000 tons, is in 18 large part responsible for the historic lows in copper 19 scrap prices seen in the late 1990's. 20 Their petition also dramatically overstates 21 the volumes of copper scrap exported by including 179 1 foreign-based scrap that was subsequently re-exported. 2 Last year's total of 754,000 tons was overstated by 3 nearly 65,000 tons or 90 percent, not an insignificant 4 amount. 5 With the loss of U.S. demand for 450,000 6 tons annually in copper scrap, particularly the lower, 7 less pure grades of copper scrap, our industry was 8 forced to find a home for this material. Fortunately, 9 over the last several years demand that foreign 10 smelters begin to grow for this material. Should these 11 export markets now be cut off and with no domestic 12 market available anymore, much of the scrap in question 13 would likely end up in landfills. Incidentally, 14 despite Mr. Kerwin's comments to the contrary this 15 morning, the CDA report that he referenced actually 16 supports ISRI's points on this matter by stating that 17 -- and I'm quoting now from the court -- "exports are 18 expected to make up for the loss of U.S. capacity." 19 And that's on page 18 of the CDA report. 20 The lack of evidence of a short supply of 21 copper scrap suggests that this export control petition 180 1 is actually an effort to control the price of scrap. 2 But suggesting that export controls would resolve the 3 problem for the copper and brass industry is not only 4 incorrect, but history shows that it could make the 5 problem significantly worse. 6 We know this from the most recent case on 7 which export controls were imposed some 30 years ago on 8 ferrous scrap. A 1977 study published in the Business 9 Economist determined that the domestic steel industry 10 spent more than 2 billion dollars additional for 11 ferrous scrap in the period 1973 to 1974 than they 12 would have had the export controls not been imposed. 13 Clearly this was the result of a global marketplace 14 being thrown into disarray. 15 We believe the same dynamic would apply to 16 copper export controls and could perhaps cause an even 17 stronger global price reaction. While ferrous prices 18 are based on direct trades between buyer and seller, 19 copper's price, which is set on world markets such as 20 COMEX and the LME can also be impacted by speculators 21 and investors. Removing hundreds of thousands of tons 181 1 of copper material from the global market place would 2 certainly send prices up and not down. Put simply, 3 copper has never operated in a vacuum of the U.S. 4 economy. 5 In a recent letter to the National 6 Association of Manufacturers concerning steel prices, 7 Commerce Secretary Donald Evans stated, "I share your 8 concerns that the controls that some of our trading 9 partners have placed on the exports of key raw material 10 inputs, especially steel inputs, may be contributing to 11 higher prices and leading to supply constraints. By 12 implementing export controls on copper scrap, the U.S. 13 will engage in the exact conduct that the Secretary 14 recognizes in his letter may violate WTO obligations. 15 The U.S. government will be much better served by 16 working with these other governments to remove barriers 17 to free and fair trade than making the problem worse by 18 imposing its own artificial market barriers. 19 At least one of the petitioners used to 20 agree. Back in 1987, when certain European countries 21 had placed export restrictions on copper scrap, Joseph 182 1 Mayer, the then and current president of the Copper & 2 Brass Fabricators Council, sent a letter to ISRI that 3 stated, and I quote, "We do not in any way wish to 4 restrict the activities of the U.S. scrap industry and 5 in fact feel that ending distortions in the world scrap 6 market caused by foreign restrictions will benefit the 7 scrap industry as well as scrap consumers." 8 Thank you for the opportunity to present 9 our views on this very important matter. I would be 10 happy to answer any questions you have but as I 11 conclude let me point out that ISRI did not seek 12 federal assistance or protection when scrap prices were 13 at record lows a few years ago. ISRI firmly believes 14 in free and fair trade. ISRI understands the cyclical 15 nature of the industry, where price peaks are often 16 quickly followed by price drops. We knew in the year 17 2000 that scrap prices would not stay low forever, just 18 as we know that times of high prices are very 19 temporary. 20 In fact, prices for copper scrap have 21 already declined over 20 percent from their highs in 183 1 early March. Prices for number two have declined more 2 than 25 percent from a high of $1.26 in early March to 3 a market that's closer to 95 cents today. Prices for 4 number one -- the favored feedstock for the brass mills 5 -- have dropped from a high in the low one-thirties to 6 do a dollar-ten today. And the spreads between COMEX 7 and scrap have widened to levels not seen in more than 8 two years. 9 We have had good years and we have had bad 10 years, but we strongly believe in the free market 11 system. Thank you. 12 MR. HILL: Thank you. How many scrap yards 13 or scrap recycling facilities, may be a better way to 14 describe it, are in the United States? 15 MS. WIENER: We represent approximately 16 1200 member companies, which we estimate that's about 17 3,000 facilities and we represent probably about 80 to 18 90 percent of the volume. So the number could be a 19 little bit higher than 3,000. 20 MR. HILL: Taking the 3,000 number, of 21 those 3,000 facilities, how many are in the export 184 1 business? 2 MS. WIENER: That's a good question. On 3 the copper side the figure is -- we can actually, I 4 don't want to take a guess because I'm afraid I may 5 give you a wrong number. We'd be happy to supply that 6 number to you at later date. 7 MR. HILL: I would appreciate that. And 8 finally drilling down here a little bit -- 9 MS. WIENER: Sure. 10 MR. HILL: -- of the 3,000 who export, what 11 percentage of their business is export dependent? 12 MS. WIENER: Again, I would be happy to 13 give you that answer at a later time. I would think 14 that for a lot of our members they are, there's 15 probably a handful that are mostly export but the 16 majority are probably doing both the domestic and 17 export business but we can try to get you some more 18 exact figures. 19 MR. HILL: Thank you. To drill down just a 20 little bit further -- 21 MS. WIENER: Sure. 185 1 MR. HILL: -- what are they exporting; what 2 grades copper, copper scrap are they exporting? 3 MS. WIENER: Which grades are they 4 exporting? 5 MR. HILL: Yes. 6 MS. WIENER: The vast majority of scrap 7 that's being exported is number two. And I think we 8 have a definitional problem, to be honest here, in 9 listening to all the presenters today. When we're 10 referring to number two, we're referring to the grades 11 that Mr. Edelstein was referring to earlier. And I 12 think that some of the consumers may be calling number 13 two what we would call a lower-grade number one or 14 ordinary number one. And, so, I think we're having a 15 definitional problem. And we're fortunate to have with 16 us this afternoon, Sheldon Tauben, who will be speaking 17 after I do or two people after I do and he can give you 18 also some more detail on that. 19 MR. HILL: Several of the witnesses today 20 have, I believe two have mentioned they have some 21 concerns about the exports and the proper 186 1 classification of the exporters, especially as they 2 relate to China, the VAT issue. Have you heard any of 3 those stories or other evidence that would tend to 4 point to the fact that good scrap is out on the bottom, 5 bad scrap is put on the top? 6 MS. WIENER: Yeah. As I mentioned at the 7 beginning of my testimony, we did hear some concerns 8 from some of our members about some perhaps unfair 9 trading practices in China, including some problems 10 with valuation of scrap and some problems with the 11 application of the VAT. And, we actually presented 12 some information related to those issues last summer 13 when we came to the Commerce Department and we would be 14 happy to supply that information back to Commerce to 15 supply the information we'd supplied last summer and to 16 include it as part of this testimony. 17 MR. HILL: I would appreciate that. Thank 18 you. Just to follow on a little bit different vein 19 now. Have you had any reports from any of your members 20 that they have been unable to supply the domestic 21 consumption requirements because they have been 187 1 exported? 2 MS. WIENER: No. No. As a matter of fact, 3 we have asked our members that question and no one has 4 reported any problems with scrap availability. 