67 FR 8520, February 25, 2002 A-570-822 Seventh Administrative Review POR: 10/1/99-9/30/00 Public Document SAH: x3464 MEMORANDUM DATE: February 15, 2002 TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Richard W. Moreland Deputy Assistant Secretary, Group I Import Administration SUBJECT: Issues and Decision Memorandum for the Final Results of the Antidumping Duty Administrative Review of Certain Helical Spring Lock Washers from the People's Republic of China _________________________________________________________________________ SUMMARY We have analyzed the comments in the case and rebuttal briefs submitted by interested parties in the antidumping duty administrative review of certain helical spring lock washers ("HSLWs") from the People's Republic of China ("PRC"). As a result of our analysis, we have made changes, including corrections of clerical errors, in the margin calculations. We recommend that you approve the positions we have developed in the Discussion of the Issues section of this memorandum. Below is the complete list of the issues in this review for which we received comments from the parties: Comment 1: Use of Import Prices to Value All Steel Wire Rod Inputs Comment 2: Plating Operations: Factory Overhead, SG&A Expenses and Profit Comment 3: Representativeness of Plating Factors of Production Comment 4: Valuation of Hydrochloric Acid Comment 5: Valuation of Inland Shipping Rate Comment 6: Valuation of Potassium Aluminum Sulfate Comment 7: Calculation of Factory Overhead Net of Scrap BACKGROUND The products covered by this review are HSLWs of carbon steel, of carbon alloy steel, or of stainless steel, heat-treated or non-heat-treated, plated or non-plated, with ends that are off-line. HSLWs are designed to: (1) function as a spring to compensate for developed looseness between the component parts of a fastened assembly; (2) distribute the load over a larger area for screws or bolts; and, (3) provide a hardened bearing surface. The scope does not include internal or external tooth washers, nor does it include spring lock washers made of other metals, such as copper. This administrative review was requested by Shakeproof Assembly Components, Inc. ("the petitioner"). The respondent is Hang Zhou Spring Washer Co. Ltd. ("Hangzhou"), also known as Zhejiang Wanxin Group, Co., Ltd. The period of review ("POR") is October 1, 1999 through September 30, 2000. We invited parties to comment on our preliminary results. DISCUSSION OF ISSUES Comment 1: Use of Import Prices to Value All Steel Wire Rod Inputs In the Preliminary Results, the Department used the price of steel wire rod ("SWR") imported by Hangzhou from the United Kingdom to value Hangzhou's SWR input. The petitioner raises several objections to the use of this information for valuing this input. First, the petitioner contends that the prices paid by Hangzhou cannot be used because: (i) the prices are aberrationally low; (ii) Hangzhou's estimated usage of SWR is based on changes in inventory, without tracing the SWR used to the HSLWs actually produced, and (iii) the prices reported by Hangzhou reflect unverified prices paid for imported SWR during the POR, not the cost of wire rod in its inventory. According to the petitioner, the prices Hangzhou paid are aberrational when compared to data on Indian imports, Chinese imports, U.K. exports and U.S. imports. Second, the petitioner argues that, as a matter of administrative practice, the Department must reject small quantity import data when the unit values differ substantially from larger quantity imports. In support of this claim the petitioner refers to Shakeproof Assembly Components Division of Illinois Tool Works Inc. v. United States, Slip Op. 99-70, at 11 (CIT 1999) ("Shakeproof I"), which cites, inter alia, to Heavy Forged Hand Tools, Finished or Unfinished, With or Without Handles, from the People's Republic of China, Final Results of Administrative Reviews, 62 FR 11813 (March 13, 1997). Third, the petitioner argues that the Department is abusing its discretion by using the prices Hangzhou paid for SWR without first verifying the prices and the fact that the imported SWR was actually used during the POR. The Department further abused its discretion, according to the petitioner, when it used the prices Hangzhou paid for imported SWR despite the fact that Hangzhou did not import every size of SWR that it used and the chemical compositions of the imported and domestically sourced SWR differed in some instances. Before using the actual import prices paid by Hangzhou, the petitioner contends, the Department must find the use of import prices leads to a more accurate calculation of the dumping margin than the alternatives (citing Shakeproof I at 7). In this review, the petitioner points out, the Department did not justify or support its claim that the amount of imported steel was meaningful. The petitioner further contends that the Department's remand determination in Olympia Indus., Inc. v. United States, 7 F. Supp. 2d 997 (CIT 1998) and 36 F. Supp. 2d 414 (CIT 1999) ("Olympia") established the criteria for determining whether to use import values. Under these criteria, the Department must examine: (i) the value and volume of imports; (ii) the type and quality of the imported input; and (iii) consumption of the imported input by the nonmarket economy ("NME") producers in order to assess the reliability of steel import prices as "alternative surrogate values." The petitioner concludes that unless the Department can demonstrate that the actual import prices paid by Hangzhou for SWR yield a more accurate method of valuing this input, then the Department must use Indian steel prices. Hangzhou supports the valuation methodology used by the Department in the Preliminary Results. First, Hangzhou contends that the valuation issue has been definitively settled by the Department in §351.408(c)(1) of its antidumping duty regulations and by the CIT in Shakeproof Assembly Components Division of