[Federal Register Volume 62, Number 204 (Wednesday, October 22, 1997)]
[Notices]
[Pages 55014-55024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27983]
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DEPARTMENT OF COMMERCE
International Trade Administration
[C-307-814]
Final Affirmative Countervailing Duty Determination: Steel Wire
Rod from Venezuela
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: October 21, 1997.
FOR FURTHER INFORMATION CONTACT: Christopher Cassel, Robert Copyak, or
Richard Herring, Office of CVD/AD Enforcement VI, Import
Administration, U.S. Department of Commerce, Room 1874, 14th Street and
Constitution Avenue, N.W., Washington, D.C. 20230; telephone (202) 482-
2786.
Final Determination
The Department of Commerce (the Department) determines that
countervailable subsidies are being provided to CVG-Siderurgica del
Orinoco (SIDOR), the producer and exporter of steel wire rod from
Venezuela. For information on the estimated countervailing duty rates,
please see the Suspension of Liquidation section of this notice.
Petitioners
The petition in this investigation was filed by Connecticut Steel
Corp., Co-Steel Raritan, GS Industries, Inc., Keystone Steel & Wire
Co., North Star Steel Texas, Inc., and Northwestern Steel and Wire (the
petitioners), six U.S. producers of wire rod.
Case History
Since our preliminary determination on July 28, 1997 (62 FR 41439,
August 4, 1997), the following events have occurred:
We conducted verification of the countervailing duty questionnaire
responses from August 27, 1997 through September 9, 1997. Petitioners
and SIDOR (respondent) filed case briefs on September 23, 1997, and
rebuttal briefs on September 26, 1997. A public hearing was held on
October 1, 1997.
On September 12, 1997, the GOV and the U.S. Government initialed a
proposed suspension agreement. On October 14, 1997, the U.S. Government
and the GOV signed a suspension agreement (see Notice of Suspension of
Countervailing Duty Investigation: Steel Wire Rod from Venezuela) which
is being published concurrently with this notice in the Federal
Register. On October 14, 1997, the petitioners also requested that the
Department and the International Trade Commission (``ITC'') continue
this investigation in accordance with section 704(g) of the Act. As
such, this final determination is being issued pursuant to section
704(g) of the Act.
Scope of Investigation
The products covered by this investigation are certain hot-rolled
carbon steel and alloy steel products, in coils, of approximately round
cross section, between 5.00 mm (0.20 inch) and 19.0 mm (0.75 inch),
inclusive, in solid cross-sectional diameter. Specifically excluded are
steel products possessing the above noted physical characteristics and
meeting the Harmonized Tariff Schedule of the United States (HTSUS)
definitions for (a) stainless steel; (b) tool steel; (c) high nickel
steel; (d) ball bearing steel; (e) free machining steel that contains
by weight 0.03 percent or more of lead, 0.05 percent or more of
bismuth, 0.08 percent or more of sulfur, more than 0.4
[[Page 55015]]
percent of phosphorus, more than 0.05 percent of selenium, and/or more
than 0.01 percent of tellurium; or (f) concrete reinforcing bars and
rods.
The following products are also excluded from the scope of this
investigation:
Coiled products 5.50 mm or less in true diameter with an average
partial decarburization per coil of no more than 70 microns in depth,
no inclusions greater than 20 microns, containing by weight the
following: carbon greater than or equal to 0.68 percent; aluminum less
than or equal to 0.005 percent; phosphorous plus sulfur less than or
equal to 0.040 percent; maximum combined copper, nickel and chromium
content of 0.13 percent; and nitrogen less than or equal to 0.006
percent. This product is commonly referred to as ``Tire Cord Wire
Rod.''
Coiled products 7.9 to 18 mm in diameter, with a partial
decarburization of 75 microns or less in depth and seams no more than
75 microns in depth; containing 0.48 to 0.73 percent carbon by weight.
This product is commonly referred to as ``Valve Spring Quality Wire
Rod.''
The products under investigation are currently classifiable under
subheadings 7213.91.3000, 7213.91.4500, 7213.91.6000, 7213.99.0030,
7213.99.0090, 7227.20.0000, and 7227.90.6050 of the HTSUS. Although the
HTSUS subheadings are provided for convenience and customs purposes,
our written description of the scope of this investigation is
dispositive.
The Applicable Statute
Unless otherwise indicated, all citations to the statute are
references to the provisions of the Tariff Act of 1930, as amended by
the Uruguay Round Agreements Act effective January 1, 1995 (the
``Act'').
Injury Test
Because Venezuela is a ``Subsidies Agreement Country'' within the
meaning of section 701(b) of the Act, the ITC is required to determine
whether imports of steel wire rod from Venezuela materially injure, or
threaten material injury to, a U.S. industry. On April 30, 1997, the
ITC published its preliminary determination, finding that there is a
reasonable indication that an industry in the United States is being
materially injured or threatened with material injury by reason of
imports from Venezuela of the subject merchandise (62 FR 23485).
Verification
In accordance with section 782(i) of the Act, we verified the
information used in making our final determination. We followed
standard verification procedures, including meeting with government and
company officials, and examination of relevant accounting records and
original source documents. Our verification results are outlined in
detail in the public versions of the verification reports, which are on
file in the Central Records Unit (Room B-099 of the Main Commerce
Building).
Subsidies Valuation Information
Period of Investigation: The period for which we are measuring
subsidies (the ``POI'') is calendar year 1996.
Allocation Period: In the past, the Department has relied upon
information from the U.S. Internal Revenue Service on the industry-
specific average useful life of assets in determining the allocation
period for non-recurring subsidies. See General Issues Appendix (GIA),
appended to Final Countervailing Duty Determination; Certain Steel
Products from Austria, 58 FR 37217, 37226 (July 9, 1993). However, in
British Steel plc. v. United States, 879 F. Supp. 1254 (CIT 1995)
(British Steel), the U.S. Court of International Trade (the Court)
ruled against this allocation methodology. In accordance with the
Court's remand order, the Department calculated a company-specific
allocation period for non-recurring subsidies based on the average
useful life (AUL) of non-renewable physical assets. This remand
determination was affirmed by the Court on June 4, 1996. British Steel,
929 F. Supp. 426, 439 (CIT 1996).
In this investigation, the Department has followed the Court's
decision in British Steel. Therefore, for the purposes of this final
determination, the Department has calculated a company-specific AUL.
Based on information provided by SIDOR regarding the company's
depreciable assets, the Department has determined that the appropriate
allocation period for SIDOR is 20 years.
Equityworthiness: In analyzing whether a company is equityworthy,
the Department considers whether or not that company could have
attracted investment capital from a reasonable, private investor in the
year of the government equity infusion based on information available
at that time. In this regard, the Department has consistently stated
that a key factor for a company in attracting investment capital is its
ability to generate a reasonable return on investment within a
reasonable period of time.
In making an equityworthiness determination, the Department
examines the following factors, among others:
1. Current and past indicators of a firm's financial condition
calculated from that firm's financial statements and accounts;
2. Future financial prospects of the firm including market studies,
economic forecasts, and project or loan appraisals;
3. Rates of return on equity in the three years prior to the
government equity infusion;
4. Equity investment in the firm by private investors; and
5. Prospects in the marketplace for the product under
consideration.
For a more detailed discussion of the Department's equityworthiness
criteria, see the GIA, 58 FR at 37244.
Petitioners alleged that SIDOR was unequityworthy from 1977 through
1992. (As explained below, while the GOV's conversion of SIDOR's
external debt into equity was made effective in October 1992, we
consider 1991 to be the relevant year to examine the company's
equityworthiness. Therefore, throughout this notice, we will refer to
the transaction as the ``1991 debt-to-equity conversion.'') On this
basis, petitioners claim that any equity infusions into SIDOR by the
GOV from 1977 through 1990, and the 1991 decision to convert SIDOR's
external debt into equity were inconsistent with the usual investment
practices of private investors. In addition, we examined whether land
transferred from CVG to SIDOR in 1993 and 1994 to cancel unpaid capital
subscriptions was inconsistent with the usual investment practices of
private investors.
