66 FR 12759, February 28, 2001 A-557-810 Investigation Public Document MEMORANDUM TO: Bernard Carreau, fulfilling the duties of Assistant Secretary for Import Administration FROM: Holly A. Kuga Acting Deputy Assistant Secretary for Import Administration Group II DATE: February 14, 2001 SUBJECT: Issues and Decision Memorandum for the Investigation of Steel Wire Rope from Malaysia Summary We have analyzed the comments in the case and rebuttal briefs submitted by interested parties in the antidumping duty investigation of steel wire rope from Malaysia. As a result of our analysis, we have made changes in the margin calculations. We recommend that you approve the positions we have developed in the Discussion of Interested Party Comments section of this memorandum. Below is the complete list of the issues in this investigation for which we received comments from the parties. In Section I, we identify the issues in this investigation for which we received comments from the interested parties. Section II sets out the scope, or product coverage, of this investigation. Section III identifies the changes made in the margin calculation since the preliminary determination. Section IV analyzes the comments of the interested parties. Finally, we recommend approval of the Department's positions developed for each of the issues. Background On October 2, 2000, the Department of Commerce (the Department) published its preliminary determination in the antidumping investigation of steel wire rope from Malaysia. The period of investigation (POI) is January 1, 1999, through December 31, 1999. See 65 FR 58736. The respondent in this investigation is Kiswire Sdn. Bhd. (Kiswire). We invited parties to comment on the preliminary determination. Kiswire and the petitioner submitted case briefs on December 21, 2000, and rebuttal briefs on January 4, 2001. (1) Counsel to Kiswire and the petitioner requested a public hearing in this case. Both parties subsequently withdrew their requests. List of issues 1. Mandatory Respondents and "All Others" Rate 2. Cost Reporting for Grade and Lay of Rope 3. Model Match Hierarchy 4. Adjustments to Home Market and U.S. Market Short-Term Borrowing Rates 5. Treatment of Negative Margins 6. General and Administrative Expense 7. Financial Expense Ratio II. Scope of the investigation For purposes of this investigation, the product covered is steel wire rope. Steel wire rope encompasses ropes, cables, and cordage of iron or carbon or stainless steel, other than stranded wire, not fitted with fittings or made up into articles, and not made up of brass-plated wire. Imports of these products are currently classifiable under subheadings: 7312.10.6030, 7312.10.6060, 7312.10.9030, 7312.10.9060, and 7312.10.9090 of the Harmonized Tariff Schedule of the United States (HTSUS). Although HTSUS subheadings are provided for convenience and Customs Service purposes, the written description of the scope of this investigation is dispositive. Changes in the Margin Calculation Since the Preliminary Determination We adjusted home market warranty expenses for two observations where warranty expenses were incurred after the company submitted its responses. See December 12, 2000, Kiswire verification report at 2. We revised Kiswire's packing expense for seven observations. See December 12, 2000, Kiswire verification report at 2. We recalculated the ringgit and U.S. dollar short-term borrowing rates based on the loans denominated in the respective currencies, and recalculated the home market and U.S. credit expenses using the revised rates. See Comment 4 of Section IV, below. We corrected a clerical error in the comparison market program by treating billing adjustments (BILLADJH) as deductions, rather than additions, to normal value. 5. We corrected the customer code field (CUSCODH) for 15 observations in the home market database. See December 12, 2000, Kiswire verification report at 2. We revised Kiswire's financial expense ratio using the consolidated financial statements. See February 14, 2001, memo from Laurens van Houten to Neal Halper. We disallowed unverified interest income offsets to the financial expense ratio. See February 14, 2001, memo from Laurens van Houten to Neal Halper. We adjusted the cost of goods sold used in the financial expense ratio to exclude an amount for packing costs. See February 14, 2001, memo from Laurens van Houten to Neal Halper. Discussion of Interested Party Comments Comment 1: Mandatory Respondents and "All Others" Rate The petitioner argues that the Department erred in choosing only one respondent in this case. According to the petitioner, statistical information indicates that there is at least one other major producer of steel wire rope in Malaysia. The petitioner contends that while it is too late to add respondents at this stage of the proceeding, the Department should, as facts available, employ an "all others" rate based on the margins set forth in the notice of initiation. The respondent asserts that by selecting Kiswire as the lone respondent in this case, the Department complied fully with section 777(A) of the Act and the Department's own regulations regarding respondent selection, and that it would be inappropriate to base the all others rate on anything other than Kiswire's rate. The Department's Position: We agree with the respondent. Section 777A(c)(2) of the Act gives the Department discretion, when faced with a large number of exporters/producers, to limit the number of companies examined if it is not practicable to