5 MR. HILL: Have you seen -- and thank you. 6 In your testimony I believe you alluded to this but 7 have you seen an increase of the inputs for your 8 recyclers now that the manufacturing sector is starting 9 to improve? 10 MS. WIENER: I'm sorry. Are you asking 11 whether or not our members have received more scrap, 12 the availability of scrap to our members? 13 MR. HILL: Yes. 14 MS. WIENER: Yes, there's definitely been 15 in the last several weeks as a result of the previous 16 higher prices of scrap, there's definitely been a 17 loosening of supply. We have seen that throughout the 18 country. 19 MR. HILL: And you think that's in the last 20 couple of weeks, though? 21 MS. WIENER: Yeah. As I mentioned earlier, 188 1 despite what we said earlier, supply does respond to 2 the rise in prices and it is an elastic market. 3 MR. HILL: As we have asked other 4 witnesses, what would be your view on the impact of 5 such an embargo that would be caused by export controls 6 or more monitoring being imposed? 7 MS. WIENER: Well, again, as I mentioned 8 earlier, based on a study that was done back in the 9 seventies after the experience we had with the ferrous 10 expert controls, we would expect something very similar 11 to happen, where there would be unfortunately a control 12 reversal prices go up rather than down. Because, by 13 placing artificial restrictions into the marketplace, 14 it throws the marketplace into disarray and there would 15 be increased demand for a limited supply. And, so, 16 there would be certainly a, more of a price war for the 17 materials globally and this is a global marketplace, 18 that would ultimately affect the price of the material 19 here in the United States as well. 20 MR. HILL: Thank you. As we said earlier, 21 in response to Mr. Kerwin's concern about 189 1 confidentiality of information, if that is an issue, if 2 you could, as we said to him, if you could aggregate 3 the numbers upward so that there's no identifiers, that 4 would be very helpful in your submission. 5 MS. WIENER: That's no problem. 6 MR. HILL: Appreciate that. Thank you. 7 MR. KLASON: Thank you. As we talked about 8 briefly this morning, the Department of Commerce is 9 required to look at five factors, five determinations 10 that we have to make. And the fifth determination 11 permits us only to impose controls when it's necessary 12 to protect the domestic economy. Can you explain just 13 how, why export controls or monitoring is in your view 14 not necessary to protect the domestic economy and what 15 your understanding of the term domestic economy would 16 be? 17 MS. WIENER: Sure. I will attempt to do so 18 and, sure, I'll also state that we have submitted into 19 the record some comments that actually expand on some 20 of these issues as well and we can do that, we can 21 further do that as well. As I stated earlier, the U.S. 190 1 scrap industry is a vital part of the U.S. economy and 2 employs over 30,000 people directly, and, there are 3 also, subsequently we have to be very concerned about 4 not only the recycled stream effect on consumers but we 5 would point out that it's important when looking at the 6 domestic economy as a whole to look at all segments, 7 including the peddlers and collectors who rely on the 8 health of our industry for their own health and 9 stability. And, so, you have to look at the entire 10 recycling stream and that would all be inclusive within 11 the nation's economy, have an effect on the nation 12 economy. 13 MR. KLASON: Thank you. And, yeah we would 14 appreciate it if you could expand on that further. 15 MR. HILL: Can I just add to that? That 16 would be very useful and I know you are represented by 17 counsel who is not testifying today, if you could have 18 that in writing to us. 19 MS. WIENER: Absolutely. 20 MR. HILL: As Mr. Hartquist will be giving 21 us that in writing as a well. 191 1 MR. KLASON: And Mr. Hartquist would be 2 interested in your views and the Department of Commerce 3 as well. 4 MR. HILL: Thank you. 5 MR. KRITZER: You talked about reports that 6 certain mills were delaying receipt of purchased scrap? 7 MS. WIENER: Yes. 8 MR. KRITZER: Could you provide for the 9 record some examples, you know, information on the 10 compilation of that? 11 MS. WIENER: Sure. We have, just to 12 clarify that has been, that information is based on an 13 informal supply of a wide range of our members and we 14 would be happy to go back to them and see who would be 15 willing on the record to share that information and 16 then submit that to you. But, we have heard that from 17 a large number of members. 18 MR. KRITZER: That would be useful. 19 MS. WIENER: Yeah, be happy to do that. 20 MR. KRITZER: The second question I have 21 is, with the imposition of controls, your statements 192 1 about controls would have a negative effect on supply. 2 In addition to supply, what would happen to the 3 infrastructure right now that is developed around the 4 export market, would that infrastructure be 5 compromised, would that infrastructure have to be 6 reoriented to supply the copper domestically; what kind 7 of effects would that have, would there be costs? 8 MS. WIENER: Well, certainly it would have 9 the effect of throwing the market into disarray because 10 there would be a huge dislocation. There are some 11 members who are dependent, much more dependent on the 12 export market than others. And, for those, as I stated 13 earlier, we don't believe based on the fact that, well, 14 again we believe that the vast majority of material 15 being shipped right now is number two and that material 16 we believe does not have a market. The vast majority 17 of that does not have a domestic market and therefore 18 there would be a group of companies that rely on the 19 sale of that material overseas that would not have a 20 market for that material and would be hurt economically 21 would be hurt, may result in shutdowns, layoffs, et 193 1 cetera. 2 MR. KRITZER: Would that extend to 3 companies that essentially have export infrastructure 4 but if they were not able to export they would not have 5 the rail cars, highway transportation or other 6 logistics to supply domestic markets or domestic 7 markets would be located at great distances where 8 transportation would become an element? 9 MS. WIENER: Well, there certainly are 10 regional issues. And one of the presenters earlier 11 talked about the relative cost of transportation, and 12 how it's much more, it's significantly cheaper to ship 13 from LA to China than it is from LA to San Francisco. 14 And so, and we have the same experience within our 15 industry. And, so, specially on the West Coast, that's 16 a particular concern of ours because there are a large 17 number of exporters on the West Coast and if their 18 markets were to disappear, the transportation cost to 19 ship that material domestically might be prohibitive 20 and may not allow for the disposition of that material. 21 MR. KRITZER: Thank you. 194 1 MR. HENRY: In the beginning of your 2 testimony you talked about suggesting a Section 301 3 case -- 4 MS. WIENER: Yes. 5 MR. HENRY: -- in place of Export 6 Administration Act investigation. Can you elaborate on 7 that more and why you think that would be a more 8 appropriate forum for this case? 9 MS. WIENER: Absolutely. My understanding 10 is that there some of the presenters have alleged 11 unfair trade practices with them. Specifically China 12 has been named a number of times. And as I mentioned 13 earlier, we have also heard some of those same claims, 14 information about some of those similar practices or 15 same practices from some of our members. However, 16 Section 7C was not designed to address those types of 17 problems. The remedy in an export control ban, as we 18 understand it our reading of the statute and the 19 legislative history, is that it's simply not the 20 purpose of 7C to deal with unfair trade practices; it's 21 to deal with supply shortages. And, if what we are 195 1 facing, we believe this is what we're facing is non a 2 supply shortage but potential unfair trade practices, 3 then the proper remedy is a 301 action. 4 MR. HENRY: And again I'm trying to 5 understand how purchases are made, both foreign and 6 domestic. In the cases where you have maybe not bids 7 but you have purchases foreign or purchases domestic, 8 is there a bidding process that goes on that the 9 highest price buys the product or are there some, is 10 there some portion of the industry such as you say out 11 in Los Angeles out in the California area that may be 12 cost prohibited because of freight into the Midwest? 