1. 1977 through 1990 Equity Infusions
On March 18, 1997, we initiated an investigation of SIDOR's
equityworthiness for the years 1977 through 1990. See Memorandum dated
March 18, 1997, from The Team to Jeffrey P. Bialos, Re: Initiation of
Countervailing Duty Investigation: Steel Wire Rod from Venezuela
(Initiation Memo), (on file in the public record of the Central Records
Unit of the Department of Commerce, Room
B-099). In past investigations, the Department preliminarily determined
that SIDOR was equityworthy in 1977, and unequityworthy for the years
1978 through 1984. See Preliminary Affirmative Countervailing Duty
Determination; Carbon Steel Wire Rod From Venezuela, 50 FR 28234, 28237
(July 11, 1985) (1985 Wire Rod from Venezuela), and Preliminary
Affirmative Countervailing Duty Determination; Certain Steel Products
From Venezuela, 50 FR 11227, 11230 (March 20, 1985) (Steel Products
from Venezuela). The
[[Page 55016]]
Department also previously initiated an investigation of SIDOR's
equityworthiness for the period 1985 through 1990. See Initiation Memo,
and Final Affirmative Countervailing Duty Determination: Circular
Welded Non-Alloy Pipe from Venezuela, 57 FR 42964 (September 17, 1992)
(Non-Alloy Pipe from Venezuela). Although we previously found SIDOR to
be equityworthy in 1977, that decision was a preliminary finding. See
the Memorandum, dated October 15, 1991, to Eric I. Garfinkel, Re:
Initiation of Countervailing Duty Investigation: Circular Welded Non-
Alloy Steel Pipe From Venezuela, appended to the Initiation Memo. As
such, we concluded that this preliminary finding warranted
reinitiating.
In this investigation, SIDOR did not provide any new information
regarding the company's financial position for the years 1977 through
1990. Because no information has been presented in this investigation
that calls into question the Department's prior determinations that the
company was unequityworthy for the years 1978 through 1990, we continue
to find that the GOV equity investments made in those years were
inconsistent with the usual investment practices of private investors.
Moreover, with respect to the 1977 equity infusion, neither party has
provided any information beyond what the Department examined in the
prior proceeding in which we preliminarily found the company to be
equityworthy for that year (see Steel Products from Venezuela).
Therefore, because no new information has been submitted in this
proceeding to indicate that our prior preliminary decision in Steel
Products from Venezuela was incorrect, we find that it is appropriate
to follow that earlier determination, and determine SIDOR to be
equityworthy in 1977.
2. 1991 GOV Debt-to-Equity Conversion
We also initiated an investigation of SIDOR's equityworthiness with
respect to the conversion of SIDOR's external debt into equity, which
was approved by the Venezuelan Congress on May 18, 1993. See Initiation
Memo. The transaction was made retroactive to October 28, 1992, and is
reflected in SIDOR's 1992 financial statements. However, in the
questionnaire responses, the GOV stated that the decision to convert 60
percent of SIDOR's external debt into equity was reached in October
1991, and that the terms of the transaction did not change by the time
the transaction was approved by the Venezuelan Congress in 1993.
Therefore, we consider 1991 to be the relevant year for purposes of
determining whether the conversion of SIDOR's external debt into equity
was consistent with the usual investment practices of private
investors.
In our preliminary determination, we found SIDOR to be equityworthy
in 1991. Therefore, we determined that the GOV's decision to capitalize
SIDOR's external debt in 1991 was consistent with the usual investment
practices of private investors. See Preliminary Affirmative
Countervailing Duty Determination: Steel Wire Rod From Venezuela, 62 FR
41939, 41941 (August 4, 1997) (Preliminary Determination). In reaching
our preliminary finding, we evaluated SIDOR's financial ratios for the
three years prior to 1991. We also took into account respondent's claim
that a major restructuring process, begun in 1989 and aimed at
improving SIDOR's profitability and international competitiveness, had
significantly improved the company's financial position by 1991. See
Preliminary Determination, 62 FR at 41941. However, we also stated that
additional issues must be examined before reaching a final
determination with respect to the conversion of SIDOR's debt into
equity. We have reexamined our preliminary finding that SIDOR was
equityworthy in 1991, and, taking into account our findings at
verification, and the financial results in light of high inflation, we
now determine that SIDOR was not equityworthy in 1991.
In reaching our decision, we considered the specific investment
factors relied upon by Venezuelan commercial bankers to evaluate the
financial condition of potential customers. The bankers stated that in
a high inflationary economy where financial statements are not adjusted
to reflect the impact of high inflation, potential customers are
evaluated not only on the basis of their financial ratios. Rather, a
number of additional aspects of a company's operations are also taken
into account, including: (1) a company's ability to generate real,
inflation-adjusted revenue growth and cash flow, (2) the reputation of
the company, and (3) the company's competitiveness. In analyzing these
factors, the bankers stressed that a key issue for investors is whether
a company has successfully survived the crises of the economy,
including inflation, over the last years. See the September 19, 1997,
Memorandum to Barbara E. Tillman Re: Meetings with Commercial and
Investment Banks in the Countervailing Duty Investigation of Steel Wire
Rod from Venezuela (Memo Re: Meetings with Commercial Bankers) at 2-6
(on file in the public record of the Central Records Unit of the
Department of Commerce, Room B-099). Accordingly, in evaluating SIDOR's
equityworthiness in 1991, we have expanded our standard analysis to
consider these additional factors.
As petitioners correctly point out, the bankers indicated that
SIDOR did not represent a sound investment during the early 1990s.
Furthermore, in one banker's view, no private investor would have
provided SIDOR with U.S. $1.0 billion in 1991. Respondent attempts to
discount these statements by arguing that the bankers also concluded
that an inside investor ``may well have made such an investment.'' Memo
Re: Meetings with Commercial Bankers at 6. This argument is not
persuasive. The Department has never distinguished between ``inside''
and ``outside'' investors. In the GIA, we stated ``it would be
inappropriate, if not impossible, to fashion a unique inside investor
standard as a variation of the Department's reasonable private investor
standard,'' because ``the Department must render its equityworthiness
determinations on the basis of objective and verifiable evidence.'' 58
FR at 37249, 37250.
Furthermore, SIDOR's competitive position was not favorable in
1991. SIDOR's restructuring efforts were insufficient to justify the
conversion of almost U.S. $1.0 billion of the company's external debt.
As one banker noted, ``[t]he government is not able to make the
difficult restructuring changes to SIDOR. . . to make [the company a]
competitive entity.'' Memo Re: Meetings with Commercial Bankers at 7.
Our own evaluation of the restructuring process, discussed below,
reaches the same conclusion. In light of the information gathered at
verification, respondent's assertion that the bankers thought SIDOR's
long-term prospects justified the debt restructuring is not convincing.
An analysis of SIDOR's inflation adjusted revenue growth for 1988
through 1991, also an important investment criterion, shows that
SIDOR's revenue growth was not keeping pace with inflation in 1988 and
1989. While real revenue growth was 9.44 percent in 1990, in the
preceding two years it was negative 13.38 percent and negative 5.15
percent, respectively. See the October 14, 1997, Memorandum for the
File, Re: Calculations for the Final Affirmative Countervailing Duty
Determination: Wire Rod From Venezuela (POI 1996) (Final Calculations
Memo) (public version on file in the Central Records Unit of the
Department of Commerce, Room B-099).
In our preliminary finding, we noted that inflation was an
important issue
[[Page 55017]]
that we would examine prior to reaching the final decision with respect
to the 1991 transaction. Venezuelan commercial bankers discounted the
importance of an analysis of certain financial ratios because the
impact of inflation on historical financial statements is not very well
understood. See Memo Re: Meetings with Commercial Bankers at 3.