examine all companies. The Act permits us to investigate either 1) a sample of exporters, producers, or types of products that is statistically valid based on the information available at the time of selection, or 2) exporters and producers accounting for the largest volume of the subject merchandise that can reasonably be examined. In selecting respondents in this case, the Department took into consideration the number of respondents in the companion investigations of steel wire rope from China and India, as well as the limited resources available, and determined it was most appropriate to choose the largest producer/exporter of the subject merchandise in order to cover the greatest possible export volume from Malaysia. U.S. Customs import statistics indicated that Kiswire accounted for over 90 percent of all exports of the subject merchandise from Malaysia during the period of investigation (POI), and accordingly the Department determined to limit the Malaysian investigation to Kiswire. Regarding the "all others" rate, there is no statutory authority to do what the petitioner suggests. Accordingly, in this case, as in all cases where all respondents have de minimis dumping margins, the "all others" rate is also de minimis and the case is terminated. Comment 2: Cost Reporting for Grade and Lay of Rope The petitioner argues that Kiswire erred in its section B questionnaire response of June 29, 2000, by basing its product comparisons on a hierarchy of product characteristics that differed from the hierarchy detailed by the Department in its original questionnaire. The petitioner also contends that Kiswire disregarded grade of steel and lay of rope as relevant product characteristics. The petitioner claims that, although Kiswire resubmitted its response with the correct product hierarchy, it is possible that Kiswire did not revise its product comparisons to account for the variable cost differences associated with different grades of steel. The petitioner urges the Department to ensure that Kiswire did revise its product comparisons and that the difference in merchandise (DIFMER) adjustment is performed correctly. Kiswire states that, upon realizing that it had improperly reported its hierarchy of product characteristics in its original Section B questionnaire response, the company re-ordered its hierarchy in its supplemental questionnaire responses to conform to the Department's specifications. Kiswire further contends that it did not ignore grade of steel and lay of rope as product characteristics in reported costs, but rather that the record establishes that there are no cost differences among different grades of steel. Therefore, Kiswire contends that the Department should continue to rely on Kiswire's reported raw material costs in the final determination. The Department's Position: We agree with the respondent. Kiswire reported both the grade and lay of rope accurately, and we included these characteristics in our product matching. As to the allegation that the reported costs do not accurately capture differences in these characteristics, we note first that "lay of rope" denotes the direction of the winding of wires and strands, and that there are no cost differences related to the direction that the ropes are wound in the production process. Furthermore, at Kiswire's cost verification, the Department noted that costs between grades of steel varied very little or not at all. See Verification Report on the Cost of Production and Constructed Value Data Submitted by Kiswire SDN.BHD and Kiswire Trading, Inc., dated December 1, 2000, ("Cost Verification Report") at 17. We also verified that Kiswire does not track grades of steel, a determinant of tensile strength, during production or in its normal records. At verification, the Department noted that various grades of steel are used interchangeably to produce products of the same tensile strength, and that tensile strength can be adjusted through the method of processing. See Cost Verification Report at 17. We also noted that Kiswire does not trace in its production records the particular grade of steel wire rod that it uses in producing wire for wire rope. Therefore, Kiswire's reported raw material costs appropriately reflect the product-specific cost including grade and lay. Comment 3: Model Match Hierarchy Kiswire argues that the Department should place class of rope and type of core immediately ahead of diameter of rope in the model match hierarchy. According to Kiswire, the class of steel wire rope plays a much greater role in defining the product than does diameter. Kiswire contends that its product catalog establishes the relative importance of product characteristics, beginning with class, then core, and then diameter. The respondent also contends that its proposed reordering of the product hierarchy is consistent with official government standards and product specifications controlling the steel wire rope industry, and supported by a price correlation analysis. Kiswire argues that the model match hierarchy used in previous steel wire rope investigations, such as the 1993 Korean investigation, should not preclude the Department from altering its hierarchy in the instant proceeding. The petitioner argues that the Department must not revise its model match hierarchy for the final determination. According to the petitioner, the government specifications and industry standards referenced by Kiswire are not dispositive, and the manner in which Kiswire, or any other steel wire rope manufacturer, has