13 MS. WIENER: What I would like to suggest, 14 if it's, with the permission of this panel, is that for 15 questions regarding commercial practices, how purchases 16 work, et cetera, I think that to give you the most 17 comprehensive answer it would be probably most 18 appropriate if I deferred those questions to Mr. Tauben 19 because he's in the business. He's one of the largest 20 brokers for copper scrap in the United States and I 21 think he can probably give you the most accurate 196 1 answers to those questions. 2 MR. HENRY: And one final question. 3 Regarding scrap, apparently copper is a small portion 4 of the scrap which you sell. And, I am just wondering 5 that are there, has it been a general trend that other 6 commodities such as ferrous scrap or other types of 7 scrap have prices increased at the same rate as the 8 copper crap; in other words, has it been a general case 9 that prices have risen for other types of scrap? 10 MS. WIENER: All of the scrap commodities 11 are cyclical in nature and so we have experienced peaks 12 and drops in most of the commodity areas if not all of 13 them, and most recently as has been reported in the 14 general press. Certainly we have seen it in ferrous 15 scrap as well. But similar to what's happened in 16 copper prices, as we expected, the price peaks were 17 followed by price drops. And, so, several weeks ago if 18 not several months ago actually ferrous scrap prices 19 started turning around and they have declined. I 20 believe they declined at a bit more rapid rate than 21 even copper has. 197 1 MR. HENRY: Thank you. 2 MR. EDELSTEIN: In just looking at your 3 statement earlier that the scrap recycling industry 4 employs 30,000 people or 125 million tons, and the 5 potential impact on that industry it might have, I 6 assume in that you are including as part of your 7 industry, it goes well beyond copper, to steel, 8 includes the paper recycling industries and plastic 9 recycling industries so copper is only a small portion 10 of that, is that correct? 11 MS. WIENER: It is correct that that 12 employment figure includes all of the employees of the 13 scrap recycling industry and we represent companies 14 that process nonferrous and ferrous metals, paper, 15 plastic, glass textiles; however, with many of our, the 16 vast majority of our members and from representing a 17 vast number of those employees, are companies on the 18 metal side of the business and many of our ferrous 19 processors, the vast majority of them handling ferrous 20 are often handling nonferrous as well, instead of 21 handling copper, in varying quantities but it would be 198 1 throughout the industry. 2 MR. EDELSTEIN: So would it be possible to 3 isolate the copper portion? 4 MS. WIENER: It's a good question and I, we 5 could try. I haven't seen published figures that 6 actually state how many, what percentage of those 7 employment figures would represent copper. And again I 8 would think it would be difficult because the industry 9 is much more integrated than you might think in terms 10 of the handling of this material although certainly 11 there are some specialists in the industry who may only 12 handle copper. I think the majority of those members 13 that are handling copper also handle other materials as 14 well. 15 MR. EDELSTEIN: And this may be a question 16 you want to defer but I will ask anyway. We've heard 17 testimony that there has been a shift in the practice 18 of the scrap industry in that they are not upgrading, 19 processing, sorting, chopping scrap to the same extent 20 that they were possibly and, in fact, this may be also 21 contributing to the shortage of the higher grades or 199 1 the alleged shortage of higher-grade scraps available 2 to the brass mill and foundry industry. And, but 3 because the scrap is being exported as a rough mixture 4 or a bulk for their greater profits in doing that 5 because of the higher prices being offered, could you 6 address that? 7 MS. WIENER: I think I will defer to 8 Mr. Tauben on that; otherwise, though, I would like to 9 state one thing about that, which is that our members 10 work very closely with their consumers to try to 11 deliver the highest quality product. And, therefore, I 12 don't believe that there is, I don't believe that there 13 is a problem with lower quality materials going into, 14 being sold to the consumers; however, with regard to 15 different grades of, the availability of different 16 grades of the material that could be shipped to 17 consumers, I would like to defer that question, that 18 issue directly to Mr. Tauben. 19 MR. EDELSTEIN: And similarly if, in fact, 20 remedy, offer, suggest, implemented in scrap exports be 21 rolled back to the previous average by about half, are 200 1 there copper scrap or is there copper scrap that would 2 not have a home here in the U.S., that would be the 3 languishing, so to speak? 4 MS. WIENER: Absolutely. And that is one 5 of our primary concerns with this petition. As I 6 stated in my comments, in my testimony, the shutdown of 7 the domestic copper smelting industry has resulted in a 8 loss of capacity of approximately 450,000 tons 9 annually. And it is interesting to note that the 10 period petitioners are using for calculation of what's 11 considered a normal period of time for export levels, 12 the '96 to 2000, is a time period when some of that 13 domestic capacity was still in existence. And, as a 14 CDA report notes and I noted, the problem that exists 15 is that the, after this capacity was lost this material 16 did not have a home here in the United States and we 17 were fortunate when there was a buildup of demand 18 overseas, that that could eventually take the material 19 but if we were to now have those markets cut off again, 20 then there would be material with no place to go. But 21 it's a significant number. Again, we're talking about 201 1 nearly 450,000 tons, which is greater than the amount 2 that petitioners are looking to cut exports by. 3 MR. EDELSTEIN: Thank you. 4 MS. WIENER: Thank you. 5 MR. HILL: Thank you. At this time I would 6 like to call Robert Damuth to the witness table, 7 please. 8 MR. DAMUTH: Thank you, Mr. Chairman. Good 9 afternoon, gentlemen. My name is Robert Damuth. I'm a 10 vice president and economist Nathan Associates, 11 Incorporated. Nathan Associates is an economic 12 consulting firm, founded in 1946 by Robert Nathan. 13 Before beginning, I want to thank you for giving me 14 this opportunity to comment on behalf of the institute 15 for scrap recycling industries. Mr. Henry, you asked a 16 question, made a comment a moment ago that reminds me 17 that now more than twenty years ago when Bob Nathan, it 18 reminds me when Bob Nathan before the Senate Banking, 19 Housing and Urban Affairs Subcommittee on International 20 Finance to comment on behalf of the Institute in 21 support of expanding exports of scrap iron. 202 1 Today, though, I will be presenting 2 findings of a recent Nathan Associates' study of 3 inventories of obsolete copper scrap. This study was 4 completed under my direction. I am submitting today 5 the executive summary of the summary report and figures 6 and tables that present the calculations and data in 7 the analysis. I will submit the final full study 8 report within a week, which will obviously have more 9 explanation of the methodology. 10 In addition to presenting the inventory 11 estimates, I want to also discuss a few concepts that 12 are relevant to the definition of inventory obsolete 13 copper scrap and highlight the importance of the 14 economic relationship between scrap supplies and scrap 15 prices. The estimates I will present are derived from 16 statistics that have been collected in the U.S. 17 Geological Survey. It's interesting because my 18 estimates are actually downward revisions, downward 19 adjustments to these statistics. So, as a surprising 20 as some people might find the numbers, they actually 21 are smaller than published statistics in the public 203 1 domain. 2 As you can see in table one of my 3 submission, the U.S. inventory of obsolete copper scrap 4 has grown steadily since 1982. 1982 is the first year 5 of our analysis. Net additions to the inventory 6 through 2003 totaled 36 and a half billion pounds, or 7 1.7 billion pounds per year. 8 Each year enough obsolete copper scrap is 9 generated in the U.S. economy to more than adequately 10 meet the demand of domestic consumption. The U.S. 11 inventory of obsolete copper scrap has been and will 12 continue to be a more than adequate source of supply 13 for copper scrap demand. In the end of 2003, the 14 inventory reached 112.4 billion pounds. Recycled, 15 prompt, or new, recycled prompt and obsolete copper 16 scrap in 2003 was equivalent to only 3.6 percent of the 17 inventory of obsolete copper scrap. This percentage is 18 also equivalent to the average percentage over the 19 entire period of our analysis, 1982 to 2003. 