However, there are certain areas of the financials which can be
analyzed in real terms and adjusting these for inflation results in a
less favorable picture of the company's earnings. For example, because
sales revenues are recorded during the fiscal periods and reflect the
effects of inflation, the costs related to these sales may be
understated as the value of inventory used for these sales may have
been produced and recorded prior to the sale. Adjusting ``costs of
goods sold'' to reflect the erosion of currency values shows that real
costs would increase resulting in a lower net profit or higher net
loss. If such an adjustment is made to SIDOR's cost of goods sold, the
company's net profit margin deteriorates significantly: the positive
nominal profit margin of 0.06 percent in 1988 and 3.31 percent in 1989
become negative 6.67 percent and negative 11.92 percent, respectively.
The nominal profit margin for 1990 worsens from negative 5.42 percent
to negative 11.77 percent. See Final Calculation Memo at 22. With a
negative real profit margin in each of these years, SIDOR's return on
equity similarly turns negative from 1988 through 1990.
In their case brief, petitioners constructed an inflation-adjusted
return on equity (ROE) for SIDOR by comparing the company's nominal ROE
with the rate of inflation in that year. According to this analysis,
with annual inflation rates of over 30 percent, no well-run private
company would be found equityworthy in Venezuela. This is an
unreasonable conclusion. As noted above, we calculated an adjusted
profit margin for SIDOR, based on an adjustment of the company's cost
of goods sold. This is a reasonable adjustment to the company's
financial results to account for high inflation during the 1988 through
1990 period.
Nevertheless, we recognize that the rate of return from a company
during years of high inflation would require the company to earn very
high returns, and investors would consider whether the investment would
ultimately yield a real rate of return. An analysis of SIDOR's
financial ratios clearly indicates that the company's rate of return,
in nominal terms, was very low, or negative. In the context of the high
rates of inflation during these years, the company's rate of return was
very poor, and yields an unfavorable future financial outlook.
Respondent has argued that SIDOR was worth more than its nominal
book value because the historical financial statements understated the
value of the company's assets, and because a company's fixed assets
maintain their value and increase in nominal value with inflation. See
Respondent's September 26, 1997, rebuttal brief. While we acknowledge
that this may be the case, this increase in the nominal value of the
company's real assets is not compelling for determining that SIDOR was
equityworthy during these years. An investor is investing in an on-
going operation, and the important factor is the efficient operation of
the assets in order to yield a return on those assets. As we noted in
the GIA, a reasonable investor's decision to invest in an operating
steel company such as SIDOR would be based on many factors, not just
the level of nominal value of the underlying assets. See 58 FR at
37247. The value of the corporation's underlying assets is more
important when a company is terminating and liquidating. This is not
the primary consideration of an equity investor. In any case,
respondent has failed to quantify this argument in any meaningful way.
Only in 1994 did SIDOR begin to apply inflation adjustments to the
historical figures in its financial statements, and the company has
admitted that ``there is no accurate way to retroactively adjust
[unadjusted statements] for inflation.'' SIDOR's July 3, 1997,
questionnaire response at 10 (on file in the Central Records Unit of
the Department of Commerce, Room B-099).
Another important factor during the 1988-1991 period is that little
private investment was actually taking place in Venezuela. Rather,
given the economic instability in the country, as evidenced by rising
interest rates and steady currency devaluations, private money was in
fact fleeing the country for alternative foreign currency-denominated
investments. See Memo Re: Meetings with Commercial Bankers at 1-2.
There were few exchange controls at the time, and currency was easily
invested in foreign currency-denominated assets. While it is certainly
true that some private investment was taking place in Venezuela during
the early 1990s, SIDOR would have been an unlikely recipient of such
funds, and certainly not in the magnitude of the GOV's 1991 debt
conversion.
In preliminarily finding SIDOR equityworthy, we relied upon
respondent's claim that the company's restructuring process, starting
in 1989, had significantly improved SIDOR's competitiveness. At
verification, officials from the Ministry of Finance (Hacienda) and
SIDOR again stated that the restructuring process greatly improved the
company's financial health and placed SIDOR on the path to becoming an
internationally competitive steel company. See the September 19, 1997,
Memorandum to Barbara E. Tillman Re: Verification of Information
Provided in the SIDOR Questionnaire Responses (SIDOR VR) at 3-9, and
the September 20, 1997, Memorandum to Barbara E. Tillman Re:
Verification of the Government of Venezuela Questionnaire Responses
(GOV VR) at 3-6 (public versions on file in the Central Records Unit of
the Department of Commerce, Room B-099). Respondent also claims that
the GOV's decision to convert U.S. $1.0 billion of SIDOR's external
debt into equity was in large part due to the company's commitment to
meet specific short- and long-term goals, and the projections of the
company's financial position if it met these goals. While we
acknowledge that SIDOR may have made some progress as a result of the
restructuring process, we do not agree that these changes provide a
basis for finding that SIDOR was equityworthy in 1991. In the GIA, we
stated that any projections of future earnings based on restructuring
plans would have to be reconciled with an analysis of past performance.
58 FR at 37245. As we will show, the projections do not provide a
sufficient basis to overcome SIDOR's past performance and the company's
poor reputation. Rather, but for the debt capitalization by the GOV,
SIDOR's cash flow would have become so unstable that the company would
have been unviable. See SIDOR VR at 8.
At verification, SIDOR officials explained that the 1989
restructuring process was aimed at making the company more competitive
internationally and returning it to profitability. To achieve this,
SIDOR intended to measure and improve several key indicators of the
company's performance, including:
(1) work force productivity, as measured by tons of steel produced
per worker per year;
(2) debt to equity ratio;
(3) unit cost of production and sales;
(4) the timing of deliveries; and
(5) the ratio between inventories and sales, taking into account
net sales.
See SIDOR VR at 4. SIDOR also started a cost reduction program and
determined that the company's product mix had to be reduced by
specializing in the more profitable flat products. To
[[Page 55018]]
become more competitive, SIDOR also reduced its work force. According
to SIDOR, by 1991, the company had greatly improved all of the
indicators and had released 3000 workers. An additional program to
improve SIDOR's performance was initiated in 1991, as part of the debt
restructuring that was agreed upon in principal in that year. Unlike
the 1989 restructuring program, under this program, SIDOR made specific
commitments to the GOV, and agreed to reach these performance targets
by 1993. The targets included (1) an 11.0 percent reduction in per unit
production costs; (2) an increase in labor productivity as measured by
tons of liquid steel production per man year; (3) a reduction of
inventories to 25 percent; and (4) an increase in sales volume to
2,400,000 tons per year, and capacity utilization of over 80 percent.
See SIDOR VR at 8. According to SIDOR officials, if these targets were
reached by that time, SIDOR would become competitive globally. Id.
However, we disagree with these arguments. It may be true that
SIDOR's inability to meet its commitments to the GOV was, as respondent
claims, compounded by the difficulties in the Venezuelan economy.
However, petitioners correctly note that not all of the performance
targets were linked directly to the success of Venezuela's economy or
to worsening inflation. See SIDOR VR at 8. Moreover, as the bankers
noted, a key factor in determining a company's potential was its
ability to perform adequately in spite of the worsening economic
conditions.
In conjunction with GOV's 1991 agreement to capitalize 60 percent
of the company's external debt, although SIDOR prepared a report
containing certain financial projections for the Economic Council of
the Presidential Cabinet, there were no independent evaluations of this
potential investment. See SIDOR VR at Exhibit 21 (Public Document). In
analyzing SIDOR's potential, the report details a plan of action to
improve the company's competitiveness. However, the report includes
scant projections of the company's projected financial performance,
such as profitability, and other financial indicators--important
information that a private investor would consider. Rather, the
report's focus is on SIDOR's projected cash flow, with and without the
capitalization of 60 percent of the company's external debt. The report
acknowledges that ``[d]espite implementing a cost reduction program * *
* the high debt burden impedes SIDOR from accomplishing its
modernization plans {and the capitalization of 60 percent of SIDOR's
external debt} is the minimum required to guarantee the continued
operation of the firm.'' Id. Moreover, respondent acknowledges that the
economic indicators used in the projections ``had proved to be too
optimistic.'' Respondent's September 26, 1997, Rebuttal Brief at 17.