chosen a catalog layout of its products is not an indication of the relative importance of product characteristics, as catalogs are designed for customer convenience and marketing purposes. The petitioner contends that, in fact, Kiswire's catalog layout does not necessarily follow the hierarchy of other product characteristics, of which Kiswire has not made an issue. The petitioner further argues that Kiswire's use of a price correlation analysis is flawed because it only measures the range of prices for steel wire rope products that have the same diameter but different classes, or products which have the same class but different diameters, but does not mention direct price-to-price comparisons between two products which share the same characteristics except for diameter or class. According to the petitioner, current industry standards have not changed significantly since the early 1990's when Kiswire's parent company was involved in establishing the hierarchy of product characteristics for another steel wire rope antidumping proceeding conducted by the Department, and it is that earlier proceeding from which the Department has derived the model match hierarchy in the instant investigation. The Department's Position: We agree with the petitioner. The evidence cited by Kiswire in favor of its proposed reordering of the model match hierarchy is not persuasive. The government and industry standards cited by Kiswire do not explicitly characterize the class of rope as being of greater significance than diameter, nor do Kiswire's product catalogues speak explicitly to this issue. Moreover, the price correlation analysis provided by the petitioner, which controls more extraneous variables than Kiswire's analysis, shows diameter to be a greater price/cost determinant than class. Finally, we agree with the petitioner that, in view of the involvement of Kiswire's parent company in the development of the model match hierarchy in the original LTFV investigation of steel wire rope from Korea - a hierarchy that was the basis for the hierarchy followed in this investigation - it would be inappropriate to depart from that hierarchy absent some change to industry norms since that time. Kiswire has provided no such evidence. Comment 4: Adjustments to Home Market and U.S. Market Short-Term Borrowing Rates Kiswire argues that certain home market loans disbursed in ringgits but negotiated in dollars should be regarded as ringgit loans. According to Kiswire, since the ringgit is pegged to the dollar, and the loans in question were disbursed in ringgits, those loans were effectively ringgit loans. Kiswire contends that since it had no short-term borrowing of dollars in the United States market, the Department should continue to base the interest rate for imputation of U.S. credit expenses on the Federal Reserve rate, as done in the preliminary determination. The petitioner did not address this issue. The Department's Position: We disagree with Kiswire. The record evidence establishes that a number of the loans obtained by Kiswire from Malaysian banks during the POI were denominated in dollars. See Kiswire verification report at 8 and 9. The respondent's argument that dollar-and ringgit-denominated financing was interchangeable because the ringgit was pegged to the dollar is belied by the fact that the dollar denominated loans had an average interest rate that was several percentage points higher than the average interest rate on ringgit loans. (2) Moreover, we find that the use of the interest rate on dollar denominated loans obtained from Malaysian banks is an appropriate rate for purposes of imputing credit expenses for U.S. sales. Import Administration Policy Paper 98.2 sets forth the policy that credit expenses must be imputed using the rate of the currency in which the sale is made. See February 23, 1998, Import Administration Policy Bulletin 98.2, Imputed Credit Expenses and Interest Rates. There is no requirement that loans be obtained in the country in which the sale is made. The fact that Kiswire's U.S. affiliate did not obtain short-term loans in the United States does not preclude the use of Kiswire's U.S. dollar short term-borrowing rate, based on Malaysian loans. Therefore, for the final determination, we have relied on the respondent's interest rate on dollar denominated loans to calculate imputed credit expenses for U.S. sales, and the interest rate on ringgit denominated loans to calculate imputed credit expenses for home market sales. Comment 5: Treatment of Negative Margins Kiswire argues that the Department should adhere to the finding of WTO Panel Report European Communities - Antidumping Duties On Imports of Cotton-Type Bed Linen From India, WT/DS141/R (September 4, 2000), and discontinue its practice of zeroing out negative dumping margins in the calculation of the overall weighted-average dumping margin. The petitioner argues that the Department must not deviate from its practice of zeroing out sales with negative dumping margins. The petitioner contends that the WTO Panel Report at issue was aimed solely at the European Communities, and that the United States is under no obligation to modify its procedures and conform with the panel report. Further, the petitioner contends that it is unclear whether or not the appeal process surrounding the dispute settlement body's decision in this matter has been resolved, and thus not clear whether the panel report has been adopted. The Department's Position: We disagree with Kiswire. The WTO panel decision