20 Based on the total amount of recycled scrap 21 of prompt and obsolete in 2003, and the year-end 204 1 inventory of obsolete scrap, there's enough obsolete 2 scrap in the inventory today to meet total demand for 3 recycled scrap through the year 2030. Obsolete copper 4 scrap consists of copper contained or installed or 5 placed in products in the economy. These products 6 which can be grouped into five end-use product 7 categories, and are grouped that way in published 8 statistics, are manufactured by at least 35 industries 9 defined at the six-digit level North American 10 Industrial Classification System. These industries are 11 identified for you in figure one of my submission. 12 Whether in the form of wiring in a personal 13 computer plumbing pipes and fixtures, sheet roofing, or 14 other products, the defining characteristic of obsolete 15 copper scrap is that it is used and in a position to be 16 recovered. 17 Generally, the inventory of obsolete copper 18 scrap can be thought of as a pool of copper-containing 19 products, the size of which fluctuates according to 20 rates of additions to and withdrawals from the pool. 21 Additions to the pool occur as products containing 205 1 copper reach the ends of their useful economic lives. 2 Withdrawals occur as the copper in these products is 3 removed and recycled by industries that utilize copper 4 as a manufacturing or fabricating input. 5 In the normal business sense of the word, 6 inventory is a stock of immediately available materials 7 or products used to even out market fluctuations and 8 supply and demand. But not all obsolete copper scrap 9 is immediately available for use. Products containing 10 copper must first reach the ends of their useful lives 11 and then their copper content must be extracted and 12 recycled. 13 For determining the size of the inventory 14 of obsolete proper scrap, the narrow notion of business 15 inventories must be broadened by incorporating geologic 16 concepts like resources and reserves. In geology, 17 resources are concentrations of elements in the earth's 18 crust or under the sea existing in such form that they 19 may be extracted and used. Reserves are masses of rock 20 whose extent and grade are known to a lesser degree and 21 whose physical natures are such that they may be 206 1 extracted at a profit with existing technology and 2 present price levels. 3 These concepts have technical discovery and 4 economic dimensions, but only the latter, the economic 5 dimension is especially relevant to defining the 6 inventory of obsolete copper scrap. In geology, 7 resources are presumed to exist but must be discovered. 8 They must be measured as proved in terms of 9 composition, grade and quantity and then they can be 10 employed, held for future use, or abandoned. But this 11 technical discovery dimension is not relevant to copper 12 scrap. Copper scrap exists in and can be derived from 13 copper-containing products that reach the ends of their 14 useful economic lives. 15 So, focusing on the economic dimension 16 leads to a three-part classification that provides 17 insight into the different ways in which the inventory 18 of obsolete copper strap can be defined. First, 19 resources of copper scrap are copper-containing 20 products located on the earth's surface or in 21 landfills, existing in form that allows extraction and 207 1 use. 2 Second, potential reserves of copper scrap 3 are concentrations of known or inferred quantity in an 4 immediately useful condition that can be recovered 5 within the constraints of high but realistic prices, 6 that is, prices possibly several times higher than 7 current prices. 8 And finally, reserves of copper scrap are 9 concentrations of known extent and quality economically 10 recoverable at generally prevailing prices using known 11 technology. 12 From these three choices clearly the most 13 appropriate definition of the inventory of obsolete 14 copper scrap is potential reserves. As a concept 15 potential reserves include only material that is 16 relatively accessible and that offers the advantage of 17 scrap that exists in a metallic state not needing 18 further reduction. Therefore, potential reserves of 19 obsolete copper scrap can be drawn from within a short 20 time frame when scrap is demanded by the economy and 21 prices reach appropriate levels. 208 1 In contrast to potential reserves, a 2 measure of the larger pool of resources includes 3 material that is economical to access only in emergency 4 situations, such as wartime conditions. A measure of 5 the smaller pool, reserves, inadequately accounts for 6 the relationship between scrap price fluctuations that 7 occurred during the past and movements of obsolete 8 copper scrap from the pool of resources to the pool of 9 potential reserves. 10 Inventory defined as potential reserves of 11 obsolete copper scrap recognizes the economic 12 relationship between the availability and price of 13 copper scrap. Measuring potential reserves reflects 14 the reality that additional scrap will be available at 15 higher than current but still realistic prices. The 16 quantity of copper scrap recycled varies with the price 17 of copper scrap. As price increases, the amount of 18 copper scrap recycled increases and additional scrap 19 moves from the resource base to the potential reserve 20 or inventory of scrap. 21 Based on historical and expected scrap 209 1 prices, the inventory of obsolete copper scrap is more 2 than adequate to meet the domestic demand for scrap. 3 In the statistics I find no evidence of a shortage of 4 copper scrap in the U.S. economy. Thank you very much. 5 If you have questions, I will be happy to answer them. 6 MR. HILL: Thank you for your testimony. 7 This is the first that we have seen of this so we would 8 be happy to study it. I do have just some initial 9 questions that may be uneducated because I have not had 10 a chance to review this. But, if copper scrap prices 11 have risen, you would intuitively believe that the 12 draw-down of the quote-unquote pool of potential 13 reserves of copper scrap would increase as well; have 14 you seen that in the statistics? 15 MR. DAMUTH: Well, there are two things 16 going on, actually. There's the transition from 17 reserve, I mean from resources to potential reserves. 18 As the price of scrap goes up, additional copper scrap 19 moves from the larger pool to the smaller pool. Then 20 the second thing is as the price of copper scrap goes 21 up, the potential reserve is actually drawn down and 210 1 recycled through the economy. 2 MR. HILL: I understand. But have you seen 3 statistics that show that movement? 4 MR. DAMUTH: Those statistics are reflected 5 in the aggregate level, in table one of what I 6 submitted. 7 MR. HILL: Okay. Table -- well, again we 8 need to spend some time studying this. When I looked 9 at table one -- 10 MR. DAMUTH: Table one shows the net change 11 in the potential reserves. So, that's reflecting 12 resource moving from, I'm sorry, copper scrap moving 13 from resources into the potential reserve and from the 14 potential reserve into the recycled stream. 15 MR. EDELSTEIN: Mr. Hill, can I proceed on 16 this? 17 MR. HILL: Sure. 18 MR. EDELSTEIN: Thank you. I guess keeping 19 to form, I have some definitional questions so I 20 understand what it is that you are presenting here. 21 What you are calling obsolete copper scrap, is that in 211 1 fact not obsolete material but material actually in 2 use; does that actually, not actually reflect the pool 3 of material that is currently in use in our electrical 4 distribution line, in our plumbing and so forth; 5 therefore, it is not obsolete but actually material in 6 current use? 7 MR. DAMUTH: No, not, not exactly. If you 8 look at table three -- if you look at table three, in 9 column six, what we have presented for you there is 10 newly obsolete copper scrap. So, that is the amount of 11 obsolete material that is newly created each year. And 12 it is created because products containing scrap have 13 come to the end of their useful lives. Now, some share 14 of that is recoverable but some is not. And, the share 15 that is recoverable is the addition to the potential 16 reserve. 17 MR. EDELSTEIN: So what you are showing is 18 the cumulative additions to potential reserve of, I 19 guess, 72.76 billion pounds there? 20 MR. DAMUTH: Yes, since 1982. 21 MR. EDELSTEIN: Okay. So, versus the -- 212 1 what you're saying is there's almost 73 billion pounds 2 of material that has reached the end of its useful 3 life? 4 MR. DAMUTH: And has been recovered. 5 MR. EDELSTEIN: Has been recovered? 6 MR. DAMUTH: Right. 7 MR. EDELSTEIN: Well, what about the 8 material that has reached the end of its useful life 9 and has hot been recovered? 