67 FR 35485, May 20, 2002 A-791-811 Investigation Public Document G1O3: SSB Team MEMORANDUM TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Richard W. Moreland Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memorandum for the Final Determination in the Investigation of Sales at Less Than Fair Value of Structural Steel Beams from South Africa - April 1, 2000, through March 31, 2001 Summary We have analyzed the case and rebuttal briefs of interested parties in the less-than-fair-value investigation of structural steel beams from South Africa. As a result of our analysis, we have made changes, including corrections of certain inadvertent programming and clerical errors, in the final margin calculations. We recommend that you approve the positions we have developed in the Discussions of the Issues section of this memorandum. Below is the complete list of the issues in this investigation for which we received comments and rebuttal comments by parties: Comment 1: Affiliation Comment 2: Indirect Selling Expenses Comment 3: Understated Cost of Production (COP) Comment 4: Byproduct Methodology v. Co-product Methodology Comment 5: Unallocated Costs Comment 6: General and Administrative Expenses Comment 7: Financial-Expense Ratio Comment 8: South African Iron and Steel Institute Domestic Sales Levy Comment 9: Minor Errors Discovered at the Cost Verification Background On June 20, 2001, the Department of Commerce (the Department) published a notice of initiation of the investigation of sales at less than fair value of structural steel beams from South Africa (66 FR 33048). On December 28, 2001, the Department published the preliminary determination in the investigation of sales at less than fair value of structural steel beams from South Africa (66 FR 67213, Preliminary Determination). This investigation covers one manufacturer/exporter. The period of investigation is April 1, 2000, through March 31, 2001. We invited interested parties to comment on the preliminary determination. At the request of certain parties, we held a public hearing with a closed session on April 9, 2002. Discussion of the Issues Comment 1: Affiliation The petitioners, the Committee for Fair Beam Imports and its individual members, argue that the Department should base U.S. price on Highveld Steel and Vanadium Corporation, Ltd.'s (Highveld) first sale to an unaffiliated South African trading company using an export-price (EP) methodology rather than to treat such sales as constructed-export-price (CEP) sales. The petitioners claim that sales by Newco Steel Trading Company (Newco) to unaffiliated customers in the United States are not pertinent CEP sales because Newco is not affiliated with Highveld under section 771(33) of the Tariff Act of 1930 (the Act). The petitioners contend that there is a lack of any evidence on the record to support Highveld's claim that it is affiliated with Newco. The petitioners assert further that, since neither the annual report nor the financial statements of Anglo American PLC (the majority owner of Highveld) list Newco AG (the parent firm of Newco) or Newco as affiliates, there is no evidence of Highveld's affiliation with Newco. The petitioners also state that at neither the sales verification in South Africa nor the sales verification in the United States, did Highveld present for the record any financial statement or other official documents corroborating its claim of ownership of shares in Newco AG, Newco, or any other company. The petitioners state that, if Highveld were truly affiliated with Newco, it should have provided the documentary evidence. The petitioners contend that, at no time from its initial questionnaire response to the petitioners' pre-verification comments, did Highveld provide evidence of the affiliation. Accordingly, the petitioners request, the Department should find Newco to be unaffiliated with Highveld and base U.S. prices on Highveld's sales to the South African trading company instead. The petitioners state further that a Dunn & Bradstreet report provided in their submission of November 30, 2001, constitutes the only third-party evidence on the record with respect to the ownership of Newco AG. The petitioners contend that, according to Dunn & Bradstreet, Makulu Holding AG (Makulu) owns 100 percent of Newco AG, which would preclude any ownership by Highveld and by its affiliated companies as claimed by the respondent. The petitioners conclude that the transactions from Highveld to an intermediate South African trading company in the sales chain with Newco should therefore be the basis for EP. The petitioners argue that, regardless of whether Highveld and Newco are affiliated, the Department must base U.S. price on Highveld's first sale to an unaffiliated party. The petitioners cite section 772(a) of the Act which defines EP as "the price at which the subject merchandise is first sold (or agreed to be sold) before the date of exportation to the United States by the producer or exporter of the subject merchandise outside of the United States to an unaffiliated purchaser in the United States or to an unaffiliated purchaser for exportation to the United States." The petitioners state that Highveld first sold the subject merchandise to the South African trading company before the date of exportation to the United States for exportation to the United States, therefore with the knowledge that its subject merchandise's ultimate destination was the United States. The petitioners conclude that Highveld's sales to the unaffiliated South African trading company are therefore EP sales and that the price from Highveld to the South African trading company is the appropriate transaction to consider in a dumping analysis. The petitioners also raise the issue that there is nothing on the record establishing how ownership in Newco AG translates into control or direction of Newco. (The proprietary nature of the degree of ownership and control preclude a discussion of the issue in this memorandum. For more detail, please refer to the Final Analysis Memorandum for Highveld from J. David Dirstine to the File dated May 13, 2002 (Final Analysis Memorandum).) In rebuttal, Highveld observes that the Department verified the affiliation between Highveld and Newco on two separate occasions, as evidenced by Memoranda to the File from J. David Dirstine, Senior Import Compliance Specialist, and Dunyako Ahmadu, Import Compliance Specialist, Office of AD/CVD Enforcement dated January, 29, 2002, and March 25, 2002. Highveld states that, if there had been any doubts regarding affiliation, the Department would have required additional information