Accordingly, the company's own projections and statements indicate
that, absent the debt capitalization, SIDOR's cash flow would be
insufficient for the company to meet its debt obligations, and the
company would become unviable.
We analyzed similar circumstances in Certain Steel From Mexico
which involved AHMSA, a Mexican steel producer. In that case, it
appeared that the financial projections were done to show that the
government of Mexico's assumption of AHMSA's debt could achieve a level
of cash flow to prevent the company from defaulting on its loans. Our
conclusion in that case is the same we have reached here: ``the focus
of the analysis was not to demonstrate to a reasonable investor that
[the company] was a good investment.'' GIA, 58 FR at 37245. Rather, in
this case, the focus of SIDOR's report for the Economic Council of the
Presidential Cabinet was to show that SIDOR would have been unable to
continue operations without the capitalization of 60 percent of the
company's external debt. Again, our evaluation of AHMSA's projections
in Certain Steel From Mexico, are also appropriate in this case. At
that time, we stated that the reasonable investor would weigh a
company's past performance ``far more than a financial projection done
by the company itself in an attempt to garner more financial aid from
the {government}.'' GIA, 58 FR at 37245.
The analysis above makes clear that SIDOR was not an equityworthy
company in 1991. Accordingly, we determine that the 1991 conversion of
SIDOR's external debt into equity was not consistent with the usual
investment practices of private investors.
3. 1993 and 1994 CVG Land Transfers to SIDOR
In the Preliminary Determination, we found that in 1993 and 1994,
CVG transferred land to SIDOR to cancel unpaid capital subscriptions.
We also found that SIDOR was equityworthy in each of these years. See
Preliminary Determination, 62 FR at 41941. For many of the same reasons
outlined above, we have reevaluated our preliminary determination that
SIDOR was equityworthy in these years. For example, SIDOR's real
revenue growth from 1991 to 1993 was negative 16.97 percent, negative
8.73 percent, and negative 22.48 percent, respectively. We have also
calculated SIDOR's cost of sales, adjusted for the rate of inflation,
in each year from 1990 through 1993. This adjustment yields negative
profit margins in each of the three years preceding the 1993 and 1994
land transfers, except 1991. However, even in that year, the adjusted
return was very small, 0.18 percent. See Final Calculation Memo at 22.
In each year that SIDOR experienced a loss after adjusting for
inflation, the company's return on equity would also be negative,
meaning that SIDOR was not able to generate a real return on investment
in those years. Accordingly, we now determine that SIDOR was
unequityworthy in 1993 and 1994.
Equity Methodology: In measuring the benefit from a government
equity infusion to an unequityworthy company, the Department compares
the price paid by the government for the equity to a market benchmark,
if such a benchmark exists. A market benchmark can be obtained, for
example, where the company's shares are publicly traded. See, e.g.,
Final Affirmative Countervailing Duty Determinations: Certain Steel
Products from Spain, 58 FR 37374, 37376 (July 9, 1993).
Where a market benchmark does not exist, the Department has
determined in this investigation to continue to follow the methodology
described in the GIA, 58 FR at 37239. Following this methodology,
equity infusions made on terms inconsistent with the usual practice of
a private investor are treated as grants. Using the grant methodology
for equity infusions into an unequityworthy company is based on the
premise that an unequityworthiness finding by the Department is
tantamount to saying that the company could not have attracted
investment capital from a reasonable investor in the infusion year
based on the available information.
Creditworthiness: When the Department examines whether a company is
creditworthy, it is essentially attempting to determine if the company
in question could obtain commercial financing at commonly available
interest rates. If a company receives comparable long-term financing
from commercial sources, that company will normally be considered
creditworthy. In the absence of comparable commercial borrowings, the
Department examines the following factors, among others, to determine
whether or not a firm is creditworthy:
1. Current and past indicators of a firm's financial health
calculated from
[[Page 55019]]
that firm's financial statements and accounts.
2. The firm's recent past and present ability to meet its costs and
fixed financial obligations with its cash flow.
3. Future financial prospects of the firm including market studies,
economic forecasts, and projects or loan appraisals.
For a more detailed discussion of the Department's creditworthiness
criteria, see, e.g., Final Affirmative Countervailing Duty
Determinations: Certain Steel Products from France, 58 FR 37304 (July
9, 1993); and Final Affirmative Countervailing Duty Determinations:
Certain Steel Products from the United Kingdom, 58 FR 37393 (July 9,
1993).
Petitioners have alleged that SIDOR was uncreditworthy in each of
the years the company received GOV equity infusions, i.e., 1977 through
1992 (with the exception of 1988). In Non-Alloy Pipe from Venezuela,
the Department initiated an examination of SIDOR's creditworthiness for
the years 1985 through 1990. See 57 FR at 42964. For all other years,
the Department initiated an examination of SIDOR's creditworthiness
based upon an analysis of SIDOR's cash flow and financial ratios. See
Creditworthy/Equityworthy Memo. As outlined above under the
``Equityworthiness'' section, for all the years except 1989 through
1992, SIDOR did not submit financial data beyond what was examined in
the initiation stage, stating that such information was inaccessible.
Therefore, because SIDOR has not provided any information that
undermines the Department's initiation analysis, we determine that
SIDOR was uncreditworthy from 1978 through 1987 and from 1989 through
1990.
We also now consider SIDOR to be uncreditworthy in 1991, the year
of the GOV's decision to convert 60 percent of SIDOR's external debt
into equity. The company's financial picture in the three years prior
to 1991 was erratic. As outlined under the equityworthiness section
above, in 1991, SIDOR's real revenue growth was negative in 1988 and
1989, and, after making an adjustment for inflation, the company's
profit margin was negative in each of the three years preceding 1991.
According to Venezuelan commercial bankers, this is a key factor in
evaluating a company's ability to meet its debt obligation. See Memo
Re: Meetings with Commercial Bankers at 3. While the bankers also
stated that they would lend to Venezuelan companies with a debt-to-
equity ratio of up to 300 percent, they further indicated that a key
factor would be whether the company had survived the crises of the
economy. This cannot be said of SIDOR. The company's own projections at
the time made clear that without the GOV's conversion of SIDOR's
external debt, the company would not have been able to meet its debt
obligations. See SIDOR VR at Exhibit 21 and the ``Equityworthiness''
discussion above.
We have also determined that SIDOR was unequityworthy in 1993 and
1994. Therefore, we have also examined the company's financial
statements over the period 1990 through 1993, to analyze SIDOR's
ability to obtain commercial financing at commonly available interest
rates. For the three years after 1991, SIDOR's liquidity improved
significantly, with current assets exceeding current liabilities by
over two to one. In addition, SIDOR's ability to service its long-term
debt also improved, and the cash flow to debt ratio increased to over
14 percent in 1992 and 1993. While SIDOR's financial picture remained
weak during the period 1990 through 1993, the lessened debt burden and
improved liquidity indicate that SIDOR would have been able to obtain
commercial financing at commonly available interest rates in 1993 and
1994. Therefore, we determine SIDOR to be creditworthy in each of these
years.
Discount Rates: For uncreditworthy companies, our practice is to
use as the discount rate the highest long-term fixed interest rate
commonly available to firms in the country plus an amount equal to 12
percent of the prime rate. Because we were unable to locate a prime
rate in Venezuela, we added 12 percent to the discount rate. See e.g.,
Final Affirmative Countervailing Duty Determination: Certain Steel
Products From Brazil, 58 FR 37295, 37298 (July 9, 1993) (Brazil Steel),
Final Affirmative Countervailing Duty Determination: Grain-Oriented
Electrical Steel From Italy, 59 FR 18357, 18358 (April 18, 1994).
(GOES).
In the Preliminary Determination, we calculated the benefit from
non-recurring countervailable subsidies received by SIDOR through 1987
by using as the discount rate the long-term corporate bond rates in
Venezuela, published by Morgan Guaranty Trust Company in World
Financial Markets. See 62 FR at 41942. For the period after 1987, we
used as the discount rate the average short-term interest rate, because
the long-term corporate bond rates were not available after 1987, and
because the primary mechanism for obtaining long-term domestic currency
financing in Venezuela has been through short-term, roll-over, loans.
