66 FR 33530, June 22, 2001 A-449-804 Investigation Public Document Group II/Office V: CMS MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Bernard T. Carreau Deputy Assistant Secretary for Import Administration, Group II DATE: June 14, 2001 SUBJECT: Issues and Decision Memorandum for the Final Determination in the Antidumping Duty Investigation of Steel Concrete Reinforcing Bars from Latvia Summary This memorandum addresses issues raised in the above-referenced proceeding. Section I lists the issues briefed by interested parties. Section II identifies the changes made in the margin calculation since the preliminary determination. Finally, Section III analyzes the comments of the interested parties. Finally, we recommend approval of the Department's positions developed for each of the issues. Background On January 30, 2001, the Department of Commerce (the Department) published its preliminary determination in the antidumping investigation of steel concrete reinforcing bars from Latvia. See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Steel Concrete Reinforcing Bars from Latvia, 66 FR 8348 (January 30, 2001). The period of investigation (POI) is April 1, 1999, through March 31, 2000. The sole respondent in this investigation is JSC Liepajas Metalurgs (LM). We conducted verification of the cost information submitted by the respondent from February 26 through March 2, 2001, and we conducted verification of the respondent's sales information from April 9 through April 13, 2001. We issued the cost verification report on April 4, 2001, and the sales verification report on April 27, 2001. We invited all parties to comment on the preliminary determination, and the findings of verification. The Rebar Trade Action Coalition (the petitioner) and LM submitted case briefs on May 8, 2001, and rebuttal briefs on May 14, 2001. The petitioner submitted a request for a hearing on March 1, 2001, and withdrew this request on May 7, 2001. I. List of issues 1. Whether LM is Affiliated with a Trading Company 2. Facts Available 3. Brokerage Expenses in the Third Country Market 4. Inclusion of Non-Operating Expenses in Revised General and Administrative Expense Ratio 5. Credit Expenses II. Changes in the Margin Calculation Since the Preliminary Determination 1. We changed the methodology for deriving the facts available rate, as follows: the facts available rate is now based on the highest average margin generated for any distinct product. See Comment 2. 2. We revised the reported brokerage expenses for the U.S. and German markets to account for the respondent's clerical errors and a verification finding. See Comment 3. 3. We revised the G&A ratio to account for findings at verification. See Comment 4. III. Discussion of Issues Comment 1: Whether LM is Affiliated with a Trading Company The petitioner argues that the Department was correct in preliminarily determining that LM is affiliated with a European trading company, within the meaning of section 771(33)(G) of the Tariff Act of 1930, as amended (the Act) and the Statement of Administrative Action (SAA). According to the petitioner, the trading company is in a position to exercise direction or restraint upon LM, by virtue of an exclusive distribution contract for U.S. sales and the provision of financing capital for production of rebar. The petitioner contends that the Department discovered additional evidence of affiliation at verification, including negotiations with the trading company and its parent bank for the financing of a substantial revamping of LM's facilities, the sharing of sensitive financial and customer information between the two parties, the frequency of high-level meetings (including joint visits to U.S. customers), and correspondence indicating that this company attempted to influence LM with respect to all U.S. sales. LM argues that the Department erred in preliminarily determining that it is affiliated with the trading company. According to the respondent, the record establishes that LM never honored the exclusive U.S. distribution contract with the trading company. LM claims that the record establishes that the trading company was unsuccessful in seeking to enforce the agreement, and that LM repeatedly misled the trading company by assuring it of its commitment while at the same time covertly selling rebar to other trading companies in the U.S. market. LM further argues that the production financing provided by the trading company reflects standard business arrangements for what it characterized as a "Central European" steel producer, and LM required such terms of sale from all customers. The respondent contends that the negotiations with the trading company and its parent bank for the modernization of LM's facility were never consummated, and in any event do not establish control by the trading company. Finally, LM argues that the visits between its top managers and the directors of the trading company reflect nothing more than good relations between a steel producer and an important customer, and are not indicative of a control relationship. The Department's Position: For the reasons discussed below, we find that LM is affiliated with the trading company in question. Section 771(33)(G) of the Act provides, inter alia, that parties are affiliated where one party controls another. The SAA provides specific examples of such control: The traditional focus on control through stock ownership fails to address adequately modern business arrangements, which often find one firm "operationally in a position to exercise restraint or direction" over another even in the absence of an equity relationship. A company may be in a position to exercise restraint or direction, for example, through corporate or family groupings, franchises or joint venture agreements, debt financing, or close supplier relationships in which the supplier or buyer becomes reliant upon the other. See SAA at 838. In the fact gathering stage of the investigation, the Department analyzed the contractual