from Highveld and/or Newco in its verification outlines or at verification itself. Highveld claims that, as evidenced by the administrative record, it is affiliated with Newco. Highveld cites section 771(33)(E) of the Act, which defines an affiliated company as "{a}ny company directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization." Highveld states that Newco is a wholly owned subsidiary of Newco AG and the percentage of Highveld's ownership of the parent of Newco exceeds the legal requirement. Highveld concludes that Highveld's influence over Newco is therefore self-evident. Highveld claims that Highveld and Newco negotiate the sale and the South African trading company, as Newco's exclusive agent in its dealing with Highveld, is responsible for processing order details, making shipping arrangements, finalizing exports, forwarding payments, and otherwise facilitating the negotiation of the sale and shipping of the merchandise between Highveld and Newco. Highveld explains that Newco provides the South African trading company with any information relating to the sale in order to communicate with Highveld and facilitate sales negotiations and shipping of the merchandise between the two parties. Highveld explains further that the South African trading company receives a commission based on a fixed amount per quantity involved in the transaction. Highveld states that the current agency agreement between Newco AG, Newco, and the South African trading company, provided as a U.S. sales verification exhibit, states specifically that the South African trading company acts as the exclusive agent for Newco for all transactions relating to the purchase and export of commodities traded and handled by Newco which are produced in and/or exported from {South Africa}," and that "{i}n return for all {services}, Newco shall pay the {South African trading company} commissions . . . ." Highveld contends that this is consistent with the representations Highveld made in its questionnaire responses and that this was verified by the Department at the U.S. sales verification. Finally, Highveld argues that this agency agreement has been constant since 1986 and that the sales between Highveld and Newco should continue to be treated as CEP sales by the Department. Department's Position: Pursuant to section 771(33)(E) of the Act, we consider Highveld and Newco to be affiliated. During the home-market verification of Highveld's sales questionnaire responses, we examined documents that supported the percentages of ownership presented in Highveld's section A questionnaire response and December 17, 2001, letter to the Department. See Memorandum for the File from J. David Dirstine and Dunyako Ahmadu, dated January 29, 2002, Re: Home-Market Verification of Highveld Steel and Vanadium Corporation, Ltd., Sales Questionnaire Responses (Home-Market Verification Report) at 2. We found that Highveld's ownership of Newco AG and Newco exceeds five percent (id. at 2). On May 13, 2002, we placed on the record an international business report and verification exhibit which establishes that Makulu Holdings owns 33 percent of Newco AG and not 100 percent as alleged by the petitioner. For a more detailed analysis, please refer to the Memorandum to the File from J. David Dirstine, dated May 13, 2002, Re: Affiliation Between Highveld Steel and Vanadium Corporation, Ltd., and Newco Steel Trading Company, and to the Final Analysis Memorandum. Finally, at the U.S. verification of Highveld's sales questionnaire responses, we examined the agency agreement between Newco AG and the unaffiliated South African trading company and other documents that supported Highveld's contention that the unaffiliated South African trading company served as an agent facilitating the sales between two affiliated companies. See Memorandum for the File from J. David Dirstine and Dunyako Ahmadu, dated March 25, 2002, Re: United States Sales Verification of Highveld Steel and Vanadium Corporation Ltd., Questionnaire Response (U.S. Verification Report) at 2. In conclusion, the Department finds that there was no sales transaction between Highveld and the South African trading company which served strictly as a sales facilitator and commissionaire of Highveld. We also find that Highveld is affiliated with Newco and that our use of Newco's resales to unaffiliated customers as CEP transactions is appropriate. Our decision on affiliation is based on section 771(33)(E) of the Act (i.e., five-percent ownership) and, therefore, the issue of control is not implicated. Comment 2: Indirect Selling Expense The petitioners argue that Highveld did not properly report indirect selling expenses (ISEs) that were incurred as a result of services provided by Larson Sales Company (Larson). Specifically, the petitioners claim that the fees charged by Larson for the accounting and payroll functions it performed on behalf of Newco were not at arm's length and Highveld should have reported Larson's actual costs. The petitioners contend that the Department does not accept inter-company transfers for valuing goods or services provided by affiliated parties unless the respondent can demonstrate that the fees charged represent arm's-length prices. The petitioners observe further that, for services such as administrative support, the Department typically requires that the respondent report the actual costs incurred by its affiliated provider. The petitioners allege that no such costs have been provided in this case. Moreover, the petitioners contend, there is no evidence that Highveld included any costs incurred by Newco and Larson's U.S. parent in its reported U.S. indirect selling expenses. The petitioners observe that the financial statements of these companies are not on the record and that there is no other information regarding their activities, functions, or expenses. The petitioners acknowledge that the Department has taken limited financial records with respect to Newco's payment to Larson and Larson's parent in Houston, Texas, but, because neither the financial statements nor the chart of accounts for any of the companies were ever placed on the record, it is impossible to determine the nature of these accounts. Nevertheless, the petitioners argue, the accounts demonstrate that the financial transactions between Newco, Larson, and Larson's parent are much higher than those reported by Highveld. The petitioners contend that, if the Department treats sales to the South African trading company as the basis for the U.S. sales, then the ISEs incurred in the United States are not relevant to the calculations; however, if the Department