10 MR. DAMUTH: That is still in the pool of 11 resource. 12 MR. EDELSTEIN: Okay. In the pool of 13 resource, but that pool is what you're calling obsolete 14 scrap, is that correct? 15 MR. DAMUTH: No. I'm calling the inventory 16 of obsolete scrap the pool of potential reserves. It's 17 what's been recovered, what is recoverable and in the 18 pool of potential reserves. Once there, it can be 19 used. It can be recycled. 20 MR. EDELSTEIN: But in this case the most, 21 a lot of it may still be in use, is that correct? 213 1 MR. DAMUTH: No. 2 MR. EDELSTEIN: Or is that just the 3 obsolete, this is just the obsolete scrap? 4 MR. DAMUTH: Right. Right. 5 MR. EDELSTEIN: Okay. 6 MR. DAMUTH: If you look at table two, 7 you'll see the additions, potential reserves and you 8 will see in column three the actual withdrawals, the 9 use of obsolete copper scrap from that pool. And it's 10 the difference between those two that is the final 11 end-of-year net change in the inventory. 12 MR. EDELSTEIN: And how did you determine 13 what was becoming obsolete, is that based on the 14 average life of product? 15 MR. DAMUTH: Yes. Yes. And it's in five 16 different product categories. And as you have the 17 time, I suggest look to tables six through ten, or, I'm 18 sorry, five through nine. That shows the detailed 19 calculations by each end-use product category. The 20 useful lives of products vary from category to category 21 so it's a different calculation for each category. 214 1 MR. EDELSTEIN: And in this do you take a 2 look at material lost to waste disposal and things like 3 that, is that accounted for? 4 MR. DAMUTH: I think it is only to the 5 extent that, and frankly I would want to go back and 6 look at some of the detailed calculations but I think 7 it is only to the extent that it's captured in the 8 recovery rates that we have used in the analysis and 9 they are presented I believe in table fourteen. 10 MR. EDELSTEIN: Okay. Based on that 11 understanding, if I can draw an analogy then and see if 12 you agree with my interpretation. Your reserves of 13 copper scrap, unrecovered copper scrap are the 14 equivalent of the reserves, the mineral reserves of 15 copper in terms of definition; they are there, in the 16 ground, available to be recovered at some point in time 17 but at least at this point in time does not necessarily 18 reflect what is available to the consumer, just from 19 copper mining, refined copper isn't available to the 20 consumer until they mine it and therefore this reserve 21 is not available, of scrap is not available until the 215 1 miners in the scrap industry have in fact for whatever 2 reason received it, processed it, and made it available 3 to the consumer, is that correct? 4 MR. DAMUTH: Yes. 5 MR. EDELSTEIN: Thank you. 6 MR. HENRY: You did say we're going to see 7 a methodology and data that support this? 8 MR. DAMUTH: The methodology is actually 9 contained, the way the tables are organized, if you -- 10 MR. HENRY: You can see how -- 11 MR. DAMUTH: Yes. 12 MR. HENRY: -- it goes from one to the 13 next? 14 MR. DAMUTH: Yes. But I will within a week 15 submit a report that describes the methodology so that 16 one would not need to read footnotes in a table to 17 follow it. 18 MR. HENRY: And as we look through this, 19 and get to the point where we can try to understand how 20 the supply responds to price, is there any overall 21 conclusion -- I haven't looked at your executive 216 1 summary, but is there any, at all, conclusion about its 2 price elasticity, at what point do you see your reserve 3 of copper scrap, whether obsolete; well, anyway, at 4 what point to you see copper scrap going to the 5 consumer, at what price levels? Have we seen that in 6 the last year as prices of copper scrap exported and 7 domestic prices have increased, do we see this reserve 8 of copper scrap going to the recyclers, and at what 9 point in price was that happening? 10 MR. DAMUTH: Our analysis, this analysis is 11 done at the aggregate level. What you are looking for 12 is a much more micro-oriented analysis, to try to 13 determine the trigger price, that that would be a 14 difficult task but one that could be done. I haven't 15 done it. What we can say, though, is that the history 16 of price changes in copper scrap over the period of our 17 analysis has induced consistently, has brought 18 consistently net additions to potential reserve of 19 copper scrap. And if you look year by year, you will 20 see some years the addition is somewhat more than other 21 years but then there's also a draw-down in those years, 217 1 too, as copper is taken from a reserve and actually 2 recycled and consumed. 3 One thing I want to step back and say, 4 though, is that I have heard the term elasticity 5 referred to in the little time I have been here and I 6 think there's a little confusion. Elasticity is a very 7 precise concept in economics. I don't think, although 8 I heard a rumor that somebody earlier had said that 9 there's, the elasticity of supply of scrap does not 10 exist, that there is no elasticity. I think that 11 that's a misstatement. I don't think that witness 12 would have said there's not a positive and direct 13 relationship between the price of something and the 14 amount supplied of something. The question is, how 15 responsive is that relationship to a change in price 16 and we have not looked at that. It is something that 17 could be determined, subject to the constraints of data 18 which I have not looked closely at but I know many, 19 many years ago we did an elasticity calculation for the 20 supply of iron scrap. So, from that study I do know 21 that demand for iron scrap is elastic and I would be -- 218 1 elastic meaning the percentage change in the quantity 2 supplied is greater than the percentage change in the 3 price. Okay? And I would be surprised if something 4 similar were not true of the copper scrap industry. 5 MR. HILL: Okay. Thank you, sir. Thank 6 you for your testimony. I would ask that you submit 7 that report to us in the week as you have promised and 8 I would ask that you do so in electronic format as we 9 are subject to 508 compliance rules here in the 10 department. We wish to get this up on our Web Site as 11 soon as possible. So, we will look forward to seeing 12 your full review, your full report so that we can study 13 it closely. Thank you very much. 14 MR. DAMUTH: I will. You're welcome. 15 MR. HILL: At this time I would like to 16 call Sheldon Tauben to the witness table. 17 MR. TAUBEN: Good afternoon. My name is 18 Sheldon Tauben and I'm the President of Metalsco, 19 Incorporated, in St. Louis, Missouri. And we are a 20 metal merchant. We're not a broker. A broker buys 21 from A and sells to B, for a small commission, and has 219 1 no financial interest in the transaction, basically. 2 As a merchant we buy and sell for our account. We deal 3 in scrap metals exclusively, principally copper, brass 4 and aluminum. And, Metalsco has been in existence 5 since 1976. I have been in the industry since 1951. I 6 have participated in a lot of ISRI events and 7 activities in the past. In 1987 I was a national vice 8 president under a predecessor organization which was 9 merged with the Institute of Scrap Iron Steel to 10 produce ISRI in 1987. 11 All scrap is not created equal. And I 12 would just like to open my remarks, which I don't have 13 a printed, extensive report for you. I might skip 14 around on some of these things to touch on some things 15 that I think are important because I have the advantage 16 of being the last speaker. So, I recognize all the 17 mistakes that have been made so far today -- no, I'm 18 only kidding -- some inaccuracies. And one of the most 19 important ones, Robin touched on it briefly and I just 20 want to expand on it for a moment because it gets to 21 the very guts, the heart of what we're trying to do 220 1 here, and that is the subject of number two copper 2 scrap. I believe that value-wise the bulk of the 3 exports to China in the last couple of years has been 4 in the form of number two copper scrap. Now, number 5 two copper scrap is very specifically described in the 6 ISRI spec sheet. None of the brass mills, none of the 7 people that spoke today claiming to use number two 8 copper scrap in fact use it. They can't use it. 9 Number two copper scrap is 94 to 96 copper; the 10 balance, tin, nickel, lead, iron, zinc, you name it, 11 aluminum. There's no brass mill that can run a product 12 like that. 13 Now, what they mean when they say a number 14 two copper scrap, they mean that there are internal 15 gradations of scrap. Number two is less desirable than 16 number one but their number two is not the number two 17 copper that we are talking about. We're talking about 18 number two copper that has gone for generations, in 19 fact, since the turn of the century, to a custom 20 smelter and refiner. I worked for one in 1954, 21 American Melting Company, Limited, in New Jersey. They 221 1 closed up about twenty years ago. The problem we have 2 is that in the last four or five years, every one of 3 these customs smelters, meaning that they process other 4 people's material, they're not going to turn it into a 5 mining operation -- they buy other people's raw 6 material and convert into electrolytic copper, 7 basically, custom smelters. 