01-4407. Preliminary Affirmative Countervailing Duty Determination: Pure Magnesium From Israel

AGENCY:

Import Administration, International Trade Administration, Department of Commerce.

EFFECTIVE DATE:

February 22, 2001.

FURTHER INFORMATION CONTACT:

Marian Wells or Melanie Brown, Office of CVD/AD Enforcement I, Import Administration, U.S. Department of Commerce, Room 3096, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone [phone] and [phone], respectively.

SUMMARY:

The Department of Commerce (the Department) preliminarily determines that countervailable subsidies are being provided to producers and exporters of pure magnesium from Israel. For information on the estimated countervailing duty rates, please see the “Suspension of Liquidation” section of this notice.

SUPPLEMENTARY INFORMATION:

Petitioners

The petition in this investigation was filed by the Magnesium Corporation of America (“Magcorp”), the United Steel Workers of America, Local 8319, and the United Steelworkers of America, Local 482 (the petitioners).

Case History

Since the publication of the notice of initiation in the Federal Register (see Notice of Initiation of Countervailing Duty Investigation: Pure Magnesium from Israel, 65 FR 68126 (November 14, 2000) (Initiation Notice)), the following events have occurred. On November 8, 2000, we issued countervailing duty questionnaires to the Government of Israel (GOI) and the sole producer/exporter of the subject merchandise, Dead Sea Magnesium Ltd. (DSM). On December 20, 2000, we postponed the preliminary determination of this investigation until no later than February 14, 2001. See, Pure Magnesium from Israel: Postponement of Time Limit for Preliminary Determination of Countervailing Duty Investigation, 65 FR 81489 (December 26, 2000). We received responses to our initial questionnaires from the GOI and DSM on January 3, 2001. Between January 11 and 30, 2001, we issued supplemental questionnaires to the GOI and DSM, and we received responses to those questionnaires in January and February.

On January 11, 2001, the petitioners requested that the Department include an additional program, the Israeli Foreign Trade Risk Insurance Corporation (IFTRIC), in our investigation. On January 22, 2001, the GOI and DSM submitted comments opposing the investigation of IFTRIC. On February 12, 2001, the Department declined to investigate the IFTRIC program. See, February 12, 2001, Memorandum to Susan H. Kuhbach, Acting Deputy Assistant Secretary, from the Team, Allegation of Possible Subsidy: Magnesium from Israel.

Scope of the Investigation

The scope of this investigation includes imports of pure magnesium products, regardless of chemistry, form, or size, including, without limitation, ingots, raspings, granules, turnings, chips, powder, and briquettes.

Pure magnesium includes: (1) Products that contain at least 99.95 percent primary magnesium, by weight (generally referred to as “ultra-pure” magnesium); (2) products that contain less than 99.95 percent but not less than 99.8 percent pure magnesium, by weight (generally referred to as “pure” magnesium); and (3) chemical combinations of pure magnesium and other material(s) in which the pure magnesium content is 50 percent or greater, but less than 99.8 percent, by weight, that do not conform to an “ASTM Specification for Magnesium Alloy” ^[1] (generally referred to as “off-specification pure” magnesium); and (4) physical mixtures of pure magnesium and other material(s) in which the pure magnesium content is 50 percent or greater, but less than 99.8 percent, by weight, except that mixtures containing 90 percent or less pure magnesium, by weight, when mixed with lime, calcium metal, calcium silicon, calcium carbide, calcium carbonate, carbon slag coagulants, and/or fluorspar, are excluded.

The merchandise subject to this investigation is classifiable under 8104.11.00, 8104.19.00, and 8104.30.00 of the Harmonized Tariff Schedule of the United States (HTSUS). Although the HTSUS subheading is provided for convenience and customs purposes, the written description of the merchandise under investigation is dispositive.

Comment on Scope

In the Initiation Notice, 65 FR at 68126, we invited comments on the scope of this proceeding. On December 1, 2000, we received comments from the petitioners clarifying that finished mixtures containing pure magnesium and/or off-specification pure magnesium that are prepared solely for use as a desulfurizer in steel-making are excluded from the scope of the investigation, unless such mixtures contain only minimal amounts of non-magnesium materials in order to circumvent an antidumping or countervailing duty order. On January 30, 2001, the petitioners submitted proposed language to further clarify their intent with respect to the scope of this investigation. The resulting revised scope language is reflected in the “Scope of Investigation” section above.