treats Newco's sales as CEP transactions, the petitioners assert it should apply facts available in the calculation of U.S. ISEs. The petitioners argue that, as facts available, the Department should recalculate the U.S. ISEs by first excluding fees paid to Larson from the calculation of total U.S. ISEs. The petitioners also argue that, to be consistent with the Department's practice, the Department should include the total net interest expenses (net of interest income and offset by imputed credit expenses) in its ISE recalculation. The petitioners contend that the resulting percentage should be tripled as a surrogate for Larson's and Larson's parent's unreported ISEs (once for each company). Finally, the petitioners argue, these percentages should be totaled to arrive at the total ISEs allocable to CEP transactions. Highveld states that the Department verified fully Highveld's reported U.S. ISEs. Highveld contends that the evidence in the administrative record proves conclusively that Highveld's calculation of the U.S. ISEs reflected the Department's normal methodology and were based on costs which are, by definition, at arm's length (salaries, rent, and depreciation). Furthermore, Highveld claims, the Department verified that Larson is the only company providing certain administrative services to Newco and, thus, Larson's fees are the only outside ISEs Highveld should have reported. Highveld states that three of Larson's nine employees are involved in Newco's operations. Highveld argues that a substantial portion of the cost for services charged by Larson are dedicated exclusively to salaries for the three employees involved, with the remaining costs covering administrative expenses such as depreciation and the rental of offices and equipment. Highveld states that the total invoiced amount from Larson was also tied to the trial balances and the ISE worksheet. Highveld claims further that salaries and rent are fair representation of market value and must, by their nature, be considered to be arm's length. Highveld requests the Department to conclude that the amount charged by Larson is an arm's-length amount because the salaries represent such a substantial portion of the total amount Larson charged for its services. Highveld states that Larson is the only company within the group providing services to Newco. Highveld contends that, since the petitioners have not provided any evidence to the contrary and have not questioned any additional U.S. ISEs, Highveld's allocation provides a rational basis of calculating U.S. ISEs. Highveld requests that the Department to continue to accept this allocation in the final determination. Department's Position: We agree with Highveld that the ISEs represented by the services provided by Larson to Newco were allocated properly. At the U.S. verification of Highveld's sales questionnaire response we found that Larson consists of nine employees, three of whom are involved with Newco operations. See U.S. Sales Verification Report at 2. We examined accounting expense documentation to support expense amounts for selected months during 2001 and traced the amounts to the relevant trial balances and to Larson's ISE worksheet. We also conducted additional ties of certain selected items to quarterly sales, general, and administrative expense reports, to trial balances, to expense reports, and proofs of payment. We did not find discrepancies in Larson's allocation methodology and we conclude that the amounts charged by Larson capture all of Larson's costs. Comment 3: Understated Cost of Production Based on their review of COP verification exhibits, the petitioners argue that Highveld understated its COP. The petitioners argue that the average costs in Highveld's November 13, 2001, COP submission differ from the cost calculated in a cost verification exhibit. The petitioners assert that Highveld's figures do not capture all of the costs in the steelmaking stage and structural mill. They also state that, because the Department did not verify Highveld's methodology for calculating per-unit costs, the cost of manufacture should be adjusted to capture all costs. Highveld argues that it did not understate its COP. Highveld states that the average cost to which the petitioners refer is based on Highveld's first COP submission. Highveld argues that, since that time, Highveld has revised its data in response to the five supplemental COP questionnaires. Highveld states that, according to the Department's the cost verification report, it slightly over-reported the total costs citing Memorandum from Laurens van Houten, senior accountant, and Heidi Norris, senior accountant, to Neil M. Halper, Director, Office of Accounting, at 23 (March 18, 2002), (Cost Verification Report). Highveld acknowledges that minor corrections were made to the cost information reported and requests that the Department include those corrections in the final determination. Department's Position: We agree with Highveld that it did not under- report its costs. In fact, the petitioners' argument reflects a comparison of the average cost in Highveld's first COP response with the costs in the cost verification exhibit. First, Highveld revised its costs with each subsequent COP questionnaire response. We verified the data Highveld submitted in its last COP database of January 7, 2002. Second, the cost verification exhibit shows Highveld's calculation of costs at its steelmaking plant and structural mill plant and does not show an offset for the slag produced at the steelmaking plant. Finally, contrary to the petitioners' allegation, the Department did verify Highveld's submitted costs and reviewed Highveld's methodology for calculating its per-unit cost. See Memorandum to Neal M. Halper, Director, Office of Accounting, from Laurens van Houten and Heidi Norris, dated March 18, 2002, Re: Verification Report on the Cost of Production and Constructed Value Data Submitted by Highveld Steel and Vanadium Corporation, Ltd. (Cost Verification Report). While we did find a few minor errors in Highveld's calculations, we found that, after making these adjustments, Highveld's costs were actually slightly over-reported. Id. at 23. Comment 4: By-product Methodology v. Co-product Methodology Highveld argues that the Department erred in the preliminary determination by excluding the vanadium slag offset from the total cost of manufacture and should allow an offset for vanadium slag based on the by- product methodology for the final determination. Highveld argues that the Department's longstanding practice, both in its five-factor analysis (described below) and its prior