Illinois Tool Works, Inc. v. United States, ("Shakeproof II"), 102 F.Supp. 2d 486 (CIT 2000), which affirmed the Department's remand determination in Certain Helical Spring Lock Washers from the People's Republic of China; Final Results of Antidumping Duty Administrative Review, 62 FR 61794 (November 7, 1997) ("3rd administrative review"). Section 351.408(c)(1) of the regulations states that the Department will normally use the market economy price paid by a NME producer in a market economy currency to value an input, even if only a portion of the input used is imported, and that regulation is controlling in this review. Because of the regulation, Hangzhou maintains that the Department does not need to determine actual usage of the imported steel by Hangzhou or how the use of import prices leads to a more accurate result than the use of Indian surrogate values. The respondent adds that the Department's regulation in fact promotes predictability because it puts parties on notice regarding factor valuation by the Department. Second, Hangzhou argues that the CIT's decision in Shakeproof II fully supports the methodology used in this review. According to that decision, Hangzhou claims, the use of actual import prices paid by the NME producer promotes accuracy in the Department's results. Also, the court in Shakeproof II applied the less deferential Skidmore standard (see Skidmore v. Swift & Co., 323 U.S. 134 (1944). However, because the current review is being conducted under §408(c)(1) of the Department's regulations, Hangzhou argues that the Department's actions are entitled to a full Chevron deference (see Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Third, Hangzhou maintains that under all relevant law, a market economy price is preferable to a surrogate value to value a factor of production ("FOP") unless that quantity is not meaningful (i.e., deemed "insignificant"). In this review, Hangzhou states that over half of the SWR it purchased was from market economy suppliers as compared to the 34 percent considered significant by the CIT in Shakeproof II. Hangzhou points to Ferrovanadium and Nitrided Vanadium from the Russian Federation, 62 FR 65656, 65661 (December 15, 1997), where the Department noted that the respondent had purchased a "relatively small amount" of an input from a market economy supplier. Despite this, according to Hangzhou, the Department rejected the price paid to the market economy supplier on the grounds that the imported and Russian-sourced inputs were not comparable, and not on the grounds that "a relatively small amount" was "insignificant." Hangzhou contends that because the prices it paid for imported SWR meet all the criteria established in §351.408(c)(1) of the Department's regulations and the amounts are significant, use of those prices promotes accuracy, fairness and predictability. Hangzhou notes that several of the arguments made by the petitioner against using these import prices have been raised and dismissed by the Department in prior reviews. Regarding the petitioner's claim that the import prices are invalid because certain diameters of SWR are not imported, the Department has found that the SWR with larger diameters (sourced domestically) is usually less expensive than the smaller diameter (imported) rod and that relatively little large diameter SWR is used by Hangzhou. Hangzhou further contends that the petitioner's claim of aberrationally low prices of imported SWR is unsubstantiated. Hangzhou also notes the Department's statement in Certain Helical Spring Lock Washers from the People's Republic of China; Final Results of Antidumping Duty Administrative Review, 65 FR 31143 (May 16, 2000) ("5th administrative review"), i.e., that Commerce is not aware of any cases where it "tested" market economy prices actually paid by an NME producer. Hangzhou argues that there is no reason to do so here because the petitioner has not identified any relevant fact that would lead the Department to question whether these were market economy transactions. Also, the petitioner's reference to "information and belief" regarding U.S. prices is not relevant because the United States' level of economic development is not comparable to that of the PRC and, hence, U.S. prices would not normally be used. Regarding Olympia, Hangzhou contends that the petitioner incorrectly continues to rely on this decision. As Hangzhou has argued in past reviews and the Department has agreed, Olympia addresses the situation where an input is imported by a Chinese trading company and resold to the Chinese producer, and payment is made in NME currency. Olympia does not apply in the instant case, according to Hangzhou, because Hangzhou purchases its SWR from a market economy supplier through a market economy trading company with market-economy currency. However, Hangzhou claims that even if the Department were to apply the Olympia criteria to its purchases of steel wire rod, its import prices would be found reliable. Finally, Hangzhou dismisses the petitioner's argument that the Department must verify Hangzhou's import prices before they can be used to value SWR. Hangzhou states that it was verified in the 4th and 6th reviews of this order (see Certain Helical Spring Lock Washers from the People's Republic of China; Final Results of Antidumping Duty Administrative Review, 64 FR 13401 (March 18, 1999) ("4th administrative review") and Certain Helical Spring Lock Washers from the People's Republic of China; Final Results of Antidumping Duty Administrative Review, 66 FR 1078 (January 5, 2001) ("6th administrative review")) and no discrepancies were found regarding the price of the imported SWR and the rod's usage. On this point, Hangzhou argues that the petitioner's speculation is insufficient to establish "good cause" to conduct a verification. Department's Position: We have continued to value all SWR using the price paid by Hangzhou for SWR imported from the U.K. during the POR for these final results. This