relationship between the respondent and the trading company, and found sufficient evidence of affiliation to request that LM report the downstream U.S. sales of the trading company. See Memorandum from Gabriel Adler to Gary Taverman: Antidumping Investigation of Steel Concrete Reinforcing Bars from Latvia; Affiliation (December 1, 2000). After consideration of the findings at verification, as well as other record evidence, there is a more complete picture of the relationship between LM and the trading company. Beyond the contractual relationship that the preliminary determination cited, there is evidence of (a) negotiations between the respondent, the trading company, and the trading company's parent bank to finance a major overhaul of the respondent's production facilities, requiring that LM share sensitive financial information and business plans; (b) the provision of a large line of credit to finance the production of rebar for sale to the United States through the trading company; and (c) numerous visits of top managers of the trading company to LM, in the company of U.S. customers, suggesting the sharing of customer information (and, similarly, visits of top managers of LM to the United States, in the company of top managers of the trading company, for purposes of meeting with U.S. customers). In view of the totality of these facts, it is clear that the trading company is in a position to exercise direction or restraint upon the respondent. First, the Department learned at verification that the president, vice- president, and chairman of LM had met with top officials of the trading company and its parent bank to discuss a plan for the modernization of LM's furnaces and other capital equipment. See sales verification report at 7. As part of this negotiation, LM was required to provide sensitive business information. Id. This is indicative of ties well beyond the arms-length relationship claimed by LM, and establishes that the trading company is to a large extent a partner in LM's production and sale of rebar to the United States. (1) Second, the trading company provided LM with a line of credit to finance production of rebar for sale to the United States through the trading company. See sales verification report at 3. These sales represented approximately half of the respondent's sales of all products to all markets during the period of review, and were therefore key to the operation of the company. Indeed, LM officials stated at verification that procurement of such a credit line was a key determinant in the establishment of a relationship with the trading company. Id. at 3. Moreover, LM officials stated that they never cancelled the exclusive distribution agreement with the trading company out of fear that it would cause an important part of their business to evaporate. Id. at 4. Third, at verification, we found evidence of 17 separate visits of top managers of the trading company to LM during a 14 month period, in the company of U.S. customers. Id. at 6. Moreover, we found evidence that top managers of LM had visited the United States in the company of top managers of the trading company, for purposes of meeting with U.S. customers. We asked the vice-president of LM whether, in his experience, it was customary for trading companies to take their suppliers on tours of the U.S. market to meet their customers. Mr. Segal stated that it was not, but that the trading company considered that it had a commitment from LM to a significant share of the U.S. market. Id. at 7. These contacts further establish a close relationship between LM and the trading company. In sum, the totality of the evidence on the record establishes that the relationship of LM and the trading company is far closer than that of the typical steel producer and an unaffiliated trading company customer. (2) The fact that LM in certain instances may have misled the trading company by selling rebar to other customers does not negate the significant control held by the trading company over the respondent's activities. We, therefore, continue to find that LM is affiliated with the trading company in question. Comment 2: Facts Available The petitioner argues that LM's failure to fully cooperate in this investigation necessitates the use of facts available for the purpose a calculating an antidumping margin. According to the petitioner, LM failed to disclose the full extent of its relationship with the trading company involved in the majority of U.S. sales, in order to obscure its level of affiliation with that company. The petitioner contends that LM's failure to report the downstream U.S. sales data for the trading company makes it impossible to calculate an accurate margin for the sales involving the trading company, and calls into question the overall reliability of the responses. According to the petitioner, LM's lack of cooperation and the magnitude of its omissions warrant application of total facts available based on the petition rate. In the alternative, the petitioner argues for the calculation of a margin based on other data on the record. For normal value, the petitioner proposes the use of (a) the normal value in the petition, (b) a constructed value based on the costs of production of a petitioner company, or (c) the highest reported comparison market price (as in the preliminary determination). For the U.S. price, the petitioner proposes the use of the lowest reported U.S. price. LM argues that it has been completely cooperative in this investigation, and that the use of facts available is not warranted. LM contends that if the Department uses facts available, it should use a partial approach as it did in the preliminary determination, but based on less punitive assumptions. LM suggests a model-specific approach, comparing the lowest reported U.S. price to the normal value of the matching model sold in the German market. The Department's Position: For the final determination, we continue to find that the use of partial facts available and