Applicable Statute and Regulations

Unless otherwise indicated, all citations to the statute are references to the provisions effective January 1, 1995, the effective date of the amendments made to the Tariff Act of 1930 (the Act) by the Uruguay Round Agreements Act (URAA). In addition, unless otherwise indicated, all citations to the Department's regulations are to the regulations codified at 19 CFR Part 351 (2000).

Injury Test

Because Israel is a “Subsidies Agreement Country” within the meaning of section 701(b) of the Act, the International Trade Commission (ITC) is required to determine whether imports of the subject merchandise from Israel materially injure, or threaten material injury to, a U.S. industry. On December 13, 2000, 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 Israel of the subject merchandise. (See Pure Magnesium from China, Israel, and Russia: Determinations, 65 FR 77910 (December 13, 2000).)

Period of Investigation (POI)

The period of investigation (POI) for which we are measuring subsidies is calendar year 1999.

Change in Ownership

DSM, the sole producer/exporter of subject merchandise from Israel, is a joint venture between the Israeli company, Dead Sea Works (DSW) and Volkswagen (VW). DSW, in turn, is owned by the Israeli company Israel Chemicals Ltd. (ICL). The subsidies were received by DSW and later, by DSM, after the formation of the joint venture.

In 1991, the GOI announced its plan to privatize ICL, under the supervision of the Government Corporation Authority. Prior to that, in 1987, the Ministry of Finance, which controlled the Government Corporation Authority, commissioned an investment banking firm, First Boston, to assist in the initial steps of the privatization process of government-owned corporations. The GOI's objective in privatizing these companies was to promote and strengthen free-market mechanisms in Israel, enhance competitiveness, and raise funds to reduce internal and external debt. See GOI Response at II-5. First Boston identified a number of government-owned corporations that were suitable for private sale or public offering, suggested schedules for each sale, and addressed technical issues relating to the Government Companies Law, accounting and tax issues, and privatization methods.

In 1988, the Ministry of Finance's Government Economic Committee adopted First Boston's recommendations as the framework for a five-year plan for privatization. The Government Corporation Authority updated this plan in 1991 to include the sale of shares in government-owned companies on the Tel Aviv Stock Exchange. In February 1992, the Committee on Privatization approved the sale of up to 72 percent of ICL through public and private sales.

The GOI privatized ICL through a series of private sales and public offerings of existing shares of ICL conducted in the years 1992 through 1995, and 1997 through 1999. The privatization of ICL, the parent company of DSW/DSM, directly and necessarily resulted in the privatization of the government's interest in DSW/DSM. The first partial privatization was conducted under a prospectus for sale of ICL's shares to the public and its employees that was published on February 19, 1992. According to the prospectus, the share capital of ICL consisted of 1,199,999,999 ordinary shares registered on the Tel Aviv Stock Exchange, and one special state share. Under this prospectus, the state sold 20 percent of ICL's shares, including 226,619,916 shares sold to the public, and 13,068,999 shares sold to ICL employees. The GOI continued to hold the special state share after this and subsequent privatizations. See GOI Response at II-9 through II-12 for information relating to shares sold at each privatization.

In this preliminary determination, we have applied our new privatization approach, first announced in a remand determination on December 4, 2000, following the decision of the U.S. Court of Appeals for the Federal Circuit (CAFC) in Delverde Srl v. United States, 202 F.3d 1360, 1365 (Fed. Cir. 2000), reh'g en banc denied (June 20, 2000) (Delverde III). We have also applied this new approach recently in Grain-Oriented Electrical Steel from Italy: Final Results of Countervailing Duty Administrative Review, 66 FR 2885 (January 12, 2001).

Under this approach, the first requirement is to determine whether the person to which the subsidies were given is, in fact, distinct from the person that produced the subject merchandise exported to the United States. If the two persons are distinct, the original subsidies may not be attributed to the new producer/exporter.