Based on our findings at verification, we now determine that it is
not appropriate to use long-term corporate bond rates as the discount
rate. Central Bank of Venezuela officials stated at verification that
``[c]ommercial banks in Venezuela have never given long-term loans. The
general practice is to give one-year loans at a short-term rate and
roll it over each year with a new short-term rate.'' GOV VR at 3.
In the Preliminary Determination, we also stated that it was
appropriate to adjust the discount rate to take into account inflation
because Venezuela has experienced intermittent periods of high
inflation over the past twenty years, and because SIDOR has adjusted
its financial statements to take into account the effects of inflation
since 1994. See Preliminary Determination, 62 FR at 41942. We have
modified our approach for this final determination and no longer
consider it appropriate to make such an adjustment to the short-term
discount rate. In addition, we now determine that, in calculating the
benefit from non-recurring subsidies, it is appropriate to account for
inflation only for the period 1987 through 1996. Therefore, for the
years 1978 through 1986, we are using, as the discount rate, the short-
term bolivar interest rates described above. As noted above, these
rates represent the primary mechanism for obtaining long-term domestic
currency financing in Venezuela.
We have determined that the most reasonable way to account for
inflation for the is to convert the equity infusions into U.S. dollars,
and to then apply, as the discount rate, a long-term dollar lending
rate. Therefore, for our discount rate, we used data for U.S. dollar
lending in Venezuela for long-term non-guaranteed loans from private
lenders, as published in the World Bank Debt Tables: External Finance
for Developing Countries. This conforms with our practice in Brazil
Steel. See 58 FR at 37298. The changes to our calculation methodology
are discussed more fully below under the GOV Equity Infusions into
SIDOR and Interested Party Comment sections of the notice. Because we
determine SIDOR to be uncreditworthy for the years 1978 through 1991
(except 1988), we added to the discount rates a risk premium equal to
12 percent of the discount rate in each of those years.
Based upon our analysis of the petition and the responses to our
questionnaires, we determine the following:
[[Page 55020]]
I. Programs Determined To Be Countervailable
A. GOV Equity Infusions into SIDOR
SIDOR received GOV equity infusions in every year from 1977 through
1991, except 1988. SIDOR is a 100-percent government-owned company. Its
parent company is Corporacion Venezolana de Guayana (CVG), a holding
company owned by the GOV charged with promoting industrial development
in the Guayana Region. The majority of the equity infusions were made
by the Fondo de Inversiones de Venezuela (FIV), a GOV investment fund.
The remaining funds were provided by the Hacienda, primarily as
interest payments on loans. According to the response of the GOV, the
government equity infusions into SIDOR were provided pursuant to
special laws adopted with respect to government-approved expansion
projects of SIDOR. Thus, these equity infusions were specific under
section 771(5A)(D) of the Act.
The first law, published in the Gaceta Oficial No. 30,587 on
January 2, 1975, authorized SIDOR's 1974-79 ``Plan IV'' expansion. This
expansion was aimed at increasing SIDOR's steel production by 3.6
million tons as well as increasing the company's rolling capacity for
flat and non-flat products. The government equity infusions under Plan
IV were not disbursed in the amounts or at the time originally
projected in this plan. However, the amounts received by SIDOR were
recorded in the company's annual financial statements in the year they
were received. Equity funds also were provided to SIDOR in accordance
with a 1987 law passed by the Venezuelan Congress. This law was
published in the Gaceta Oficial No. 33,771 on December 21, 1987. The
FIV received both preferred and common shares for these equity
investments into SIDOR.
As noted above, funds were also provided to SIDOR by the Hacienda.
Funds provided by the Hacienda between 1977 and 1981 were authorized
under Article 11 of a 1976 Special Law for Public Credit and were also
made pursuant to a June 26, 1977, agreement between the Hacienda, FIV,
CVG and SIDOR. Under this agreement, the Hacienda agreed to pay SIDOR's
interest on loans from the FIV in return for shares in the company.
Equity payments made between 1984 and 1986 were provided pursuant to
government Decree 390 of December 1984, authorizing the Hacienda to
help SIDOR service its foreign debt. Finally, a 1987 loan from the
Hacienda to SIDOR was converted into equity, but recorded as an advance
for future capital increase.
SIDOR records all Hacienda equity funds in the years the funds were
received. However, the capital investments appeared in SIDOR's annual
financial statements as ``Advances for Future Capital Increase.'' In
1989, all advances were converted into shares issued to Hacienda, the
delay stemming from a disagreement between the Hacienda and CVG as to
who should take ownership of the shares. The issue was resolved in
1989, and on the same day the shares were issued to Hacienda, they were
transferred to CVG, SIDOR's parent company. We have treated these
Hacienda funds as capital investments in each year in which they were
received by SIDOR.
According to the agreement under which the Hacienda funds were
provided, the funds are to be treated as capital infusions.
In 1991, following several years of restructuring by SIDOR, the GOV
agreed to convert 60 percent of SIDOR's debt and the interest accrued
on the debt into equity which was converted into shares provided to
Hacienda. This debt related to SIDOR's pre-1986 foreign currency loans
that had been restructured in accordance with government Decree 1261 of
November 15, 1990. As a result of this conversion, the Hacienda now
holds 39.68 percent of SIDOR's shares. As of December 31, 1996, the
remaining 60.32 percent were held by SIDOR's parent company, CVG.
In 1993 and 1994, also in connection with SIDOR's Plan IV expansion
project, CVG transferred some of the land on which the company
constructed the Plan IV expansion. The land was used as payment for
unpaid capital subscriptions from CVG. At the time, CVG purchased only
about half of the 1,860,000 shares in SIDOR it had subscribed to. We
consider the land transfers to be capital investments in each year in
which they were received by SIDOR.
We determine that the equity infusions into SIDOR in the years 1978
through 1987, 1989 through 1991, 1993 and 1994 confer a benefit under
section 771(5)(E)(i) of the Act because the GOV investments were not
consistent with the usual investment practice of private investors. See
the discussion on ``Equityworthiness'' above. Also, these equity
infusions are specific within the meaning of section 771(5A)(D) because
they were limited to one company.
As explained in the ``Subsidies Valuation Information'' section, we
have treated equity infusions in unequityworthy companies as grants
given in the year the capital was received. We have further determined
these infusions to be non-recurring subsidies. Therefore, we have
allocated the benefits over 20 years.
Venezuela experienced periods of high inflation during the period
1978 through 1996 (the rates ranged from 7 percent to 103 percent). In
the Preliminary Determination, we found that it was appropriate to take
into account the effects of inflation to accurately value the benefit
from GOV equity infusions. See 62 FR at 41943. We did this by adjusting
the principal component of the benefit by the inflation index, using
the year of receipt as the reference year to measure inflation. We also
adjusted the interest component by adding the rate of inflation in each
year to the discount rate.
Based on our verification and comments from interested parties, we
find that the methodology used in the preliminary determination to
account for inflation should be changed. First, prior to 1987,
inflation was relatively low and, as such, we do not consider it
appropriate to adjust for inflation prior to 1987. In 1987, inflation
increased to 40 percent and thereafter remained consistently high,
reaching 103 percent in 1996. The period after 1986, therefore, can
clearly be distinguished from the prior years as marked by consistently
high inflation. Accordingly, when calculating the benefit to SIDOR
during the POI from the GOV equity infusions, we adjusted the nominal
values of the equity infusions to account for inflation from 1987
through 1996. See the Interested Party Comment section of this notice
for a more detailed discussion of this adjustment.