investigation of Highveld, as well as the evidence on the record, dictates that vanadium slag is a by-product of the steel production process and should be treated as a by-product. Highveld states that it is consistent with its normal business practice and company history to treat vanadium slag as a by-product which in turn is in accordance with the generally accepted accounting principles (GAAP) of South Africa. According to Highveld, the Department's longstanding practice is to apply the following five-factor analysis in determining whether a product should be considered a by-product: (1) identify how the company records and allocates cost in the ordinary course of business; (2) evaluate the significance of each product relative to the other products produced during the same period of investigation; (3) determine whether the product is an unavoidable consequence of producing another product; (4) ascertain whether management intentionally controls production of the product; and (5) determine whether the product requires significant further processing after the split-off point. Highveld refers to Elemental Sulphur from Canada; Final Results of Antidumping Finding Administrative Review, 61 FR 8239, 8241-42 (March 4, 1996) (Elemental Sulphur), and Notice of Final Determination of Sales at Less Than Fair Value: Pure Magnesium From Israel, 66 FR 49,349 (September 27, 2001): Issues and Decision Memorandum, at Comment 3 (Pure Magnesium). Highveld asserts that no single factor is dispositive in this type of analysis but, rather, the Department must consider each factor in light of the facts and circumstances in an investigation. Highveld argues that the application of the five-factor analysis will indicate that the Department should treat vanadium slag as a by-product. Highveld states that, if it wanted to treat vanadium slag as a co- product, it would have tracked the production costs in separate cost centers, as it does for other products. According to Highveld, there is no direct allocation of any actual COP to vanadium slag in its records and, therefore, Highveld's normal business practice is to treat vanadium slag as a by-product. Highveld states that the Department normally relies on the respondent's books and records prepared in accordance with the home- market country GAAP unless those accounting principles do not reasonably reflect the COP of the merchandise. Second, Highveld states that the production of vanadium slag in comparison to all the steel products sold by Highveld is insignificant. Third, Highveld states that vanadium slag is an unavoidable consequence of the steelmaking process. According to Highveld, vanadium slag represents a by-product because it is a result of the raw material input, iron ore, which contains a certain percentage of vanadium. Highveld states that the vanadium must be extracted from the iron ore in the steelmaking process because South African and international standards require that the steel product not contain the vanadium. Fourth, Highveld states that its management cannot control the production of vanadium slag intentionally because it must be extracted from the iron ore used in the steelmaking process. According to Highveld, it cannot use iron ore that does not contain vanadium because Highveld's ore reserve contains vanadium. Fifth, Highveld states that it does not do any significant further processing of the vanadium slag. Finally, Highveld argues that the Department has already treated vanadium slag as a by- product and allowed an offset based on the by-product methodology in previous investigations involving Highveld, referring to the 1997 investigation of cut-to-length carbon steel plate from South Africa, 62 FR 61731 (November 19, 1997). Furthermore, according to Highveld, it has submitted quarterly sales and cost data in accordance with the suspension agreement in that case and the Department has never changed its methodology in any subsequent determination and verification. Thus, Highveld argues, there is no reason for the Department to take a different approach to its longstanding practice. The petitioners argue that the Department should treat vanadium slag as a co-product rather than a by-product. They assert that, under the Department's five-part test, vanadium is a co-product and should be treated as such. First, the petitioners argue, Highveld considers vanadium to be a co-product in the normal course of business. Second, they state that the production of vanadium slag is significant. Third, according to the petitioners, vanadium slag is not an unavoidable consequence of producing another product. They state that vanadium is a valuable material and the ability to produce vanadium slag makes Highveld's operations more profitable. They argue that, when vanadium is recovered as a co-product, the market price of the main product supports the cost of extraction of vanadium and the recovery and sale of vanadium, in turn, makes recovery of the main product more attractive economically. Fourth, the petitioners argue, management does control the production of vanadium since Highveld knows that the ore it uses contains vanadium and the value of the recovered vanadium slag was a factor in Highveld's decision to enter this business. They comment that Highveld specifically designed its steel plant to have a shaking ladle which can extract the vanadium slag from the rest of the steel. Finally, petitioners argue, vanadium slag requires significant further processing after the split-off since it is crushed, screened, and bagged for sale. The petitioners argue that this is more post-split-off further processing than is done for non-prime steel, which is always considered a co-product. Department's Position: For the reasons stated below, the Department has reclassified vanadium slag as a by-product for this final determination. Highveld uses iron ore as the primary raw material for the production of liquid steel. It does not is purchase iron ore; rather it is mined at the company's Mapochs mine which produces both lumpy and fine ore, all of which contains vanadium. The fine ore is sent to the company's Vanchem plant as raw material for the production of vanadium chemicals. The lumpy ore is used in the iron plants because the fine ore can clog the kilns. The vanadium must be extracted from the iron ore in the steelmaking process because South African and international standards require that the steel product contain limited, if any, vanadium. The lumpy ore is melted in the iron plants and then the liquid iron is sent to the steel plant where it is further manufactured to produce the steel. During the production