8 For the last five years I've seen three, 9 the last three custom smelters in the United States go 10 out of business -- Southwire, about three or four years 11 ago, in Carrollton, Georgia. They're still operating 12 as a wire mill and a rod mill but they no longer take 13 copper scrap in and convert it to electrolytic copper 14 cathodes. They gave up that operation up completely. 15 So, copper, in the St. Louis area did the 16 same thing. They closed down their number two copper 17 refinery, smelter and now they buy cathodes only. 18 Prior to that, they'd use number two copper to make 19 cathodes and use it in their tube mill. Today they 20 only buy cathodes in the outside market. The last one 21 was Cometco (phonetic) about a year ago. They went 222 1 bankrupt. They closed up, gone. 2 The prospects for a copper refinery to open 3 up as a -- operation today is kind of remote. The 4 spreads vary too much and there's no consistency of a 5 supply of raw material at a fixed spread. We may see 6 some reopening of some smelter capacity in the 7 southwest. In 1999, 2000 to 2001, my company did four 8 or five hundred thousand tons a month of domestic 9 number two copper scrap. That went to Mexico where -- 10 had a smelter. 11 And that worked out very nicely until the 12 copper prices dropped from 90 cents to about 65 cents. 13 And they gave up the ghost because it no longer was an 14 operating spread for them. And just about that time, 15 the Chinese entered the market and got bigger and 16 bigger as a buyer over these last couple years. So, 17 the important thing to remember is that we are trying 18 to prevent the control and licensing of export of 19 copper scrap, and the main item is number two copper in 20 my opinion. 21 Now, it might help if we provide a brief 223 1 description of what I consider the five main grades of 2 copper scrap. There's the bare bright number one 3 copper, which is, as it is described, new wire cable, 4 new production scrap and with the brass mills that 5 we've spoken to and have spoken to you today, describe 6 number one copper scrap. That's what we're talking 7 about, number one copper. Why? Because it's a direct 8 replacement for cathodes and they put it right into the 9 furnace and it melts, it's all, 99.9. And it's a 10 regularly traded commodity. It's known as BARAY, 11 B-A-R-A-Y and ISRI Code. 12 The next grade number one copper is what I 13 call ordinary number one. Ordinary number one is 14 basically clean -- wire of varying gauge, 16 gauge, 15 usually that's minimum, 16 gauge but it could be finer, 16 mixed, and it also includes clean new and old tubing 17 and pipe, free of -- connections, free of 18 contamination. That is ordinary number one copper. 19 Okay. None of the brass mills that make a 20 sheeted strip, use that grade because the copper has 21 phosphorous in it and they can't have 70/30 brass made 224 1 with phosphorous in it. Also, the number one -- wire 2 could have some minor amount of impurities, maybe a 3 trace lead here or there. That commodity that I 4 described as ordinary number one is mainly used by the 5 tubing manufacturers, among which is Mueller Copper 6 Tube and Cambridge Lee and Overlea tube and a few 7 others. 8 In terms of export, I'll just jump to that 9 for a minute. There has been a lot of number one 10 copper exported, not so much of the ordinary number 11 one, however, a fair amount but not so much. That 12 material is still in relatively good supply. The bare 13 bright copper scrap by definition would mean the least 14 amount available in the market and is also the most 15 expensive. Some of that has gone for export and it's 16 possible that some of the brass mills may have suffered 17 because of that, to the extent to which I really don't 18 know but there's no shortage of the material in any 19 event. It's really a question of price. 20 Now, the value of that material again is on 21 supply and demand. And as the COMEX has gone up the 225 1 spreads have widened so that bare bright copper scrap 2 that used to go for a penny or two cents under COMEX, 3 is now -- going up over COMEX. The reason is because 4 the scrap prices follows cathodes. As cathodes have 5 escalated from the normal two and a half to three cents 6 to as much as seven or eights cents of spot material, 7 that means that the brass mills using the cathodes can 8 afford to pay a little bit more money than they 9 normally would for the bare bright material, because 10 it's replacing cathodes, as long as they've got a three 11 or four cent spread. 12 Okay. Now, another aspect of this is the 13 fact that this month an important labor contract may 14 expire in Miranda, in Canada. Miranda produces copper 15 cathodes and supplies the bulk of the copper cathodes 16 that go into the northeast, New England, on the East 17 Coast. It may be that there's some boatloads right now 18 that are going to China that have been diverted, that 19 come into New England in case there is a strike but 20 that's another reason why the big spread on cathodes is 21 developed. In all the years I have been doing this 226 1 trading business, I never remember a cathode premium 2 that went to nine or ten cents, never. They are 3 unusual circumstances. Cathodes are in tight supply, 4 you have Miranda, strike possibility coming up -- 5 MR. HILL: Mr. Tauben, your time has 6 expired. If you can take 30 seconds and wrap it up, 7 please. 8 MR. TAUBEN: Well, I tell you what. Let me 9 answer questions. You may get more from that. I can 10 talk for two hours on this with no trouble at all. Why 11 don't you ask some questions I'll try to see what I can 12 do to help you understand some of the problems we've 13 got here. 14 MR. HILL: Appreciate that, sir. We have 15 set the rules so that all the witnesses are treated 16 equitably. My question is, it's our understanding that 17 this business -- 18 MR. TAUBEN: I can't hear you. 19 MR. HILL: I'm sorry. Can you hear me now? 20 Can you hear me? 21 MR. TAUBEN: Okay. 227 1 MR. HILL: My understanding of this 2 business is it's very similar to other types of 3 businesses in the United States, where you have 4 long-term customer relationships. And I have heard 5 reports that some scrap recyclers and processors have 6 had long-term relationships for many, many years, 30, 7 40 years, with their customers and that loyalty between 8 customer and supplier are an important facet of this 9 industry. Are you, in your company, have you had any 10 of your customer base move away because you have not 11 been able to provide or supply scrap to them? 12 MR. TAUBEN: No. We, as a merchant, 13 Metalsco, we kind of sit in the middle of the thing 14 here. We're doing export extensively. We're a major 15 shipper of copper scrap to the Far East. In Korea, a 16 major copper refinery counts us as their major USA 17 supplier. We also supply almost every major domestic 18 copper tube mill and brass mill in the United States. 19 When the domestic copper refineries were operating, we 20 were a major supplier to every one of them. So we had 21 a lot of scrap every month and I have not run in into 228 1 any situation where we couldn't buy enough scrap to 2 gather up our needs to meet the orders that we have, 3 have not a problem. Of course there was a price I had 4 to pay but I could buy it. 5 MR. HILL: Bernie? 6 MR. KRITZER: Have you had any instances 7 where some of your foreign purchasers have paid higher 8 than market prices, have outbid U.S. customers or at 9 least a situation generally available to both the U.S. 10 customer and the foreign purchaser when these contracts 11 come up? 12 MR. TAUBEN: I don't know. 13 MR. KRITZER: What I'm looking at is some 14 of the earlier speakers talked about premia that had 15 been paid by foreign purchasers. Have you had 16 situations where that's occurred that pushed prices 17 upwards yards and when you conduct your sale operations 18 are there bidding between foreign and U.S. purchasers 19 or do you try to have enough supply to take care of 20 both areas? 