As we noted under the ``Discount Rate'' section above, in
calculating the benefit from equity infusions received prior to 1987,
we have used the short-term bolivar interest rates. For the period 1987
through 1996, we have accounted for inflation in our benefit
calculation by converting the equity infusions into U.S. dollars after
1986. This conforms with our past practice and with business practices
in Venezuela. See Brazil Steel, 58 FR at 37298. For example, a
principle source of funding for capital investment in Venezuela was
``overseas foreign currency-denominated financing.'' See Memo Re:
Meetings with Commercial Bankers at 2. Also, SIDOR's long-term loans
were denominated in foreign currency. Accordingly, for equity infusions
received prior to 1987, we converted the remaining face value of the
grant in 1987 into U.S. dollars using the bolivar/dollar exchange rate
[[Page 55021]]
prevailing in that year. For the remaining allocation period, we then
applied the long-term U.S. dollar interest rate described in the
``Discount Rate'' section of this notice. For equity infusions received
after 1986, we converted the infusion into U.S. dollars at the exchange
rate in effect on the day the infusion was received by SIDOR. The
discount rate used was the same described above.
To calculate the total benefit from the infusions to SIDOR, we
summed the benefit allocated to the POI from each equity infusion.
After converting the benefit from U.S. dollars into bolivars, we then
divided that total benefit by SIDOR's total sales of all products
during the POI. On this basis, we determine the net subsidy for this
program to be 23.61 percent ad valorem for SIDOR.
B. Dividend Advances From the Hacienda
Between 1977 and 1981, pursuant to a June 26, 1977, agreement among
the Hacienda, FIV, CVG and SIDOR, the Hacienda paid dividends on behalf
of SIDOR on the preferred shares held by FIV. These were recorded in
SIDOR's accounting records as ``Dividend Advances.'' These dividend
advances are still reported in SIDOR's 1996 financial statement.
According to the 1996 financial statement, the final treatment of these
dividend advances has not been decided. Because the payment by the
Hacienda of dividends on behalf of SIDOR is based on an agreement
signed by the Hacienda, FIV, CVG and SIDOR, the payment of dividends by
the Hacienda, a government agency, is limited to one company, SIDOR,
and is, thus, specific under section 771(5A)(D) of the Act. To
determine whether a benefit has been provided, the Department must
determine whether SIDOR was obligated to pay dividends to FIV on the
preferred shares. If the Hacienda relieved SIDOR of a payment
obligation, then the payment of dividends by the Hacienda on behalf of
SIDOR constitutes a countervailable subsidy.
According to its supplemental questionnaire response, SIDOR had
fiscal losses in the years the dividend payments were made. Therefore,
SIDOR stated that it was not obligated to pay any dividends. To
determine whether SIDOR was obligated to pay the dividends to FIV on
the preferred shares, we examined the 1977 agreement among the
Hacienda, FIV, CVG and SIDOR. We verified that under this agreement,
the preferred shares yielded a fixed yearly dividend equivalent to
seven percent of their nominal value. Therefore, SIDOR was obligated to
pay fixed yearly dividends to FIV. Because the payment of dividends by
the Hacienda to FIV relieved SIDOR of a financial obligation, we
determine that the outstanding balance of the ``Dividend Advances''
constitutes a benefit under section 771(5)(E) of the Act.
In order to calculate the benefit from this program, we treated the
dividend advances as interest-free short-term loans because the
advances appear to be liabilities of SIDOR. The 1977 agreement under
which these dividends were paid does not state that these are capital
infusions into SIDOR by the Hacienda. In addition, neither the GOV or
SIDOR has treated these dividend advances as capital infusions. Thus,
it appears, that SIDOR is still liable for repayment of the dividend
advances.
To calculate the benefit in the POI, we took the amount of the
dividend advances reported in SIDOR's 1996 financial statement and
calculated the amount of interest the company would have paid in 1996
if it had received an interest-free loan equal to the amount of the
dividend advances. We used as our benchmark interest rate the annual
average short-term interest rate reported by the GOV in its
supplemental response. We used this as the benchmark because we
verified that SIDOR did not have short-term bolivar lending during the
period of investigation. The calculated interest savings was then
divided by SIDOR's total sales in the POI. On this basis, we determine
the net subsidy for this program to be 0.08 percent ad valorem for
SIDOR.
II. Programs Determined To Be Not Countervailable
A. GOV Loan to SIDOR in 1990
We initiated an investigation of this program based upon
petitioners' allegation that the GOV replaced a $1,507 million
commercial loan to SIDOR with a 15-year loan from the government. We
verified that this 1990 GOV loan to SIDOR was part of a debt
restructuring program which was examined and found not countervailable
in the Final Affirmative Countervailing Duty Determination:
Ferrosilicon From Venezuela; and Countervailing Duty Order for
Ferrosilicon From Venezuela, 58 FR 27539 (May 10, 1993). Because
petitioners have provided no new information or evidence of changed
circumstances to warrant a reconsideration of that determination, we
continue to find this GOV debt restructuring program, under which this
1990 loan was received, not countervailable.
B. Government Provision of Electricity
Electricity is provided to SIDOR by EDELCA, a government-owned
utility company. Both SIDOR and EDELCA are part of the CVG Group.
EDELCA is the largest utility company in Venezuela and generates 70
percent of the electricity consumed in Venezuela. Electricity rates
between EDELCA and its industrial customers are not regulated. Tariff
rates are set by EDELCA for a one-year period corresponding to the
calendar year.
Almost all of EDELCA's clients are industrial customers or other
utility companies in Venezuela. The rates between EDELCA and the other
utility companies are regulated by the Regulatory Commission of
Electric Energy (RCEE), while the rates charged by EDELCA to its
industrial clients are not regulated. In 1990, EDELCA began using
dollar per-unit rates rather than bolivar per-unit rates for its
industrial rates in order to protect its tariff structure against the
effects of inflation. In that year, EDELCA also changed its rate
structure to one based upon its costs plus a return on its capital. To
calculate its costs, EDELCA divided capital costs by capacity and
factored in general operating costs, transmission costs, administrative
costs, and a ten percent return on capital. To calculate its base
industrial tariff rate, it then determined how much higher a price the
company would need to charge in order to generate enough income to
service its debt and maintain a profit. This base rate then served as
the basis for the industrial rates set in subsequent years. Because
this base rate was calculated in dollars, it has generally been
increased in each subsequent year by the U.S. Consumer Price Index.
EDELCA makes small adjustments to this base rate to take into
account different transmission and transformation costs for its
customers. We verified that certain industrial clients with higher
transmission costs due to the distance from the generation site paid
slightly more than the basic rate in order to account for EDELCA's
increased cost of transmission. In addition, some other industrial
clients, such as SIDOR, maintained their own substations and
transformers. These customers received a slightly lower rate.
According to section 771(5)(E) of the Act, the adequacy of
remuneration with respect to a government's provision of a good or
service ``* * * shall be determined in relation to prevailing market
conditions for the good or service being provided or the goods
[[Page 55022]]
being purchased in the country which is subject to the investigation or
review. Prevailing market conditions include price, quality,
availability, marketability, transportation, and other conditions of
purchase or sale.'' Particular problems can arise in applying this
standard when the government is the sole supplier of the good or
service in the country or within the area where the respondent is
located. In this situation, there may be no alternative market prices
available in the country (e.g., private prices, competitively-bid
prices, import prices, or other types of market reference prices).
Hence, it becomes necessary to examine other options for determining
whether the good has been provided for less than adequate remuneration.
This consideration of other options in no way indicates a departure
from our preference for relying on market conditions in the relevant
country, specifically market prices, when determining whether a good or
service is being provided at a price which reflects adequate
remuneration.
With respect to electricity, some of the options may be to examine
whether the government has followed a consistent rate-making policy,
whether it has covered its costs, whether it has earned a reasonable
rate of return in setting its rates, and/or whether it applied market
principles in determining its rates. Such an approach is warranted
where it is only the government that provides electricity within a
country or where electricity cannot be sold across service
jurisdictions within a country and there are divergent consumption and
generation patterns within the service jurisdictions.
In the instant case, we verified that during the period of
investigation EDELCA set its industrial rates, including the rate
charged to SIDOR, based upon market principles, including adjusting its
standard industrial rate for differences in transmission and
transformation costs and for level of consumption. In addition, we note
that EDELCA's rate making policy incorporates a return on its costs and
that the return earned by EDELCA on it sales to SIDOR was higher than
the average return of its industrial clients. We verified that EDELCA's
pricing policies with respect to SIDOR and its industrial customers are
consistent with the pricing policies of private utility companies in
Venezuela. Therefore, we find that the rates charged by EDELCA to SIDOR
are not countervailable under section 771(5)(E) of the Act.