process, the molten iron is put into a shaking ladle, where pure oxygen is blown in on the top of the ladle, causing the vanadium slag to form a crust on the molten iron. The liquid steel is then poured off and the remaining vanadium slag is dumped into vessels. The vanadium slag is allowed to cool; and then it is crushed, screened, and bagged. No additional processing of the slag is performed in the steelworks. Highveld sells the majority of the vanadium slag to outside parties and uses a small percentage of the vanadium slag in the Vanchem plant. In addressing the issue of whether to treat vanadium slag as a by-product or co-product of the steel production, one must first determine the split- off point in the joint production process. Cost accounting textbooks define the split-off point as the juncture in the production process where the products become separately identifiable. See Charles T. Horngren and George Foster, Cost Accounting: A Managerial Emphasis, 7th ed. (New York: Prentice Hall), p. 540. Clearly, the juncture in the production process where the joint products become separately identifiable is the output of shaking-ladle stage of production. This is the point where the vanadium slag forms a crust on the molten iron and the vanadium slag becomes separately identifiable. Prior to the output of the shaking-ladle stage of production, all costs incurred are still not identifiable to the individual products; thus, allocation among the various products is necessary. The National Association of Accountants (NAA) defines a joint product as two or more products so related that one cannot be produced without producing the other(s), each having relatively substantial value and being produced simultaneously by the same process up to a split-off point. The NAA defines a by-product as a secondary product recovered in the course of manufacturing a primary product, whose total sales value is relatively minor in comparison with the sales value of the primary product(s). In a similar vein, the products in a jointly produced group often vary in importance. Products of greater importance are termed major products and products of minor importance are termed by-products. When two or more major products appear in the same group, they are called co-products. The term "joint product" includes major products, by-products, and co-products because all are produced jointly. See Management Accountants' Handbook, Fourth Edition; Keller, Bulloch and Shultis at 11.6. The Department has looked to several factors in order to determine whether to consider joint products as co-products or by-products. See Elemental Sulphur From Canada. Among these factors are the following: (1) how the company records and allocates costs in the ordinary course of business, in accordance with its home country GAAP; (2) the significance of each product relative to the other joint products; (3) whether the product is an unavoidable consequence of producing another product; (4) whether management intentionally controls production of the product; and (5) whether the product requires significant further processing after the split-off point. No single factor is dispositive in our determination. Rather, we consider each factor in light of all of the facts and circumstances surrounding the case. Factor 1: The first factor is how the company records and allocates costs in the ordinary course of business. Highveld does not allocate production costs to the production of vanadium slag in its normal accounting records. Highveld only records the cost related to the vanadium slag plant (packaging of vanadium slag) which occurs after the split-off point. In addition, Highveld tracks the quantity of vanadium slag produced but does not record the inventory quantities associated with the vanadium slag. According to the notes to Highveld's financial statements, slag deposits and dumps are valued at zero. On the sale of these deposits and dumps, the revenue generated is included in revenue. It is only upon sale that any activity associated with the vanadium slag is recorded in Highveld's financial accounting system. In contrast, for steel products, Highveld tracks quantities produced and ending inventory quantities on a monthly basis. In addition, for purposes of it financial statement, Highveld assigns a value to the steel products in ending inventory at the date of its balance sheet. There are stark differences in how Highveld records its the vanadium slag and steel products. Because differences between the relative values of joint products influence Highveld's decision as to what time and effort to expend in measuring them, we consider Highveld's disparate treatment as indicative of the relative insignificance it associates with vanadium slag compared to steel products. The cost accounting textbook by Horngren, Foster, and Datar, Cost Accounting, A Managerial Emphasis, Prentice Hall, 1994, p.582-84, identifies four ways to account for by-products in a company's financial accounts. The characteristics associated with one of the options are: (1) activity associated with by-products are not recognized in the general ledger until they are sold; (2) the sale transaction is recorded as sales revenue or other income in the income statement; and (3) by-product inventories are not recorded. Highveld's normal accounting treatment for vanadium slag is consistent with all three of these points. We find the combination of the fact that Highveld accounts for vanadium slag in accordance with the by-product method identified above and the fact that it expends limited resources tracking its production indicated that, in its normal books and records, Highveld treats vanadium slag production as a by-product of the steel production process. Factor 2: The second factor is the significance of each product relative to the other joint products. In assessing the significance of each product generated from a joint process, in past cases we examined the relative value for each of the finished products produced from the joint process stream. See Elemental Sulphur From Canada. While the relative value of the end- products is important for purposes of financial reporting, the relative values of the joint products at the split-off point are more meaningful for assessing the significance of each product as output from the split-off point. For purposes of this case, we analyzed the relative value of each product generated from the joint process both ways (i.e., the relative values of the end-products and the relative values of the products output form the joint process). In order to convert the prices of the end-products to the