21 MR. TAUBEN: It's a question of what the 229 1 buyer wants to pay, and basically, and that may or may 2 not represent a premium in the daily market. I mean, 3 it changes every day. But, as a merchant we sell to 4 the world market and it may be that we are selling at 5 premium price relative to the domestic market. That 6 could be. And that's why people in the Far East, for 7 example, can buy it because they are willing to pay a 8 bigger price for it. 9 The other thing is this. It's kind of the 10 other side of the coin, too. There's been some mention 11 about containers. There are thousands of containers 12 coming in from the Far East every month into this 13 country and they have to go back somehow. Well, they 14 go back by loading them up with scrap at very low 15 prices. And, so, that is part of the price they're 16 paying, that they are able to buy the stuff, pay a 17 premium for it but taking advantage of the fact that 18 the traffic can move at a variable rate. As far as the 19 internal structure of what they do, VAT, I'm still a 20 little confused on that. I'm not too sure but it 21 probably is part of the picture, they will get be able 230 1 to get some benefit from the Chinese government 2 tax-wise and apply that to the price of scrap to buy it 3 in the world market away from other people. 4 MR. KRITZER: Based on your experience over 5 the last fifty years, you see, I'm sure you have seen 6 the market go in cycles. Do you think that this 7 particular market has reached its peak or has a little 8 ways to go or it's on a downward slope? 9 MR. TAUBEN: Well, we had spoke about this 10 yesterday. Incidentally, copper was up four and a half 11 cents today. I don't know if you know that. But, I 12 mean, I think that we're in a continuing cyclical 13 market that's not going to change any. Whether we will 14 see prices over a dollar-forty or not, which was recent 15 high, I think we could. I don't think the short supply 16 overall is going to dissipate. The cathode consumption 17 is pretty strong. Some of the mines that are coming 18 back into the market, producing material, that wasn't 19 available before but there's quite a time lag until it 20 gets to the market. 21 I think we'll continue to see cycles. The 231 1 only thing I can think of is that from a trading 2 appointment of view, we're liable to see over the 3 mid-term lower highs and lower lows, which would be a 4 downturn but that could turn around very quickly and 5 run into the higher highs and higher lows, sort of on 6 the way up. So, to try to make a long-term forecast in 7 our business is what's going to happen next week. So, 8 it's hard for me to give you any kind of, you know, 9 extensive program on it. We live with it day to day. 10 MR. KRITZER: I have one final question, 11 and I asked this of one of our earlier witnesses, 12 Mr. Kerwin. Do you see new developments where in 13 foreign countries or the United States companies are 14 making investments in anticipation of the continued 15 high prices to bring new supply on line in the next 16 year or two? 17 MR. TAUBEN: I think they're already doing 18 that. Some are reopening old mines. Whether somebody 19 is going to go open a Greenfield operation, I mean, 20 open a new mine, it depends on what they think their 21 cost of production is. Some of the South American 232 1 producers have very low cost; and they figure a 30 cent 2 cost, they'll pay good the money to do it. If it's 3 going to cost them 80 cents, they might think twice 4 about it. 5 MR. KRITZER: Thank you. 6 MR. HENRY: Thank you. You provided with 7 this testimony today an outline. Do you intend to 8 write up something that would address everything in 9 your outline for this group? 10 MR. TAUBEN: I do. I haven't done it but I 11 could do that for you if you would like me to. 12 MR. HENRY: We would appreciate that. And 13 secondly, you brought up the point about confusion of 14 grades, particularly number two? 15 MR. TAUBEN: Yes. 16 MR. HENRY: And you have gone on to say 17 that what the copper and brass mills are talking about 18 in number two is not what you consider to be number 19 two. And my question to you is, is, what's being 20 exported in your mind a grade that the copper and brass 21 mill industry does not normally use? 233 1 MR. TAUBEN: Does not normally use it and 2 cannot use it. If I show you some picture of the 3 material, you'll see what I'm talking about. Maybe I 4 will include that in my report. Birch cliff, it's a 5 miscellaneous copper scrap iron that doesn't quite make 6 number one and it's a little bit better than Licon 7 (phonetic). It's an Indian grade. It's not an iron 8 that can be used making brass anywhere, in the United 9 States, or even abroad, where the quality is a little 10 bit lower. It's strictly an item that goes from a 11 copper refinery to be smelted or melted and out of 12 furnace, processed. That's all it is. 13 Now, there is another aspect to it, 14 however. In China, if it's a reasonably good quality 15 material, they would put a dollar a day labor into it, 16 in some province and tear these bales apart, pick out 17 little pieces of copper tubing, that might be a good 18 number one, pieces of burnt wire. Number two copper is 19 a blend of everything. We buy scrap from certain areas 20 that is very desirable in the Far East and they like it 21 because the people that are packaging it don't have the 234 1 time, energy to separate the number one from the number 2 two, believe it or not and they throw it all in a bail 3 and ship it. So we get premium prices because the 4 buyer knows what he's getting. But that's very 5 important. Don't confuse what number two is, can't do 6 that, separate item. And, this is an item I can tell 7 you we've been handling for years and years and years 8 that I don't have to talk about. 9 MR. HENRY: And the price increase in the 10 domestic prices of the number two, that the price 11 increase that the domestic industry is paying is 12 increasing, and in your opinion is this related to the 13 scrap prices that are being exported? 14 MR. TAUBEN: It would stand to reason that 15 the greater demand for export is going to put pressure 16 on prices upward some degree, no question about it. 17 But I think the critical thing is as far as the people 18 representing the brass and tube mills, have they really 19 run out of copper, have they really been unable to 20 operate? I doubt that very much because I know we're 21 supplying them. In some cases we've even had to hold 235 1 up deliveries for a couple of different reasons. Why? 2 Come back next week or next month or we want a number 3 ten, gives us appointments for three. This has 4 happened. So, you have to, to get a balanced view, you 5 have to talk to all participants in the trade. 6 MR. HENRY: Thank you. 7 MR. TAUBEN: You're welcome. 8 MR. EDELSTEIN: Yes, thank you. As a 9 merchant do you actually collect scrap in a location in 10 warehouses and bundle it for shipment or do you in fact 11 just arrange for it to be shipped from specific scrap 12 yards? 13 MR. TAUBEN: Okay. As a merchant, we don't 14 physically handle the scrap. We shuffle the papers. 15 But, we buy from people that we've known for 30, 40 16 years. Two of my sons work for the company. They're 17 buying scrap from their grandfather. Their grandfather 18 I brought from forty years ago, same generation as me. 19 It's that kind of relationship. We're buying from one 20 generation to the next. They know us. One or two 21 copper, we know what we're going to get. 236 1 So, we don't have to handle it. We don't 2 have to see it. We just move it. We provide 3 transportation. We have a domestic traffic department 4 that picks up dozens of truckloads every week, every 5 month all over the United States, deliver to domestic 6 consumers. We have an export traffic manager that 7 arranges for a container to be picked up at the 8 terminal. The dealer picks it up, puts the scrap in 9 it, brings it back to the terminal, sends us an 10 invoice, sends the packing list, ship it overseas. 11 That's the merchant function. 12 MR. EDELSTEIN: Thank you. Then perhaps 13 you may be in the best position of all our speakers so 14 far to address exactly what is going into the different 15 trade categories of scrap. The Schedule B Harmonized 16 Tariff System shows only four different scrap 17 categories, one of which is scrap of refined copper; 18 the other three categories are of copper-alloy products 19 containing various amounts of lead, brass, brass with a 20 lead cut off, and the third category is just other 21 copper alloys scrap. When you said the largest single 237 1 quantity of scrap that is being exported is number two 2 scrap, does that all fall into that category, the 7404, 3 44420 category of unrefined -- of refined copper or 4 scrap from refined capper? 