Adequacy of remuneration is a new statutory provision which
replaced ``preferentiality'' as the standard for determining whether
the government's provision of a good or service constitutes a
countervailable subsidy. The Department has had no experience
administering section 771(5)(E) and Congress has provided no guidance
as to how the Department should interpret this provision. This case and
the other concurrent wire rod cases mark the first instances in which
we are applying the new standard. We anticipate that our policy in this
area will continue to be refined as we address similar issues in the
future.
III. Programs Determined To Be Not Used
A. Government Guarantees of SIDOR's Private Debt in 1987 and 1988
In 1987 and 1988, the GOV guaranteed loans provided to SIDOR by
Credito Italiano and Kreditanstalt Fuer Wiederaufbau (KfW),
respectively. Both of these loans were Deutschmark-denominated loans
linked to the London Interbank Offering Rate (LIBOR).
We verified that the 1987 and 1988 loans were specifically applied
for and authorized as part of a program to finance the expansion of
SIDOR's pipe mill. The approval documents specify that the loans were
for the expansion of SIDOR's pipe mill, in particular for purchasing
equipment. These were authorized under the December 10, 1987, ``Law for
the Contracting and Financing of the First Stage of the Project to
Expand and Modernize SIDOR's Pipe Mill.'' Because we verified that the
KfW and Credito Italiano loans were tied to financing the expansion of
SIDOR's pipe mill, we determine that the loans and the government
guarantees of the loans are tied to non-subject merchandise and, thus,
do not provide a benefit to wire rod. Therefore, we determine that the
GOV loan guarantees did not confer countervailable benefits on the
production and/or exportation of subject merchandise, and that this
program was not used during the POI.
B. Government Provision of Iron Ore
Iron ore is a bulky, low-priced commodity that is traded on the
international market and is used in the production of steel.
Petitioners alleged that Ferrominera, a government-owned company,
provided iron ore to SIDOR for less than adequate remuneration. SIDOR
and Ferrominera are two of the 37 companies which comprise the CVG
Group, a holding company owned by the GOV. SIDOR purchases all of its
iron ore from Ferrominera. Ferrominera is the only producer of iron ore
in Venezuela, and 99 percent of its domestic sales are to the steel
industry.
As explained in our preliminary determination, SIDOR and
Ferrominera maintain two separate contracts--one for the supply of iron
ore and one for its transportation. SIDOR and Ferrominera have a multi-
year supply contract under which Ferrominera sets SIDOR's iron ore
prices on an annual basis. The unit price (i.e., the price per ``metric
ton natural iron unit'') is set in U.S. dollars, and the terms of sale
are FOB, place of loading. When Ferrominera announced a new price for
1996, SIDOR objected and tried to renegotiate the price. Because of
this objection, Ferrominera did not apply the new price. After
negotiations failed, SIDOR and Ferrominera entered into arbitration
conducted by the CVG Group.
For the preliminary determination, we calculated a program rate by
comparing the price of iron ore that Ferrominera charged SIDOR during
1996 with a benchmark price constructed from published price
information on the record. However, at verification we learned that the
CVG arbitration decision was not made until March 1997; thus the price
that SIDOR had to pay for the iron ore was not finally set until after
our period of investigation. Because the 1996 price of iron ore was not
finalized until after the period of investigation and final payment was
not made by SIDOR until July 1997, we consider it inappropriate to
assess the countervailability of Ferrominera's provision of iron ore to
SIDOR for purposes of this final determination.
We have taken this approach in light of our practice to countervail
subsidies based on the timing of the receipt of the subsidy. See, e.g.,
Final Affirmative Countervailing Duty Determination: Certain Pasta From
Italy, 61 FR 30288 (June 14, 1996), and Certain Welded Carbon Steel
Pipes and Tubes and Welded Carbon Steel Line Pipe From Turkey: Final
Results of Countervailing Duty Administrative Reviews, 62 FR 43984
(August 18, 1997). Because the final price for the iron ore was not set
and paid until 1997, the receipt of any potential benefit under this
program is 1997, which is outside the period of investigation.
Moreover, because the standard for adequate remuneration specifies that
transportation is one of the factors to consider in determining whether
the provision of a good is for less than adequate remuneration, we do
not consider it appropriate in this case to analyze the transportation
services for the delivery of iron ore separately from the pricing
contract of such ore.
[[Page 55023]]
Therefore, the issue of whether iron ore is provided to SIDOR for less
than adequate remuneration will be examined in an administrative review
conducted under section 751 of the Act, if a countervailing duty order
is issued.
We note that the interested parties submitted comments on whether
iron ore was provided to SIDOR for less than adequate remuneration.
These comments dealt with the methodology which should be employed in
analyzing whether iron ore was provided for less than adequate
remuneration. Because we are not making a determination with respect to
the countervailability of this program, and because none of the
comments were related to the issue of the timing of the potential
benefit, it is not necessary to address the comments submitted by the
interested parties for purposes of this final determination.
C. Preferential Tax Incentives Under Decree 1477
Petitioners alleged that Decree 1477 provides partial or total
income tax exemptions and other tax credits to companies in
disadvantaged regions, including Bolivar, where SIDOR is located.
According to petitioners, companies that relocated or commenced an
expansion after March 23, 1976, qualify for tax incentives. We verified
that SIDOR never applied for or received benefits under this program.
Therefore, we determine that this program was not used by SIDOR during
the POI.
IV. Program Determined To Be Terminated
Special Permissive Regulations for Exporters (REFE)
The REFE program was enacted September 9, 1994, to enable companies
and individuals to access foreign currency more easily. Prior to 1994,
companies and individuals were not allowed to maintain foreign currency
accounts. Rather, they had to make specific requests for access to
foreign currency from the Office of Technical Exchange Administration
(OTAC, Officina Technica de Administration de Combina). In 1994,
Venezuela endured a banking crisis. In response to this crisis, the GOV
halted all exchange of bolivars for foreign currency, leaving companies
and individuals with virtually no access to foreign currency. During
July and August, 1994, companies in Venezuela were unable to service
foreign currency-denominated debt. In response to this situation, the
GOV initiated the REFE program. The REFE program allowed companies and
individuals to use directly their foreign currency receipts. Under the
program, a company could maintain a foreign account with which it could
directly service its foreign currency debts or directly pay for
imported inputs.
We verified that on April 17, 1996, the GOV terminated the REFE
program with the enactment of Decree 1,292, which established the free
convertibility of currency in Venezuela and removed the exchange
control regulations then in place. With the establishment of the free
convertibility of currency, we also determine that there are no
residual benefits from the REFE program. Thus, we determine that the
REFE program is terminated.
Interested Party Comment
Comments not already addressed in the ``Subsidies Valuation'' and
program sections above, are addressed separately below:
Comment: Issues regarding the equity methodology. Both petitioners
and respondent argue that the methodology the Department used in the
preliminary determination to calculate the benefit arising from equity
infusions into SIDOR incorrectly accounts for inflation. Petitioners'
position is that the Department should not have used variable short-
term interest rates as discount rates. Rather, they argue that the
Department should account for inflation by dollarizing (i.e.,
converting the grant amount into dollars and using a discount rate
denominated in dollars) for both the amounts of the subsidies and the
interest rates used to allocate them across time. They contend that, at
a minimum, the Department should dollarize the period 1987 to 1996.
Respondent argues that, contrary to prior practice, the Department
adjusted the benefit derived from the allocated principal for periods
which were not consistently hyperinflationary. They argue that
hyperinflation is defined as 50 percent inflation or higher, and that
therefore the Department's methodology should include inflation
adjustments only for the period 1994-1996. Second, they argue that, in
adjusting the interest benefit derived from the outstanding balance of
the equity infusion, the Department double-counted the effects of
inflation by combining the benchmark rate from the year of receipt of
the equity infusion and the inflation rate for 1996. Finally, they
contend that, in calculating the risk premium for an uncreditworthy
company, the Department used an incorrect basis in certain years which
overstated the risk premium. They propose that national average short-
term interest rates should be used to calculate the risk premium for
all years in which countervailable equity infusions were received.