administrative review is being conducted under §351.408(c)(1) of the Department's regulations. According to §351.408(c)(1), the Department will use the actual price paid by an NME producer for its input, if the NME producer purchases the input from a market economy supplier and pays for it in a market economy currency. Moreover, that regulation provides that the actual price will be used even if a portion of the input in question is sourced domestically. To date, two exceptions to the rule articulated in §351.408(c)(1) have arisen. The first is where the imported amount is insignificant or not meaningful. As Hangzhou has pointed out, over half of the SWR it purchased during the POR was imported from a market economy and paid for in a market economy currency. We determine that this amount is significant, and that the actual prices paid by Hangzhou should not be disregarded on this basis. (See, "Hang Zhou Spring Washer Plant, Ltd., also known as Zhejiang Wanxin Group Co., Ltd. ("Hangzhou") Calculation Memorandum," dated February 15, 2002.) The second exception arises where the input is dumped or subsidized (see Tapered Roller Bearings and Parts Thereof, Finished and Unfinished from the Peoples Republic of China; Final Results of 1998-1999 Administrative Review, 66 FR 1953 (January 10, 2001)("TRBs 12"), Issues and Decision Memorandum, Comment 1 and Final Determination of Sales at Less Than Fair Value: Certain Automotive Replacement Glass Windshields from the People's Republic of China, 67 FR 6482 (February 12, 2002), Issues and Decision Memorandum, Comments 1-5). The petitioner has not pointed to any evidence of dumping or subsidization. Therefore, this exception does not provide a basis for disregarding the prices Hangzhou actually paid for imported SWR. Instead, the petitioner has raised a number of other objections to use of these prices. We address these in turn. First, the petitioner claims the prices are aberrationally low. We note that the petitioner does not point to any evidence on the record to support this claim, except in comparison to the price of imports of SWR into India. As this value itself would be subject to claims that it is aberrational (see below), it is not an appropriate benchmark. More importantly, assuming for the sake of argument that the price paid by Hangzhou is low, we do not agree that this is a basis for rejecting the price. It is the price paid by Hangzhou to an unrelated market economy supplier through an unrelated market economy trading company, i.e., an arm's length price, and the petitioner has provided no information except the allegedly low price that would lead us to question the reliability of the data. While the Department will examine surrogate values to determine whether they are aberrational (see, e.g., Final Determination of Sales at Less Than Fair Value: Creatine Monohydrate from the People's Republic of China, 64 FR 71104, 71106 (December 20, 1999)), we are not aware of, nor has the petitioner pointed to, any case where we have tested the actual price paid by the NME producer to a market economy supplier for the input. The petitioner also raised the Department's practice of disregarding small quantity import data when the per unit value of the small quantity transaction differs from the per unit value of larger quantities. As discussed above, we have determined that Hangzhou's imports of SWR were significant. Moreover, the petitioner fails to mention that the cited practice relates to surrogate data. Specifically, when the Department uses a surrogate country's import statistics to value an input, we omit imports from NMEs and small quantity shipments in calculating the average import price. A review of the cases cited by the petitioner shows that the Department was examining the per unit values and quantities of imports into the surrogate country and not imports by the NME producer (see, Heavy Forged Hand Tools, Finished or Unfinished, With or Without Handles, from the People's Republic of China, Final Results of Administrative Reviews, 62 FR 11813, 11815 (March 13, 1997), and Tapered Roller Bearings and Parts Thereof, Finished or Unfinished, from Romania, 62 FR 37194, 37195 (July 11, 1997)). Regarding the petitioner's concerns about measuring the volume of SWR by reference to inventory changes and basing the value on SWR purchased as opposed to SWR used, we are satisfied that the amount reported by Hangzhou accurately reflects the price for imported SWR. We do not believe that it is necessary to trace the amount of imported SWR actually used during the POR because our regulations direct us to use the import price for all of the input. Also, we accept the price paid for SWR during the POR (rather than the price paid for rod in inventory). This is consistent with our methodology when we use surrogate values, i.e., we seek a value that is contemporaneous with the POR. Regarding the fact that Hangzhou did not import all sizes of wire rod, as stated in Hangzhou's rebuttal brief, the verification in the 4th administrative review demonstrated that Hangzhou (which was known as ZWG at that time) did not import the larger-sized diameter because of certain minimum order requirements set by the supplier. Also as stated by Hangzhou, we verified in the 4th administrative review that Hangzhou does not use very much of the larger-sized rod, and that the larger-sized diameter wire rod is usually less expensive than the smaller-sized wire rod. Therefore, in using the prices for the smaller diameter rod to value this input, the Department is arguably overvaluing the larger diameter input. More generally, the petitioner's comments have relied extensively on two rulings by the CIT, Shakeproof I and Olympia. Regarding Shakeproof I, we note that the Department's redetermination on remand was affirmed by the CIT in Shakeproof II and, since the filing of comments in this proceeding, upheld by the Court of Appeals for the Federal Circuit (See, Shakeproof Assembly Components