5 MR. TAUBEN: I think number two, the second 6 one you mentioned. Repeat the second one. 7 MR. EDELSTEIN: Okay. There is nothing 8 called number two. There are four categories of scrap 9 trade. One is scrap of refined copper, without further 10 detail, and then there are three alloyed copper 11 categories, one being brass scrap with a cutoff grade 12 for lead, the other being a brass scrap above that 13 cutoff grade and the third category being other 14 copper-alloy scrap, presumably bronze or low-grade 15 scrap, I don't know. So, material that you are 16 brokering, the number two that you are talking about, 17 does that fall into that? 18 MR. TAUBEN: It's number one. 19 MR. EDELSTEIN: That's number one? 20 MR. TAUBEN: Because the number two copper 21 is a form of refined scrap, is made up of copper wire 238 1 which is, it's just in number two copper form, that's 2 all. 3 MR. EDELSTEIN: Do you broker any brass or 4 bronze scrap or low-grade scrap? 5 MR. TAUBEN: The really low-grade scrap, 6 which is one of my items here, it's smelter items for 7 smelter and refinery. They take the low-grade 8 materials, such as, oh, electrical scrap, iron, brass 9 material that will run and they smelt that in a blast 10 furnace or a tilting reverb of some kind. And that 11 becomes eventually smelted. I mean, it goes into an 12 anode furnace and becomes a cathode for that system but 13 it starts out as very low-grade material. No, we don't 14 bother too much with that. I don't like to deal with 15 it, frankly. There are too many differences between 16 what the buyer thinks it is and what the seller thinks 17 it is so we just don't handle that item; 70/30 brass, 18 not much. 19 Actually, one of the gentlemen before 20 mentioned that there's a lot of scrap being exported. 21 I can't quite see that because of the thousands and 239 1 thousands of tons that we shipped in the last few, we 2 didn't ship 70/30 brass to anybody. Maybe West Coast 3 is somewhat of a market because it pays to ship it a 4 lower price. I wouldn't say 70/30 brass is a big item 5 at all. 6 For example, being basic raw material, 7 there's some, a little bit of that going on with the 8 West Coast, again the freight. We buy our brass on the 9 West Coast and bring it to the Midwest. We've been 10 doing that all through this whole period, so, I think 11 that the brass mill that says that his raw material's 12 going overseas is by my view I'd question it. I don't 13 think that's the case. Now, another aspect of this 14 number two copper, which is interesting though, do you 15 mind if I mention it to you? I don't have too much 16 time left, sir. Is it all right, sir? Okay. 17 Number two copper scrap, as I described, 18 birch cliff, right. Because the brass mills are 19 running into voluntary supply problem, they can't get 20 enough raw material, they have arranged with certain 21 wire choppers to take the ordinary number two copper 240 1 from the dealers, throw it at these new French 2 shredders that take everything and chop it up into 3 small discrete particles. That's the density that 4 they're referring to. They run it over a belt, with a 5 high-intensity magnet, suction it off, free iron. But 6 what they're left with is small particles of copper 7 scrap, little bits of aluminum, little bits of tin, 8 little bits of lead, little bits of zinc but it can be 9 used at the brass mill because as they said it's within 10 their impurity spec. 11 Well, there's a certain amount of that 12 number two copper that isn't being consumed today. 13 It's a relatively small amount. I would say if it's 14 5,000 tons a month, that's a lot, and it's frequently 15 in the Midwest area, located in Michigan, Indiana. Now 16 that's what they call maybe a number two copper scrap 17 but it's a process that has been beneficiary created, 18 so to speak, so they can use it. It's not the ordinary 19 birch cliff that we ship out in trailerloads with ten 20 bales and six boxes. And there's no way a brass mill 21 can use that. 241 1 MR. EDELSTEIN: Have you seen a shift in 2 the availability to you as a merchant of scrap rates; 3 for example, is there less what you would call number 4 one scrap available and more number two scrap available 5 possibly because the processors not, no longer taking 6 the time to upgrade the scrap where they might once 7 have, has there been a shift in that market? 8 MR. TAUBEN: What you are implying is that 9 the scrap process would take number two copper and 10 upgrade it to number one and there's not much of that 11 goes on. It's all hand labor. And it might work today 12 where there's a big spread between the number two 13 copper and number one. It may pay then. There's a 15 14 or 20 cent spread. A dealer might put 6, 7, 8 cents 15 and actually break the bale apart and pull out the 16 different parts of number one. That could be done. It 17 has been done in the past. We find that we have no 18 trouble buying any number one copper for our needs. 19 The problem right now is the number two copper scrap. 20 If, every dealer in the United States, a wholesale 21 dealer produces one, two three or four truckloads a 242 1 month of number two copper and right now they have got 2 no place to go with it. And if you put an embargo on, 3 it's going to exacerbate a bad situation as it is right 4 now. It's kind of interesting. 5 MR. EDELSTEIN: Thank you. 6 MR. HILL: Thank you, Mr. Tauben. 7 Actually, I have the pleasure of being the last 8 speaker. First I would like to remind everyone that we 9 are requesting that comments and responses to the 10 initial comments that were submitted by May 13th be 11 submitted to the Department in electronic format by May 12 27th, including any comments on the hearing and 13 information that was received or heard today. 14 We also would like to remind you that the 15 period for submission of all written comments will end 16 at 5 p.m., June 7th, 2004. For the record, you should 17 send your submissions to the following Web address -- 18 all one word -- coppershortsupplypetition at 19 bis.doc.gov or you may mail them to Copper Short Supply 20 Petition, Regulatory Policy Division, Bureau of 21 Industry and Security, U.S. Department of Commerce, 243 1 Post Office Box 273, Washington, D.C. 20044. 2 We have kept a list of the promises from 3 the witnesses today so we will be looking for your 4 submissions. I would like to again thank Bob Nichol 5 and his crew. I guess Bob is out getting ready to 6 escort you. There he is. We thank Bob for taking care 7 of us and making sure that it all works smoothly. I 8 would like to thank the staff, from the Department, and 9 from our Bureau, who has listened and have been taking 10 copious notes on all of this. I would like to 11 especially thank our government panel, Dan Edelstein, 12 from the U.S. Geological Survey, Dave Henry from the 13 Economic and Statistics Administration, Department of 14 Commerce, my good friend and colleague, Bernie Kritzer, 15 from the Bureau of Industry and Security and Peter 16 Klason, my counsel from the Office of Chief Counsel. 17 I would like to also thank Trina Bean, who 18 was our timekeeper today. Nice job. Court reporter, 19 thank you. And I finally and most appropriately would 20 like to finish by thanking the witnesses. I found the 21 testimony to be interesting. I found that you had 244 1 indeed been very well prepared for the hearing today. 2 I think we were very pleased with the caliber of the 3 material we heard and now we are looking forward to 4 getting the remainder information in. And as most of 5 you already know we have already started rolling up our 6 sleeves and now we will get to work to finish our 7 report. And with that I would like to close the 8 hearing and thank you all for attending. 9 (Proceedings concluded at 4:18 p.m.) 10 11 12 13 14 15 16 17 18 19 20 21 245 1 State of Maryland. 2 Baltimore County, to wit: 3 I, ROBERT A. SHOCKET, a Notary Public of 4 the State of Maryland, County of Baltimore, do hereby 5 certify that the within-named proceedings personally 6 appeared before me at the time and place herein set 7 out. 8 I further certify that the proceedings were 9 recorded stenographically by me and this transcript is 10 a true record of the proceedings. 11 I further certify that I am not of counsel 12 to any of the parties, nor in any way interested in the 13 outcome of this action. 14 As witness my hand and notarial seal this 15 1st day of June, 2004. 16 17 ___________________________ 18 Robert A. Shocket, 19 Notary Public 20 My Commission Expires: 21 November 1, 2006 246 1 INDEX 2 Copper Hearing 3 May 19, 2004 4 5 Witnesses: Page 6 Joseph Mayer 7 7 James Mallory 13 8 David Hartquist 36 9 Michael Kerwin 51 10 Roy Allen 91 11 Thomas Baker 107 12 Jeffrey Burghardt 119 13 George Dykhuizen 135 14 James Rourke 152 15 Robin K. Wiener 174 16 Robert Damuth 201 17 Sheldon Tauben 218 18 19 20 21