On the other hand, if the original subsidy recipient and the current producer/exporter are considered to be the same person, that person benefits from the original subsidies, and its exports are subject to countervailing duties to offset those subsidies. In other words, we will determine that a “financial contribution” and a “benefit” have been received by the “person” that is the firm under investigation. Assuming that the original subsidy had not been fully amortized under the Department's normal allocation methodology as of the POI, the Department would then continue to countervail the remaining benefits of that subsidy.

In making the “person” determination, where appropriate and applicable, we analyze factors such as (1) continuity of general business operations, including whether the successor holds itself out as the continuation of the previous enterprise, as may be indicated, for example, by use of the same name, (2) continuity of production facilities, (3) continuity of assets and liabilities, and (4) retention of personnel. No single factor will necessarily provide a dispositive indication of any change in the entity under analysis. Instead, the Department will generally consider the post-sale entity to be the same person as the pre-sale entity if, based on the totality of the factors considered, we determine that the entity in question can be considered a continuous business entity because it was operated in substantially the same manner before and after the change in ownership.

Using the approach described above, we analyzed the information provided by the GOI and DSM to determine whether the subsidies received by DSW and DSM prior to the privatization of ICL continued to benefit DSM during the POI. When we apply this approach to the facts and circumstances of the instant countervailing duty investigation of pure magnesium from Israel and the relevant privatization of ICL and its subsidiary, DSW/DSM, we find that the pre-sale and post-sale entities are not distinct persons.^[2] Therefore, we preliminarily determine that the subsidies provided to DSW/DSM, prior to the privatization of ICL, continue to benefit DSW/DSM post-privatization.

Due to the proprietary nature of the information submitted on the record by DSM, a more specific discussion of the factors considered in the change of ownership transactions of ICL is included in our Memorandum to the File dated February 14, 2001, Change in Ownership in the Countervailing Duty Investigation of Pure Magnesium from Israel (Change in Ownership Memorandum).

Creditworthiness

In the Initiation Notice, 65 FR at 68128, the Department stated that it would investigate DSM's creditworthiness, based on the petitioners' allegation that DSM has been uncreditworthy since its inception.^[3] On January 11, 2001, the Department issued questions concerning DSM's creditworthiness and on February 1, 2001, DSM responded to those questions.

Because the only grants that were approved for DSM in 1996 or subsequent years, were either expensed in the year of receipt or did not give rise to a benefit during the POI, we have not addressed DSM's creditworthiness in this preliminary determination.

Subsidies Valuation Information

Allocation Period

19 CFR 351.524(d)(2) states that we will presume the allocation period for non-recurring subsidies to be the average useful life (AUL) of renewable physical assets for the industry concerned, as listed in the Internal Revenue Service's (IRS) 1977 Class Life Asset Depreciation Range System and updated by the Department of Treasury. The presumption will apply unless a party claims and establishes that these tables do not reasonably reflect the AUL of the renewable physical assets for the company or industry under investigation, and the party can establish that the difference between the company-specific or country-wide AUL for the industry under investigation is significant. The Department will use the criteria found in 19 CFR 351.524(d)(2)(ii) and (iii) to decide whether the presumption has been rebutted.

In this investigation, DSM has alleged that the IRS AUL is inaccurate for DSM and has supplied gross book values of depreciable productive assets, as well as the depreciation expenses recorded in the company's normal accounting records, for purposes of calculating a company-specific AUL. We have reviewed DSM's calculation of AUL and made several minor adjustments which are fully documented in the Department's Calculation Memorandum, dated February 14, 2001, on file in Room B-099 at the U.S. Department of Commerce, Washington, DC 20230. Since DSM's AUL differs significantly from the IRS AUL, we have used DSM's AUL of 21 years to allocate all non-recurring subsidies, in accordance with 19 CFR 351.524(d)(2).

Discount Rates

In selecting a discount rate to allocate non-recurring subsidies over time, the Department prefers to use:

(1) The cost of long-term fixed-rate loans of the firm in question, excluding any loans that the Secretary has determined to be countervailable subsidies;

(2) The average cost of long-term fixed-rate loans in the country in question; or,

(3) A rate that the Secretary considers to be most appropriate. (See 19 CFR 351.524(d)(3)(i)).