Division of Illinois Tool Works, Inc. v. United States, 268 F.3d 1376 (Fed. Cir. 2001) ("Shakeproof III"). We agree with the petitioner, and, as articulated by the CAFC in Shakeproof III, that §773(c)(1) of the Act requires the Department to use the "best available information" to value the NME producer's factors of production. We disagree, however, with the petitioner's assertion that the Department did not do so. Discussing valuation of FOP and determination of "best available information," the CAFC stated that, though the Act authorizes the Department to use surrogate countries which are at a comparable level of economic development and are significant producers of comparable merchandise, to estimate the value of the FOP, the Act does not require the Department to always use surrogate country values. (Shakeproof III, 268 F.3d at 1382.) Ruling on facts almost identical to those in this review, the CAFC adopted Commerce's reasoning that the actual price paid for inputs imported from a market economy country in meaningful quantities is the "best available information" and promotes accuracy in the dumping calculation. Id. The Court recognized that a "meaningful amount" of imported goods must be determined on a case-by-case basis, and in the 3rd administrative review, the court found imported steel amounting to approximately one-third of all the steel used by ZWG to be "meaningful." Id. As discussed above, the amount of SWR input imported by Hangzhou in this review is over half. Therefore, we believe we have complied fully with the rulings of the CIT and the CAFC in the Shakeproof cases, and that using the price paid by Hangzhou in purchasing SWR from a market economy supplier in a market economy currency to value this input is correct as a matter of law. Regarding Olympia, we agree with Hangzhou that the petitioner's reliance on this ruling is misplaced. Olympia dealt with the situation where the imported input was purchased by the NME producer from a NME trading company. Thus, the Department tested the reliability of the price paid by the trading company as a surrogate value. In this proceeding, Hangzhou purchased the input directly from the market economy supplier through a market economy trading company. The CAFC in Shakeproof III notes that a critical difference exists between the facts of Olympia and those in the 3rd administrative review of the HSLW order. (See Shakeproof III, 268 F.3d at 1383.) The facts in this review are very similar to those in the 3rd administrative review. Thus, the criteria developed in Olympia do not apply here. Finally, we disagree with the petitioner that Hangzhou's data are undermined because they were not verified. The regulation dealing with factor valuation, §351.408(c)(1), does not state that the import price paid by the NME producer must be verified. Also, we are not required to conduct a verification of this particular POR under §782(i) of the Act. Specifically, §782(i) of the Act requires verification of information used in final review results if, inter alia, there has been no verification in the two immediately preceding reviews. (See also §351.307 of the Department's regulations.) In this case, we verified the information provided by Hangzhou in the 6th administrative review, the most recent review, including information regarding Hangzhou's imported SWR. Section 782(i) of the Act also directs that information used in final review results will be verified if "good cause" for verification exists. In this review, the petitioner filed a timely request for verification for "good cause." We examined the request, noted that verification was conducted in the 6th administrative review, that the facts and issues in this review were similar to those in the 6th administrative review, and determined that "good cause" was not shown. Therefore, we concluded that verification was not warranted. (See Shakeproof III.) Comment 2: Factory Overhead, SG&A Expenses and Profit in Plating Operations The petitioner contends that the Department has incorrectly treated the plating of Hangzhou's HSLWs as an integrated operation, though Hangzhou purchases plating from independent contractors. Consequently, in the petitioner's view, normal value is understated. According to the petitioner, the Department should use either a surrogate value for plating or include the plater's overheard, SG&A and profit in the value for the plating input. In support of its claim, the petitioner argues that, in a market economy case, if plating is undertaken by an independent contractor, the full cost of the plating, including the plater's overhead, SG&A, and profit, would be included in the constructed value calculations (the petitioner cites Notice of Final Determination of Sales at Not Less Than Fair Value: Collated Roofing Nails from Korea, 62 FR 51420, 51423 (October 1, 1997) ("Collated Roofing Nails from Korea"). The petitioner asserts that the same methodology should apply to NME cases. The petitioner further contends that the Department has, in fact, applied this methodology in an NME case and cites Natural Paint Brushes and Brush Heads from the People's Republic of China, (Paint Brushes), 62 FR, 60228, 60230 (November 7, 1997). According to the petitioner, in Paint Brushes, the Department used surrogate values for inputs such as handles and added the factory's overhead, SG&A, and profit on top of the full value of the finished handles. The petitioner claims that the purchase of handles in Paint Brushes is comparable to Hangzhou's purchase of plating. Second, the petitioner maintains that under the WTO Antidumping Agreement a constructed value is a proxy for a "fair sales price." Because a "fair sales price" would cover SG&A and profit, the Department's calculation of normal value should include the plating subcontractor's overhead expenses, SG&A, and profit. Third, the petitioner claims that its proposed methodology is supported by §§ 773(c) and (e) of the Act, which define the calculation of