relative values at the split-off point, we reduced each of the sales values by the cost of further processing each product after the split-off point. This was the only way to assess the significance of each product output from the split- off point because we were unable to obtain a market price for liquid steel. In short, we used the net-realizable-value method to determine the value at split-off. Based on our analysis of the relative product values at both the split- off point and the end point after further processing (i.e., finished goods), the value of vanadium slag is not significant relative to the value of liquid steel. Due to the proprietary nature of the data, please see our analysis in Memorandum to Neal Halper, From Laurens van Houten, Re: Team Recommendation Related to the Cost Accounting Treatment of Vanadium Slag from South Africa, dated May 13, 2002. Factor 3: The third factor in determining which joint products are co- products as opposed to by-products is whether the product is an unavoidable consequence of producing another product. Lumpy iron ore containing vanadium used in the production of subject merchandise comes from the company's Mapochs mine. The vanadium must be extracted from the iron ore in the steelmaking process because South African and international standards require that the steel product not contain vanadium. Highveld's reliance on lumpy iron ore obtained from its Mapochs mine as the input material means that vanadium slag is an unavoidable consequence of Highveld's decision to produce steel. Factor 4: The fourth factor in determining whether joint products are either co-products or by-products is whether management intentionally controls production of vanadium slag. Highveld cannot control the production of the vanadium slag because the vanadium content is inherent in the lumpy ore mined at the Mapochs mine. While it has no control over having to eliminate the vanadium in the iron ore when producing steel products, it does appear that it intentionally further processes the vanadium slag in order to generate saleable product. Factor 5: With regard to the last factor, whether vanadium slag requires significant further processing after the split-off point, the vanadium slag that is removed from the molten iron is poured into vessels, cooled, and then crushed, screened, and bagged for sale. We found that the vanadium slag did not require much additional processing after the split- off point when compared to the total costs the company incurred. Due to the proprietary nature of the data, please see our analysis in Memorandum to Neal Halper, From Laurens van Houten, Re: Team Recommendation Related to the Cost Accounting Treatment of Vanadium Slag from South Africa, dated May 13, 2002. Conclusion: In summary, because we do not consider the relative value of production for vanadium slag to be significant in relation to that of all products generated from the joint process and the fact that these products are an unavoidable consequence of producing steel, we consider Highveld's normal treatment of vanadium slag as a by-product rather than a co-product of the steel production process to be reasonable. Therefore, for the final determination, we have re-classified vanadium slag as a by-product of steel beam production. Comment 5: Unallocated Costs The petitioners argue that the unallocated costs for services, Spitskop, production services, and idle assets were originally part of the steelworks cost of sales and, therefore, should be allocated to the total tons of steel and slag sold during the POI as an adjustment to cost of manufacture (COM). According to Highveld, the Department identified certain indirect costs that were not allocated to a direct cost center and, therefore, were not included in the reported cost, citing Cost Verification Report at 2. Highveld acknowledges that it made some minor errors in reporting its cost. It argues that the Department should adjust the general and administrative (G&A) expense ratio to take these costs into account, instead of adjusting the COM as suggested by petitioners. Department's Position: The unallocated costs for services, Spitskop, production services, and idle assets should be allocated to Highveld's products. At verification we found that these indirect cost centers serviced all of the divisions within Highveld (see Cost Verification Report at 11). Because these costs are normally allocated to all divisions within Highveld, we have included these unallocated costs in the numerator of Highveld's G&A expense ratio calculation instead of adjusting the COM as suggested by the petitioners. Comment 6: General and Administrative Expenses The petitioners state that Highveld's parent companies, including Anglo American, are holding companies involved in the administration of Highveld, but Highveld has not provided any information about these companies. The petitioners argue that this is a convenient way to remove some of Highveld's administrative costs from Highveld's financial statements. According to the petitioners, Highveld never reported any G&A expenses for these additional corporate levels nor did it provide any financial statements for these entities. The petitioners argue that, as facts available, the Department should use Anglo American Plc's G&A rate in place of the G&A percentage calculated for Highveld alone. Highveld argues that it has reported all of its administrative costs appropriately. Highveld argues further that the petitioners have not offered any concrete evidence as to why the Department should use the G&A expenses for Anglo American,. Highveld argues that neither the petitioners' case brief nor the Cost Verification Report offer any evidence of corporate control on the part of Anglo American. Department's Position: In light of the record evidence (e.g., Memorandum from Laurens van Houten to Neal Halper, Director, Office of Accounting, Re: Cost of Production and Constructed Value Calculation Adjustments for the Final Determination, dated May 13, 2002, Attachment 3) and our policy as stated in Certain Hot-Rolled Carbon Steel Flat Products et al., from Japan 58 FR 37154, 37166 (July 9, 1993) (Certain Steel/Japan), we agree with the respondent. Specifically, the Department normally computes the G&A and other non-operating income and expense ratios of a company based on its unconsolidated operations and includes an amount of G&A from related companies which pertains to the product under investigation. G&A and other non-operating income and expense items are not considered fungible in nature. Thus, other non-operating income and expenses realized by a