DSW and DSM reported that they had long-term, variable-rate borrowings but no fixed-rate borrowings. In addition, based on the GOI's response there is no indication that long-term, fixed rate loans were available to private companies in Israel during these years. This is consistent with the Department's finding in the Final Affirmative Countervailing Duty Determination: Certain Carbon Steel Butt-Weld Pipe Fittings From Israel, 60 FR 10569, 10570 (February 27, 1995) (Butt-Weld Fittings), that during the period examined in that case only variable-rate lending was available on a long-term basis to private companies in Israel. Thus, we lack information on the first two preferred sources for a discount rate.

Lacking fixed interest rates, we looked to DSW and DSM's reported interest rates. DSM stated that the interest rates on its long-term borrowings were calculated as a fixed percentage above the London Interbank Offer Rate (LIBOR). For purposes of this preliminary determination, we have calculated an annual average rate, based on DSM's reported borrowing rate of LIBOR plus the fixed percentage, for the years in which grants were approved to use as DSM's discount rate. This calculation is consistent with the discount interest rate used in Industrial Phosphoric Acid from Israel: Final Results and Partial Recision of Countervailing Duty Administrative Review, 64 FR 49460, 49461 (September 13, 1999) (IPA). We will request additional information from DSM on its long-term loans which we will examine at verification.

I. Programs Preliminarily Determined To Be Countervailable

A. Encouragement of Capital Investments Law (ECIL)

The ECIL is a regional development program aimed at providing assistance to enterprises located in disadvantaged regions of the country. This program is administered under the Law for the Encouragement of Capital Investments 5719-1959. Amendment No. 4 of the Law authorized grants beginning in 1967. The program contributes to the development of industrial enterprises to improve the economic situation in disadvantaged regions by encouraging population distribution, creating new sources of employment, aiding the absorption of immigrants, and developing the economy's production capacity.

There are three mutually exclusive programs under the ECIL: grants, corporate income tax exemptions, and accelerated depreciation of assets. Investment grants are provided to companies as a specified percentage of the company's investment in eligible fixed assets. The amounts vary based on the region in which the assets are located. Companies can also receive reduced tax rates or a full tax exemption for the first two years in certain circumstances. Accelerated depreciation on eligible buildings and equipment is available for qualifying enterprises for the first five years of use at rates of 200 percent of the ordinary rate for equipment and 400 percent of the ordinary rate for buildings, with depreciation on buildings not exceeding 20 percent per annum.

To be eligible for benefits under ECIL applicants must be located within one of the designated development zones and meet one of the following requirements: utilize natural resources and existing plants to their full potential, absorb newly migrated persons, help to spread the population across the country, or create new jobs.

ECIL Grant Program

For purposes of the ECIL program, Israel is divided into three zones—Development Zones A and B, and the Central Zone. DSM is located in Zone A and received ECIL grants for the construction of its magnesium plant.

We preliminary determine that the investment grants provide countervailable subsidies within the meaning of section 771(5) of the Act. The grants are a direct transfer of funds from the GOI providing a benefit in the amount of the grant. The grants are specific within the meaning of section 771(5A)(D)(iv) because they are limited to firms located in a designated geographic regions.

In accordance with 19 CFR 351.524(c)(1), we have treated these grants as non-recurring subsidies and have allocated the benefit over time. To calculate the countervailable subsidy, we divided the benefit attributable to the POI by the value of DSM's total sales during the POI. On this basis, we determine the countervailable subsidy for this program to be 12.99 percent ad valorem.

B. Infrastructure Grants

Under the Infrastructure Grant Program, the GOI has established new industrial areas by partially reimbursing companies for their costs of developing the infrastructure in certain geographical zones. DSM received assistance under this program.

We preliminary determine that the investment grants provide countervailable subsidies within the meaning of section 771(5) of the Act. The grants are a direct transfer of funds from the GOI providing a benefit in the amount of the grant. The grants are specific within the meaning of section 771(5A)(D)(iv) because they are limited to firms located in a designated geographic regions.

In accordance with 19 CFR 351.524(c)(1), we have treated these grants as non-recurring subsidies and have allocated the benefit over time. To calculate the countervailable subsidy, we divided the benefit attributable to the POI by the value of DSM's total sales during the POI. On this basis, we determine the countervailable subsidy for this program to be .40 percent ad valorem.