normal value for NME cases and constructed value in market economy cases, respectively. With respect to these sections of the Act, the petitioner asserts that the Department is instructed "to add amounts for SG&A and profit to reflect the value of the subject merchandise as sold." Finally, the petitioner disputes Hangzhou's argument in the 4th administrative review that adding overhead, SG&A and profit to the plating factors of production would constitute double counting. The petitioner asserts that the Department is determining the normal value of the subject merchandise, not the cost of producing it, and claims that the normal value must contain the cost of all of the inputs, plus the SG&A component. According to the petitioner, treating plating as an input does not require the Department to treat plating as a price between NME companies, but rather as an input, like the steel wire rod input. Unlike the steel price, however, the petitioner contends that the plating constructed value does not include SG&A and profit for the plating activity. Hangzhou contends that the Department accurately accounted for all costs, including all subcontracted costs for plating, in the Preliminary Results. Hangzhou argues that the Department's methodology is consistent with previous HSLWs administrative reviews and fully captures the costs at Hangzhou and the plating factory, including all factory overhead, SG&A and profit related to the plating operations. According to Hangzhou, the methodology proposed by the petitioner would result in double-counting overhead, SG&A and profit for the plating portion of production. Hangzhou further asserts that the petitioner's methodology is contrary to the Department's regulations and practice with regard to the treatment of subcontractors in market and nonmarket economy cases. While Hangzhou agrees with the petitioner's reference to §773(c) of the Act for the calculation of normal value in NME cases, Hangzhou contends that the petitioner has failed to recognize that the Department's regulations provide that subcontractors may not be treated as the producer of the subject merchandise (see §351.401(h)). Hangzhou contends that the evidence on the record indicates that Hangzhou's platers are subcontractors as defined by the Department's regulations and, therefore, cannot be treated as producers of the subject merchandise. Hangzhou argues that the Department's calculation methodology fully accounts for the plating factors and that adopting the petitioner's methodology instead would result in treating the plating companies as producers together with Hangzhou rather than as Hangzhou's subcontractors. Citing Collated Roofing Nails from the PRC, 62 FR at 51416, Hangzhou asserts that the Department recognized this principle of not treating subcontractors as producers in NME cases and rejected essentially the same calculation methodology argument raised by the petitioner in this case. Hangzhou further alleges that the petitioner inaccurately cites Paint Brushes for the proposition that the Department used surrogate values for handles allegedly supplied by subcontractors. Hangzhou contends that the handles in Paint Brushes were not processed by a subcontractor at the direction of the respondent, but rather the brush factory purchased the finished handles from unaffiliated suppliers in normal arm's length transactions. According to Hangzhou, Paint Brushes has nothing to do with the issue of the proper valuation of a factor supplied by a subcontractor. Department's Position: We have continued to use the methodology applied in the Preliminary Results for calculating plating costs because we find no basis for the petitioner's claim that this methodology results in an understatement of normal value. In our calculation, we take all material costs (including plating materials) and apply the surrogate overhead, SG&A and profit ratios. Thus, a portion of the overhead, SG&A and profit amounts can be attributed to plating. The petitioner would, instead, have us build up a price for plating that includes plating overhead, SG&A, and profit, and then treat this as an input, assigning to it, in addition, Hangzhou's overhead, SG&A, and profit. Such a calculation could be correct if information indicated the Indian producers from whose data the overhead, SG&A, and profit ratios are derived also subcontracted their plating operations. If they did, then their cost structure and, in particular, the relationship of their materials costs, and overhead, SG&A and profit, would be such that it could be appropriate to apply the Indian ratios to a plating value that includes plating overhead, SG&A and profit. For example, in the Final Determination of Sales at Less Than Fair Value Bulk Aspirin from the People's Republic of China, 65 FR 33805 (May 25, 2000) , Decision Memorandum, Comment 4), the Department adjusted its calculations to reflect that the Indian surrogate producers were less integrated than their PRC counterparts. However, there is no information on the record of this proceeding to indicate whether the Indian producers whose information is used to compute the overhead, SG&A and profit ratios perform their own plating or subcontract for it. Without such information, the petitioner cannot claim that normal value is understated. For this same reason, we do not find the petitioner's market economy example to be relevant. In a market economy dumping calculation, we compute the responding producer's actual costs and they will reflect that producer's experience either performing its own plating or subcontracting that part of the production process. In contrast, in an NME calculation, we are imputing surrogate producers' ratios to the NME producer. We are seldom able to know whether the experience of the NME and surrogate producers are similar or how to adjust for differences. Further, we agree with Hangzhou that its situation is different from that of the PRC paintbrush producers who purchased handles. Unlike