on bed linens from India applies to the European Communities. Moreover, that decision, which is on appeal, has not been finalized as to the European Communities. Comment 6: General and Administrative Expense The petitioner argues that the general and administrative (G&A) expense ratio was not verified because it was not tied to the financial statements. Additionally, the petitioner states that G&A expenses appear to have been misclassified as selling expenses, thereby lowering the G&A expense rate. Kiswire asserts that the petitioner's claims are unfounded because, according to the cost verification report, the Department tied selling and G&A expenses to the trial balance, and the trial balance was in turn tied to the financial statements. Regarding the petitioner's assertion that certain G&A expenses were misclassified as selling expenses, Kiswire argues that its sales and administrative personnel share office space together, and therefore it is reasonable to allocate a portion of common expenses to the sales department. The Department's Position: We agree with the respondent that the submitted G&A expenses were verified during the cost verification. Specifically, the amounts on the selling, general and administrative (SG&A) schedule were tied to the trial balance. See Cost Verification Report at 27. Further, the trial balance was tied to the financial statements. See Cost Verification Report at 13. At verification, we reviewed the classification of G&A and selling expenses for cost reporting purposes, and found them consistent with the classification of selling expenses for sales reporting purposes. See Cost Verification Report at 28. Certain selling expenses that the petitioner claimed were not included in G&A were picked up as indirect selling expenses and verified during the sales verification. See Sales Verification Report at Exhibit 21. Therefore, for the final determination we have used the G&A expense rate as reported by Kiswire. Comment 7: Financial Expense Ratio The petitioner contends that the Department should base Kiswire's financial expense ratio on its unconsolidated financial statements. Acknowledging that the Department's normal practice is to rely on the highest level of consolidation for this purpose, the petitioner nonetheless claims that the use of unconsolidated financial statements would provide a better representation of the respondent's own financing costs in this case, and be consistent with section 773(f)(1)(a) of the Act, which states that "costs shall normally be calculated based on the records of the exporter or producer of the merchandise...." The petitioner notes that the interest expense ratio based on the consolidated financial statements is lower than the ratio calculated using the unconsolidated financial statements, suggesting that the respondent has higher interest expenses than the parent company. The petitioner further notes that the G&A ratio is calculated based on the unconsolidated financial statements, and that the methodologies used to compute the interest and G&A expense ratios should be consistent. The respondent argues that the Department should adhere to its practice of basing the interest expense ratio on consolidated financial statements, regardless of the specific result of that methodology in this case. The Department's Position: We agree with Kiswire that the interest expense ratio should be based on its consolidated financial statements. The Department's long-standing practice is to calculate this rate based on the financing expenses of the consolidated entity. Section 773(f)(1)(a) of the Act states the normal books and records of the company will be used as long as they reasonably reflect the costs associated with the production and sale of the merchandise. If the Department were to ignore that the consolidated entity determines the capital structure of all its subsidiaries and affiliates, we would calculate costs that did not reasonably reflect the costs associated with the production and sale of the merchandise. The Court of International Trade, recognizing the fungibility of financing funds, has repeatedly sustained the Department's use of consolidated financial expense. See e.g., Gulf States Tube Division of Quantex Corporation v. United States, 981 F. Supp. 630 (CIT, 1997). It would be inappropriate to follow this methodology only when it yields a higher interest ratio than the use of the unconsolidated financial statements. Therefore, we have continued to calculate the financial interest ratio using the consolidated financial statements. Recommendation Based on our analysis of the comments received, we recommend adopting the positions described above. If these recommendations are accepted, we will publish the final determination of the investigation and the final weighted- average dumping margins in the Federal Register. Agree__________ Disagree__________ Bernard Carreau, fulfilling the duties of Assistant Secretary for Import Administration (Date) ____________________________________________________________________________ footnotes: 1. The petitioner in this proceeding is the Committee of Domestic Steel Wire Rope and Specialty Cable Manufacturers. 2. The respondent did not disclose until the outset of verification the fact that a number of its loans were denominated in dollars, and the loan agreements are not on the record. Even if the funds for the loans in question were disbursed in ringgits, it is not clear from the record whether the loans were repaid in dollars or ringgits.