Department's position: As outlined above, for this final
determination, we have altered our methodology for calculating the
benefit to SIDOR from GOV equity infusions. Some of the modifications
to the calculation methodology reflect our agreement with arguments
made by both respondent and petitioners. For example, we agree with
respondent that it is not appropriate to account for inflation over the
entire allocation period. Also, we accept petitioners argument that, to
capture the impact of inflation on the nominal benefit to SIDOR in the
years 1987 through 1996, it is appropriate to convert the subsidy
amounts into U.S. dollars. Additional changes, in particular the use of
short-term discount rates through 1986 and U.S. dollar discount rates
from 1987 through 1996, reflect our findings at verification and the
practices in Venezuelan financial markets.
During the period 1978 through 1986, the annual inflation rates in
Venezuela ranged from 7 to 21 percent. In 1987, however, the annual
inflation rate increased to 41 percent. Since then, it has not fallen
below 30 percent and has reached levels as high as 100 percent by 1996.
The period after 1986, therefore, can clearly be distinguished from the
prior years, because the latter period was marked by consistently high
and rising inflation.
According to respondent, inflation in Venezuela only reached
``hyperinflationary'' levels from 1994 to 1996, when the rates ranged
between 57 and 103 percent. Therefore, respondent argues that in
calculating the benefit from GOV equity infusions, inflation should be
taken into account only during the period 1994 through 1996. In support
of this, respondent cites certain steel products from Mexico, where the
Department found that Mexico was hyperinflationary from 1983 through
1988, when inflation ranged between 57 and 131 percent. See Final
Affirmative Countervailing Duty Determination: Certain Steel Products
From Mexico, 58 FR 37352, 37355 (July 9, 1993). We did not account for
inflation in that case when the rate was between 19 and 29 percent.
Accordingly, respondent implies that the methodology used in Steel From
Mexico stands for the proposition that the Department only takes into
account inflation during periods in which annual inflation is 50
percent or higher.
We disagree with respondent's interpretation of the approach used
in that case. In Steel From Mexico, we did not specify that an economy
must reach
[[Page 55024]]
a certain level of annual inflation before we will account for
inflation in the benefit calculation. Adopting a threshold would miss
the point of adjusting for inflation. Rather, in Steel From Mexico, our
concern was how to treat a period of high inflation that was in the
middle of the allocation stream and clearly anomalous with respect to
the periods before and after. As respondent noted, the inflation rate
in Mexico dropped from 114 percent in 1988 to 20 percent in 1989,
bringing to an end the period of anomalous rates. In contrast,
inflation in Venezuela has been consistently high from 1987 onwards,
reaching 81 percent in 1989, and topping 100 percent in 1996, the POI.
At no time after 1987 did inflation return to the lower levels
experienced during the period prior to 1986. Petitioners correctly note
that, during periods of consistently high inflation, as experienced by
Venezuela after 1986, the nominal value of a company's non-monetary
assets increases with inflation. Therefore, untied subsidies that are
allocated over time and which benefit a company's productive activities
also increase in real terms because of inflation. Adjusting for
inflation during anomalous periods of high inflation merely recognizes
this fact, and the adjustment takes into account the value, in real
terms, of the subsidy. With respect to this, the methodology used in
the Preliminary Determination to calculate the interest component of
the benefit, was incorrect. In particular, we incorrectly added the
rate of inflation to the discount rate. This approach treats inflation
as a benefit in each year. However, as explained above, inflation
increases the real value of non-monetary assets, such as machinery,
over time, and is not a benefit in each year. In any case, we have
modified our approach by converting the equity infusions into dollars
after 1986, so that an adjustment to the interest component is no
longer necessary.
As explained in the ``GOV Equity Infusions into SIDOR'' section
above, we determine that, for periods of high inflation in Venezuela
(i.e., 1987 through the POI) it is appropriate to convert non-recurring
subsidies into dollars. This approach is consistent with the
Department's past practice, in particular when no appropriate long-term
domestic discount rate exists for use in our grant calculation.
Further, as petitioners correctly note, this approach conforms with
SIDOR's actual business practices and commercial practices in
Venezuela. See Memo Re: Meetings with Commercial Bankers at 2.
Respondent argues that inflation was not a constant phenomenon in
Venezuela. For this reason, respondent claims that other cases in which
the Department adopted a dollarization methodology, such as Brazil
Steel, are not relevant because, in that case, inflation was
consistently above 350 percent. We disagree with respondent because,
once again, the issue is not whether annual inflation reaches a certain
threshold level in a country. Rather, as noted above, adjusting the
benefit for inflation merely accounts for the fact that, when inflation
is consistently high, the value of non-monetary assets increases, and
the value of the subsidy that benefits the non-monetary assets also
increases. By converting the subsidy into dollars at the beginning of a
high inflation period and later converting the benefit allocable to the
POI back into domestic currency at the exchange rate prevailing in the
POI, we are taking into account that increase in the real value of the
subsidy.
Respondent claims that the risk premium used by the Department for
the 1978 through 1986 period is overstated, and that the Department
should use the short-term interest rates, with a risk premium, to
calculate the benefit. Because we are now using the rate advocated by
respondent for the 1978 through 1986 period, the issue is now moot.
Suspension of Liquidation
In accordance with section 705(c)(1)(B) of the Act, we have
calculated a subsidy rate for SIDOR, the one company under
investigation. This subsidy rate is 23.69 percent ad valorem. This rate
would also be applicable to any companies not investigated or any new
companies exporting the subject merchandise.
We have concluded a suspension agreement with the Government of
Venezuela which eliminates the injurious effects of imports from
Venezuela (see, Notice of Suspension of Investigation: Steel Wire Rod
from Venezuela being published concurrently with this notice). As
indicated in the notice announcing the suspension agreement, pursuant
to section 704(h)(3) of the Act, we are directing the U.S. Customs
Service to continue suspension of liquidation. This suspension will
terminate 20 days after publication of the suspension agreement or, if
a review is requested pursuant to section 704(h)(1) of the Act, at the
completion of that review. Pursuant to section 704(f)(2)(B) of the Act,
however, we are not applying the final determination rate to entries of
subject merchandise from Venezuela; rather, we have adjusted the rate
to zero to reflect the effect of the agreement.
We will notify the International Trade Commission (ITC) of our
determination. In addition, we are making available to the ITC all non-
privileged and non-proprietary information relating to this
investigation. We will allow the ITC access to all privileged and
business proprietary information in our files, provided the ITC
confirms that it will not disclose such information, either publicly or
under an administrative protective order, without the written consent
of the Deputy Assistant Secretary for Import Administration.
If the ITC's injury determination is negative, the suspension
agreement will have no force or effect, this investigation will be
terminated, and the Department will instruct the U.S. Customs Service
to refund or cancel all securities posted (see, section 704(f)(3)(A) of
the Act). If the ITC's injury determination is affirmative, the
Department will not issue a countervailing duty order as long as the
suspension agreement remains in force, and the Department will instruct
the U.S. Customs Service to refund or cancel all securities posted
(see, section 704(f)(3)(B) of the Act).
This notice is issued pursuant to section 704(g) of the Act.
Return or Destruction of Proprietary Information
This notice serves as the only reminder to parties subject to
Administrative Protective Order (APO) of their responsibility
concerning the return or destruction of proprietary information
disclosed under APO in accordance with 19 CFR 355.34(d). Failure to
comply is a violation of the APO.
This determination is published pursuant to section 705(d) of the
Act.
Dated: October 14, 1997.
Robert S. LaRussa,
Assistant Secretary for Import Administration.
[FR Doc. 97-27983 Filed 10-21-97; 8:45 am]
BILLING CODE 3510-DS-P