plating, which is one step in the production process and might be performed in house or through a subcontracting arrangement, we treat material inputs such as handles as inputs that would be purchased. We further agree with Hangzhou that the petitioner's references to §§ 773(c) and (e) are not relevant in this context. Clearly, we have included amounts for overhead, SG&A and profit in our calculation of normal value. These sections do not, in our view, require that additional amounts be included for a subcontractor under the circumstances here. Comment 3: Representativeness of Plating Factors of Production The petitioner contends that, because several subcontractors performed plating operations, information provided by Hangzhou for one plater is not representative. The petitioner argues that plating is a significant part of the value for plated HSLWs and the factors of production utilized by each of the subcontractors will differ. The petitioner maintains that when the Department uses constructed value for normal value in market economy cases, the producer must account for all costs not just representative costs. Hangzhou responds that none of the petitioner's complaints about the plating subcontractor's data are relevant or warrant changing the Preliminary Results. Hangzhou asserts that the evidence on the record demonstrates that the Department acted reasonably in using the plating subcontractors' data provided by Hangzhou. Department's Position: Hangzhou reported factors of production for its two largest platers. As in the Preliminary Results, we have continued to use those factors of production to value plating inputs. Although the petitioner claims that the factors of production reported by these platers are not representative of the plating factors generally, the claim is not substantiated. We note that the platers whose data were used accounted for more than 90 percent of Hangzhou's plated HSLWs during the POR. Given the relative importance of these platers, we view their operations as representative of plating factors for producing Hangzhou's HSLWs. Also, because these two platers accounted for such a large proportion, we did not ask Hangzhou to report factors for the other plating companies it used during the POR. Comment 4: Valuation of Hydrochloric Acid In the Preliminary Results, the Department valued hydrochloric acid using the Indian import statistics from Chemical Weekly. Hangzhou argues that the Department should value hydrochloric acid using Indonesian import statistics for the POR. In support of its argument, Hangzhou cites §773(c)(1)(B) of the Act which states that the Department is required to rely on "the best available information" to value factors of production. In this case, according to Hangzhou, the Indonesian import value constitutes the "best available information" because it is contemporaneous with the POR, specific to the input used and more accurate than the Chemical Weekly import statistics. Moreover, Hangzhou argues, the Chemical Weekly import statistics are aberrational and inconsistent with world pricing trends. In support of this claim, Hangzhou points to evidence on the record to show that the Chemical Weekly price is more than ten times the price of Indonesian imports, U.S. imports, U.S. exports and Indian exports for comparable time periods and nearly thirteen times the highest alternative value, U.S. export prices. Hangzhou points out that the Department has faced difficulty in valuing hydrochloric acid in other cases and in a decision earlier this year, Steel Wire Rope from the PRC ("SW Rope"), 66 FR 12759 (February 28, 2001), used Indonesian values. (See, SW Rope Factors of Production Valuation for the Final Determination Memorandum at 4-5, (February 14, 2001).) Hangzhou states that the Indonesian import data are a reliable source and are consistent with U.S. import and export prices. In support of use of the Indonesian import statistics, Hangzhou maintains that these data are also based on a significant volume of imports whereas the Indian import data are based on an insignificant volume of imports. The petitioner takes issue with Hangzhou's proposed use of the Indonesian import statistics to value hydrochloric acid. Because the Department has selected India as the primary surrogate country, the petitioner contends that using prices from other surrogate countries would be arbitrary and lead to confusion. Second, the petitioner does not find the Chemical Weekly import prices aberrational when compared to United States import prices from Malaysia and U.S. import prices from India submitted by Hangzhou. (The petitioner points out that Malaysia accounts for a large share of imports into Indonesia. The petitioner claims that a comparison of the value of Malaysian imports into Indonesia with the value of Malaysian imports into the United States shows that the Indonesian import statistics are flawed.) Third, the petitioner argues that the U.S. is not eligible to be a surrogate country and disputes the use of U.S. prices as a benchmark because the large volume of Canadian imports to the U.S. had a relatively low value. The petitioner concludes by urging the Department to continue to value hydrochloric acid using the Indian Chemical Weekly prices. In its rebuttal, Hangzhou argues that the Department frequently looks beyond the primary surrogate country when the data from that country are not within global pricing trends, aberrational or otherwise defective. While Hangzhou agrees with the petitioner that a U.S. value may not be an ideal source for a surrogate value given the availability of data from economically comparable countries, it argues that the U.S. price may be used as a reference point to determine a reasonable market price for the factor in question. Regarding the petitioner's specific claims about Malaysian, U.S. and Indonesian prices, Hangzhou points out that the petitioner has misread the data by looking at U.S. exports rather than imports into the United