related company do not necessarily affect the general activity of the respondent. In this case, the Department did not find any evidence that Highveld's parent companies, including Anglo American, provided administrative services on behalf of Highveld, nor have the petitioners provided such evidence. Thus, the Department finds that allocating a portion of Highveld's parent G&A expenses to Highveld would be inappropriate. Comment 7: Financial-Expense Ratio Highveld states that the Department erred when it recalculated Highveld's interest-expense ratio based on the consolidated financial statements of its parent company. According to Highveld, in AIMCOR v. United States, 69 F.Supp.2d. 1345, 1354 (Ct. Int'l Trade 1999), and in American Silicon Technologies v. United States, 118 F.Supp.2d. 1329, 1332 (Ct. Int'l Trade 1999), the U.S. Court of International Trade concluded that the Department's use of a parent's consolidated financial statements to calculate the financial-expense ratio was contrary to law where those financial statements did not reflect the level of financial expenses actually incurred by the subsidiary in the production and sale of the subject merchandise. Highveld states that the administrative record in this investigation contains no information that Highveld's parent company either determined the borrowing cost or was involved in the production, sales, or export of structural steel beams. According to Highveld, the Department is only justified in using consolidated financial statements when corporate control, whether direct or indirect, exists. Highveld argues that, under these circumstances, both the statute and court decisions dictate that the Department must calculate Highveld's financial- expense ratio based on Highveld's own financial statements. The petitioners did not comment on this issue. Department's Position: We disagree with Highveld. The Department's longstanding practice with regard to financing expenses is to base net financing expenses on the full-year net interest expense and cost of sales from the audited fiscal-year financial statements at the highest level of consolidation which correspond most closely to the POI. See Notice of Final Determination of Sales at Less Than Fair Value: Certain Cut-to- Length Carbon-Quality Steel Plate Products from France 64 FR 73143, 73152 (December 29, 1999). The Department's practice is to calculate the respondent's net interest expense based on the financing expenses incurred on behalf of the highest consolidated group of companies to which the respondent belongs. In general, this practice recognizes the fungible nature of invested capital resources (i.e., debt and equity) within a consolidated group of companies. It also recognizes that the controlling entity within a consolidated group (i.e., Anglo American) has the ultimate power to determine the capital structure and financial costs of each member within the group. There is a presumption that consolidated statements are more meaningful than separate statements and that they are usually necessary for a fair presentation when one entity directly or indirectly has controlling financial interest in another entity. The usual condition for a controlling financial interest is ownership of a majority voting interest and, therefore, as a general rule ownership by one company, directly or indirectly, of more than 50 percent of the outstanding voting shares of another company is a condition that requires consolidation. As the Department stated in Notice of Final Determination of Sales at Less than Fair Value: Low Enriched Uranium From France, 66 FR 65877 (December 21, 2001), and accompanying Issues and Decision Memorandum at Comment 14, "(c)ompanies finance operations through various forms of debt transactions, stock transactions, cost sharing and reimbursement schemes, and even corporate operating transactions. These financing activities are conducted both with internal and external parties. In such circumstances, the controlling management of the group coordinates these activities in order to maximize the benefit to the group as a whole. A few examples of these types of activities include, but are not limited to, debt moved to specific companies in order to shield assets in other companies from creditors; monies moved through manipulated transfer prices to avoid tax liabilities or currency restrictions; sharing or undertaking strategic costs such as research and development; or conversions of debt into equities (or vice versa) to present a group member in a more favorable financial position. The important point here is that the corporate control on the financing operations of individual group member companies may exist even in the apparent absence of specific inter-company financing transactions." Thus, the Department's general rule is to calculate financial expense using information from the highest consolidated level. There are many reasons why the financial expenses based on consolidated figures are better than financial expense based on respondent's own financial statements. First, financial expense based on a respondent's own financial statements, or a lower-level consolidation, only reflects the financial position that the management of the group wishes to present for that particular subsidiary or group of subsidiaries. Because the majority of the board of directors, and by extension management, of each group member is ultimately controlled by each successive board of directors, up to the highest level board of directors and management, it is reasonable to conclude that the overall strategic operations are guided from above. The Department recognizes that the very purpose of creating a corporate group is to leverage the strategic and competitive advantages of individual group companies for the betterment of the whole. We cannot ignore the fact that the company is operating as a member of a larger entity with the support (direct or indirect) to which it is entitled from the group. The true economic picture can only be seen when all inter-company holdings (i.e., shares in affiliates and debts between affiliates) and inter-company transactions (i.e., inter-company sales, receivables, payables, etc.) have been eliminated and the capital structure of other consolidated companies is accounted for. Only after such consolidation does the debt structure (i.e., debt-to-equity, debt-to-assets) of the group become apparent and does the actual cost of borrowing of group companies become visible. This provides an untainted picture of the financial expense incurred to produce the products of the group. Consolidation also derives a cost-of-sales