an adverse inference is appropriate. As discussed below, we have assigned a facts available rate to sales involving the trading company in question. That rate has been based on the highest control-number-specific margin calculated for sales that did not involve that trading company. Section 776(a)(2) of the Act provides that "if an interested party or any other person (A) withholds information that has been requested by the administering authority, (B) fails to provide such information by the deadlines for the submission of the information or in the form and manner requested, subject to subsections (c)(1) and (e) of section 782, (C) significantly impedes a proceeding under this title, or (D) provides such information but the information cannot be verified as provided in section 782(i), the administering authority and the Commission shall, subject to section 782(d) and (e) of the Act, use the facts otherwise available in reaching the applicable determination under this title." The statute requires that certain conditions be met before the Department may resort to the facts otherwise available. Where the Department determines that a response to a request for information does not comply with the request, section 782(d) of the Act provides that the Department will so inform the party submitting the response and will, to the extent practicable, provide that party the opportunity to remedy or explain the deficiency. If the party fails to remedy the deficiency within the applicable time limits, the Department may, subject to section 782(e), disregard all or part of the original and subsequent responses, as appropriate. Briefly, section 782(e) provides that the Department "shall not decline to consider information that is submitted by an interested party and is necessary to the determination but does not meet all the applicable requirements established by the administering authority" if the information is timely, can be verified, is not so incomplete that it cannot be used, and if the interested party acted to the best of its ability in providing the information. Where all of these conditions are met, and the Department can use the information without undue difficulties, the statute requires it to do so. In selecting from among the facts otherwise available, section 776(b) of the Act authorizes the Department to use an adverse inference, if the Department finds that an interested party failed to cooperate by not acting to the best of its ability to comply with the request for information. See, e.g., Certain Welded Carbon Steel Pipes and Tubes from Thailand: Final Results of Antidumping Duty Administrative Review, 62 FR 53808, 53819-20 (October 16, 1997). See also SAA at 870 (1994). While LM has been generally cooperative over the course of this antidumping proceeding, it has not been cooperative in failing to provide downstream sales data involving its affiliated trading company. LM did not identify the trading company in question as an affiliate, despite the significant control exercised by that company on LM's operations. On December 1, 2000, the Department issued a memorandum preliminarily finding that LM was affiliated with that trading company and requested downstream sales data. LM replied with a letter objecting to the Department's affiliation determination, and noting that the trading company was refusing to provide the requested information. See December 11, 2000 submission from LM. The trading company submitted a letter stating that it would not provide the requested information under any circumstances. Id. at exhibit 1. The refusal of LM and its affiliated company to report the requested downstream sales data has significantly impeded the ability of the Department to calculate dumping margins for the transactions in question. LM was of course free to argue throughout this proceeding that it was not affiliated with the trading company, but once the Department formally requested the submission of the downstream sales data, those data should (and could) have been provided. (3) Given that LM and its affiliated trading company failed to act to the best of their ability with respect to the transactions in question, we are applying the facts otherwise available for all sales made to the United States through the affiliated trading company, and are making an adverse inference. In the preliminary determination, we calculated the facts available margin by using the single lowest U.S. price for any sale not involving the affiliated trading company, compared to the highest normal value for any product. We continue to consider that, given the facts of this case, this methodology yields an appropriate facts available margin. We note that the facts available margin is slightly different from that of the preliminary determination due to correction of minor errors in the respondent's data, pursuant to revisions presented at the outset of verification. Comment 3: Brokerage Expenses in the Third Country Market LM argues that the Department should deduct brokerage expenses from third country sales prices. According to LM, the Department verified that identical brokerage expenses were incurred for U.S. and third country sales, and that due to a clerical error, the third country brokerage expenses were omitted from the reported database. Further, LM argues that the Department should not adjust the brokerage expenses for certain charges by the brokerage provider relating to shipments prior to the POI. The petitioner did not comment on this issue. The Department's Position: We agree with LM, and have deducted the verified brokerage expense from third country sales prices. We have not adjusted the brokerage expenses for certain charges pertaining to shipments prior to the POI. Comment 4: Inclusion of Non-Operating Expenses in Revised G&A Ratio LM argues that the Department should revise its G&A expense ratio to exclude several accounts ("Expenses of the Shop," "Expenses of the Medical Center," and "Expenses of the Palace of Culture") that