States. Looking at statistics regarding imports into the United States, the import prices are consistently lower than the prices of hydrochloric acid imported into India and comparable to price of imports into Indonesia. If the Department rejects the Indonesian import data, Hangzhou suggests that the Department use export statistics from the Chemical Weekly to value hydrochloric acid. If the Department continues to rely on the Chemical Weekly import statistics, Hangzhou contends that the Department should use only the sales price from E. Merck (India) Limited, the only value which is not aberrational, to value hydrochloric acid. Department's Position: We have made a change from the Preliminary Results and used the Indonesian import statistics to value the hydrochloric acid input. We agree with Hangzhou that the Indian Chemical Weekly price for hydrochloric acid is aberrational. When compared to virtually every other price for hydrochloric acid on the record of this proceeding, the Indian Chemical Weekly price of $3.27/kg. must be viewed as distorted. U.S. import prices during the corresponding period ranged from $.08/kg. to $.64/kg., with the weighted average being $.10/kg. (These data cover imports from nine countries.) The average U.S. export price for the period was $.26/kg. The only values that might support use of the Indian Chemical Weekly price are the prices of U.S. exports to Indonesia in 1999 ($3.42/kg.) and 2000 ($1.91/kg.). However, these prices themselves appear to be aberrational when compared to the ranged U.S. import data, the average U.S. import price, and the average U.S. export value listed above. We disagree with the petitioner's statement that the use of Indonesian statistics is contrary to Department policy and would lead to arbitrary results. While §351.408(c)(2) of our regulations states a preference for valuing factors in a single surrogate country, we have used more than one country to value inputs where data from the primary surrogate did not exist or were not useable. See, e.g., Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from the People's Republic of China; Preliminary Results of 1998-1999 Administrative Review, Partial Rescission of Review, and Notice of Intent To Revoke Order in Part, 65 FR 41944, 41947 (July 7, 2000), decision unchanged in Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from the People's Republic of China; Final Results of 1998-1999 Administrative Review, Partial Rescission of Review, and Determination Not To Revoke Order in Part, 66 FR 1953 (January 10, 2001), and Notice of Final Determination of Sales at Less Than Fair Value: Certain Partial-Extension Drawer Slides with Rollers from the People's Republic of China, 60 FR 54472, 54475-76 (October 24, 1995). Further, we disagree with the petitioner's claims regarding the use of U.S. prices to determine whether the Indian Chemical Weekly price is aberrational. Although we would not normally use U.S. prices to value PRC inputs because the U.S. economy would not be considered comparable to that of the PRC, we have used U.S. prices as benchmarks to test whether particular surrogate values are aberrational. See, e.g., TRBs 12, Issues and Decision Memorandum, Comment 5. The courts have upheld this methodology. See, e.g., Timken Company v. United States, 59 F. Supp 2d 1371, 1376 (CIT 1999). Finally, we do not agree with the petitioner that inclusion of low-priced imports from Canada in the U.S. statistics renders the U.S. data unuseable. Beyond objecting to the fact that such prices are low, the petitioner provides no evidence that the Canadian prices are not reflective of world market prices for hydrochloric acid. Comment 5: Valuation of Inland Shipping Rate In the Preliminary Results, we used information from a 1993 cable from the U.S. Consulate in Bombay ("cable rate") to value inland shipping. Hangzhou argues that the Department should use rates published by the Inland Waterways Authority of India ("Inland Waterways rate") dated July, 1997, to value inland shipping. Hangzhou points to the fact that the river shipping rates are more contemporaneous with the POR than the cable rate. In addition, Hangzhou claims that the ship freight rate seems aberrational compared to the freight rates used for truck and rail in the Preliminary Results. Hangzhou calculates that the ship freight rate based on the cable rate is 85 times the truck and rail freight rates. According to Hangzhou, no rational business would use inland shipping when it could use truck or rail much less expensively. If the Department continues to use the cable rate, Hangzhou requests that we rely on the rate that corresponds to the actual distance Hangzhou ships its steel wire. The petitioner did not comment. Department's Position: We have used the Inland Waterways rate submitted by Hangzhou for valuing inland ship freight for these final results. We agree with Hangzhou that the Inland Waterways rates are more contemporaneous with the POR and, hence, preferable for valuing this input. Comment 6: Valuation of Potassium Aluminum Sulphate In the Preliminary Results, we used the Indian import values of "other alums" to value potassium aluminum sulfate. Hangzhou contends that the Department should use the data it submitted for "potassium sulfate" to value the potassium aluminum sulfate input in the final results of this review. According to Hangzhou, the Department prefers surrogate values which are more specific to the actual inputs used in the production of subject merchandise, and "potassium sulfate" is more specific than "other alums." Should the Department continue to use "other alums" to value potassium aluminum sulfate, Hangzhou requests that we correct a clerical error in the calculation of the total quantity of "other alums" as reported in the Monthly Statistics of the Foreign Trade of India ("MSFTI"). The petitioner argues that the Department should continue to use the Indian surrogate value for "other alums" to value the potassium