figure free of inter-company transactions. The consolidated cost of sales is used to allocate the true financial expense to the products produced within the group. A lower-level consolidated financial statement, where one group member owns one or more lower-level subsidiaries, will still include transactions with, and exclude the capital structure of, group members which are not consolidated with a particular subgroup of companies. Furthermore, the Department recognizes that the presence of specific inter-company transactions between two particular subsidiaries only proves that such transactions take place within the group; it does not rebut the fact that the consolidated financial position is the more accurate financial position of the individual group members as well as the group as a whole. That is, many examples of intervention by controlling management into the decisions of subsidiaries are not made evident by direct transactions during the period. For example, the decision to allow a subsidiary to issue debt or stock to outside parties would not present itself as an inter-company transaction or loan and may not even take place in the current period, but it would have every bit as much of an impact on the financial position of group members. Finally, it is the Department's position that the consolidated financial statements themselves constitute substantial evidence that the true financial position of a respondent is that which is shown on the consolidated financial statements rather than its own. The fact that a respondent is consolidated into a group typically means that the home country's GAAP require such a consolidation for fair presentation, as would U.S. GAAP. This presentation requirement is present in GAAP around the world because, as observed earlier, the majority of the board of directors, and by extension management, of each group member is ultimately controlled by each higher-level board of directors, up to the highest level board of directors and management. Given that each level of companies within the group controls lower level companies through their ownership of stock, it is reasonable to conclude that the overall strategic operations are guided from above. Comment 8: South African Iron and Steel Institute Domestic Sales Levy Highveld argues that in the Preliminary Determination, the Department did not make a deduction from Highveld's normal value for a levy Highveld pays to the South African Iron and Steel Institute (SAISI) and requests that the Department adjust Highveld's normal value for a levy which is paid exclusively in the home market. Highveld suggests that, to allow a fair comparison of prices, this levy, which is a direct selling expense incurred for home-market sales, must be deducted from home-market price. Highveld states that a fair comparison of prices entails the recognition that "sellers incur different costs based on differences in selling conditions in their respective markets," citing the Department's Antidumping Manual, Chapter 8 (January 28, 1998), at 22. Citing section 773(a)(6)(C) of the Act, Highveld contends that, to account for these differences, an adjustment must be made for any differences in the circumstances of sale between U.S. price and normal value. Highveld states that, in general, under 19 CFR 351.410, the adjustment includes direct selling expenses, such as commissions, credit expenses, and warranties that result from, and bear a direct relationship to, the particular sale, assumed expenses, and a reasonable allowance for other selling expenses when commissions are paid in one market under consideration, but not the other market under consideration. Highveld argues that the SAISI levy is based exclusively on the tonnages sold for a particular month. Highveld explains that all structural steel beam sales made in South Africa were subject to this levy, and it would not otherwise make the payment if there were no home-market sales of structural beams. Therefore, Highveld concludes, this levy is directly linked to sales and represents a direct selling expense. The petitioners rebut Highveld's argument that dues to SAISI are eligible as a circumstance-of-sale-adjustment because they are dues paid to a trade association. The petitioners observe that the Department does not consider dues to a trade association engaged in promotional activities of the entire industry to be related directly to the sales of the subject merchandise. The petitioners state that the Department denied Highveld a circumstance-of-sale-adjustment for this trade-association expense correctly. Department's Position: We examined documents at the home-market verification and found that this payment of a per-ton levy to SAISI was required for all home-market sales of structural steel beams and not simply a contribution to a trade association. We also found that this levy was not applicable to export sales of structural steel beams. See Home- Market Verification Report at 11. Therefore, we made a circumstance-of- sale-adjustment by deducting the amount of this levy from normal value. Comment 9: Minor Errors Discovered at the Cost Verification. Highveld states that the Department made some minor corrections to errors in the cost information reported by it in the original and supplemental questionnaire responses. According to Highveld, these errors include the calculation of the yielded per-unit fixed cost per ton, the duplicate reporting of roll depreciation, and the omitted allocation of certain indirect costs. With the exception of the items identified in its case brief, Highveld accepts the corrections described in the cost verification report and requests that the Department include those corrections in the final determination. The petitioners did not comment on this issue. Department's position: We have made the minor corrections to the cost information reported by Highveld in its questionnaire responses as identified in the Cost Verification Report. We recalculated the fixed- yield cost per ton at the structural mill, we corrected for the double- counting of roll depreciation, and we included the unallocated indirect cost in the calculation of Highveld's G&A expense ratio as discussed above. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions and adopting all related margin calculations accordingly. If these recommendations are accepted, we will publish the final determination and the final weighted-average dumping margin for Highveld in the Federal Register. Agree _________ Disagree __________ _________________________ Faryar Shirzad Assistant Secretary for Import Administration ____________________ Date