do not relate to the operations of the company. The respondent contends that the Department properly excluded accounts such as "Ice Hall Shop Expenses" after concluding that these expenses did not relate to the operations of the company, and argues for similar treatment for the three specified accounts. The petitioner contends that the G&A expense ratio should include the accounts in question, arguing that they are related to production of subject merchandise. The Department's Position: We agree with the respondent that the above accounts (i.e., expenses of the shop, expenses of the medical center, and expenses of the palace of culture) should not be included in the revised G&A expense ratio. At verification, the Department confirmed that these items were included in cost of goods sold and not in administrative expenses. Additionally, we confirmed that the related income was included in the company's total sales revenue and not included as an offset in its G&A rate calculation. Because these items do not relate to the general operations of the company, they were not appropriately classified as G&A expenses at the preliminary determination. Therefore, we have revised the G&A expense ratio to exclude these three accounts. Issue 5: Credit Expenses The petitioners argue that the Department should continue to disallow the reported imputed credit revenue associated with "pre-payment" of sales. The petitioners further argue that the Department should make a circumstance of sale adjustment for actual borrowing costs associated with these sales. LM argues that the interest expenses associated with the sales in question are already accounted for in the reported cost of production, and should not be deducted from sales prices as a circumstance of sale adjustment. The Department's Position: We agree with the petitioners that the reported imputed credit revenue should continue to be disallowed, and we agree with LM that the actual interest expenses are already accounted for in the reported cost of production, and should not be deducted as a circumstance of sale adjustment. As explained in the Preliminary Determination, the "pre- payment" received for sales represents a loan advanced by the customer for purposes of financing production. The Department confirmed at verification that the actual interest payments associated with these loans was included in the cost of production. It would be inappropriate to adjust for these interest expenses as a circumstance of sale adjustment. Recommendation Based on our analysis of the comments received, we recommend adopting the positions described above. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margins in the Federal Register. Agree__________ Disagree__________ _________________________ Faryar Shirzad, Assistant Secretary for Import Administration _________________________ (Date) ________________________________________________________________________ footnotes: 1. The discussions took place in early 2000. See sales verification report at 7. LM's contention that the financing has not yet been extended, and that the planned modernization is on hold, may simply reflect that discussions are still ongoing, and in any event is immaterial. By LM's own admission, the company had very limited access to capital. See sales verification report at 3. The fact that LM is turning for major financing to a trading company that is already involved in the majority of its U.S. sales (indeed, providing a credit line for the production of such merchandise), and that has an exclusive distribution agreement in the U.S. market, is indicative of the close relationship between the two companies. In its rebuttal brief, LM also suggests that it was engaged in similar discussions with other banks, and was not dependent on the trading company's parent bank. There is no evidence of such discussions on the record. LM cites only to an article in Metal Bulletin, dating back to 1998, which discussed negotiations with several companies for the "supply of a new electric furnace," and notes that Mannesmann Demag was one of the manufacturers being considered. LM Rebuttal brief at 9, note 5 (emphasis added). This information was provided for the first time in the rebuttal brief, and is arguably untimely. In any event, the citation does not refer to the financing of the furnace, merely to the manufacturers being considered. Moreover, the discussions between LM, the trading company, and its parent bank were held early in the year 2000, when LM had already been exploring the modernization of its facility for two years. The minutes of the meetings of those discussions reflect a detailed analysis of the requirements for such a deal. See sales verification report at 7. 2. LM cites the CIT decision in Ta Chen Stainless Steel Pipe, Ltd. v. United States (No. 97-08-01344). In that case, the court noted that it would be "reluctant" to uphold a finding of affiliation based exclusively on a written contract (though that was not the fact pattern before the court). In this case, as described above, there is extensive evidence of affiliation beyond the exclusive distribution contract between the parties. 3. At verification, LM officials acknowledged that the trading company in fact offered LM access to its downstream data after the issuance of the preliminary determination, and that LM had made a "strategic decision" not to submit such data; LM officials stated that they were concerned that the data would be rejected as untimely, and that the offer to submit the data would be interpreted as evidence that LM and the trading company were affiliated. See sales verification report at 4. Notwithstanding LM's speculation that the data would have been rejected as untimely, it was LM's responsibility to make every effort to provide the requested data, and the trading company's ultimate offer to submit those data (which LM chose not to communicate to the Department) belies the earlier claim that the data would not be provided under any circumstances.