aluminum sulfate input. According to the petitioner, Hangzhou's assertion that "potassium sulfate" is more specific to potassium aluminum sulfate is unsupported and fails to address the fact that "potassium sulfate" does not contain aluminum. The petitioner maintains that because potassium aluminum sulfate contains aluminum, "other alums" more accurately represents the chemical input than "potassium sulfate." The petitioner further urges the Department to use the "other alums" values which it submitted on July 31, 2001. Department's Position: We agree with the petitioner that "other alums" should continue to be used to value potassium aluminum sulfate. Chapter 31 of the Harmonized Tariff System of the United States, which includes "potassium sulphate," covers fertilizers. In this case though, Hangzhou uses potassium aluminum sulphate as an input in the plating process for its helical spring lock washers. Because aluminum is integral to potassium aluminum sulfate and its use in the plating process, it is aluminum which distinguishes potassium aluminum sulfate from "potassium sulfate." (See Memorandum to the File from Sally Hastings dated February 15, 2002, which is on file in the CRU.) Therefore, the Department finds that "other alums" provides the most accurate and specific value for potassium aluminum sulfate. For the final results, we have used the more contemporaneous values for "other alums" provided by the petitioner on July 31, 2001, to value potassium aluminum sulfate. Thus, the clerical error noted by Hangzhou is no longer at issue. Comment 7: Calculation of Factory Overhead Net of Scrap In the Preliminary Results, the Department calculated factory overhead by adding total materials, total labor and total energy and multiplying the sum by the overhead ratio. Hangzhou argues that the Department overstated the total cost of manufacture (COM) in the Preliminary Results by not subtracting scrap from Hangzhou's material consumption before applying the surrogate overhead ratio. Because Hangzhou generates scrap which it sells to third parties, it claims that the total amount of materials associated with the subject merchandise is reduced, and, hence, overhead should also be reduced. The respondent also states that the Department's calculation of factory overhead is inconsistent with its calculation of SG&A and profit. Finally, Hangzhou cites the Steel Wire Rope Analysis Memorandum for Fasten Group Import and Export Co., Ltd: Final Determination in Antidumping Investigation of Steel Wire Rope from the People's Republic of China at 1 (February 14, 2001) ("SW Rope Analysis Memorandum") and the Preliminary Determination of Hot-Rolled Carbon Steel Flat Products from the People's Republic of China ("Hot Rolled Steel"), 66 FR 22183 (May 3, 2001), as evidence of the Department's long established practice of applying the surrogate overhead ratio to an amount net of scrap or byproduct credits. The petitioner states that whether a scrap adjustment is made or not should be determined by the surrogate information used to calculate the overhead ratio. If the financials adjust for scrap, then an adjustment for scrap is appropriate, but if the financials make no adjustment for scrap, then no adjustment for scrap should be made. Department's Position: We agree with the petitioner that the treatment of scrap in the calculation of factory overhead should mirror the treatment of scrap in the calculation of the surrogate overhead ratio. If the surrogate overhead ratio were calculated based on material costs net of scrap revenue, then the methodology proposed by Hangzhou would be appropriate. However, if revenue from scrap sales by the surrogate producers were reported as income, then it would not be appropriate to deduct scrap before calculating Hangzhou's factory overhead. Unfortunately, the data used to develop the overhead ratio in this proceeding, information from the Reserve Bank of India, do not provide sufficient information for us to know whether the amounts reported there for "raw material, components, etc., consumed" are net of scrap. Nor is the reporting of "Other Income" sufficiently detailed to identify whether revenue from sales of scrap are reported there. We have reviewed the precedents cited by Hangzhou and disagree that they support the approach Hangzhou suggests. In the SW Rope Analysis Memorandum, contrary to Hangzhou's claim, the cited language indicates that the Department calculated and included overhead before applying the scrap offset ("We reduced the cost of manufacturing (i.e., the total cost of direct materials, direct labor, energy and factory overhead) by the value of scrap generated during production." (emphasis added) (SW Rope Analysis Memorandum at 1.) Regarding Hot-Rolled Steel, the Department was not addressing a situation where scrap was simply recovered and sold. Instead, in that case, the respondents were additionally recovering materials and reintroducing them into the production process. Thus, the different fact pattern in Hot-Rolled Steel could support a different methodology in that case. Because we cannot say whether the data from the Reserve Bank of India reflect a cost of materials net of scrap or whether scrap revenue is included in other income, we have followed the methodology used in prior reviews of this order where we also relied on data from the Reserve Bank of India for the overhead ratio. Thus, we have not reduced the reported materials by the amount of scrap generated and sold by Hangzhou. Instead, we have offset the COM (inclusive of scrap) by the scrap revenue. RECOMMENDATION Based on our analysis of the comments received, we recommend adopting all of the above positions and adjusting all related margin calculations accordingly. If these recommendations are accepted, we will publish the final results in the Federal Register. AGREE ____ DISAGREE ____ ______________________ Faryar Shirzad Assistant Secretary for Import Administration ______________________ (Date)