C. Encouragement of Industrial Research and Development Law Grants (EIRD)

The EIRD was established in 1984 and is administered by the Office of Chief Scientist (OCS) of the Ministry of Industry and Trade. The benefits under this program include grants, loans, and tax exemptions. The OCS provides grants for 30 to 66 percent of the approved research and development expenditures (R&D), depending on the type of project to be undertaken and the location where the proposed R&D will be done. The typical level of support is 50 percent of the investment. Support for improvements in existing products is 30 percent of the investment. Support for R&D in Development Zone A is 60 percent of the investment. Support for R&D for which sole financing comes from the company performing the R&D is 66 percent of the investment.

Persons applying for a grant are required to submit information to the OCS regarding the nature, aims and budget of the proposed project. The OCS considers the following criteria in determining whether to grant EIRD funds: (1) Whether the applicant company shows innovation in the development of new technologies; (2) the management, production and marketing capabilities of the firm, as well as any marketing strategy for the new product; (3) whether the product will be able to successfully compete in international markets; (4) whether the proposed R&D project will result in the introduction of new technology or scientific manpower. The OCS provided grants to DSM for industrial research and development projects which contribute to the Israeli economy and to its scientific and technological development. There is no indication that DSM's receipt of benefits was related to export performance.

The grants provided under the program are subject to repayment, through the payment of royalties, if the supported R&D yields a commercially successful product. With respect to the grants provided to DSM for production of magnesium, one grant was partially repaid.

We preliminarily determine that the grants received under the EIRD program are countervailable subsidies. The grants are a direct transfer of funds from the GOI. If not repaid, the grants confer a benefit in the amount equal to the difference between the non-specific base rate of 30 percent and the Development Zone A rate of 60 percent. In instances where the grant is repaid, the benefit is the company's interest-free use of money. The EIRD program is specific, at least for R&D undertaken in Development Zone A, because the level of assistance is greater for companies located in that zone.

To calculate the benefit to DSM from the EIRD grants, we first tested whether the amounts approved exceeded 0.5 percent of sales in the year of approval. If not, we expensed the grant in the year of receipt. DSM received no disbursements in the POI. If the grant exceeded 0.5 percent of sales in the year of approval, we treated it as a zero-rate loan. For “loans” outstanding during the POI, the subsidy was less than 0.005 percent under any calculation methodology. Therefore, we are not computing a benefit for this program. See the February 14, 2001, Preliminary Affirmative Countervailing Duty Determination: Pure Magnesium from Israel Calculation Memorandum for DSM.

II. Programs Preliminarily Determined To Be Not Used

The following programs were not used:

A. ECIL Tax Rate benefits

B. ECIL Depreciation Preferences

C. Magnesium Research Institute (MRI) and Consortium Research Programs

Verification

In accordance with section 782(i)(1) of the Act, we will verify the information submitted by the respondents prior to making our final determination.

Suspension of Liquidation

In accordance with section 703(d)(1)(A)(i) of the Act, we have calculated an individual rate for DSM, the sole manufacturer of the subject merchandise. We preliminarily determine that the total estimated net countervailable subsidy rate is 13.39 percent ad valorem. Because we only investigated one producer/exporter, DSM's rate will also serve as the “all others” rate. Therefore, the “all others” rate is 13.39 percent ad valorem.

In accordance with section 703(d) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all entries of pure magnesium from Israel which are entered, or withdrawn from warehouse, for consumption on or after the date of the publication of this notice in the Federal Register, and to require a cash deposit or bond for such entries of the merchandise in the amounts indicated above. This suspension will remain in effect until further notice.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In addition, we are making available to the ITC all nonprivileged and nonproprietary 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 Assistant Secretary for Import Administration. If our final determination is affirmative, the ITC will make its final determination within 45 days after the Department makes its final determination.

Public Comment

In accordance with 19 CFR 351.310, we will hold a public hearing, if requested, to afford interested parties an opportunity to comment on this preliminary determination. The hearing is tentatively scheduled to be held 57 days from the date of publication of the preliminary determination or the next business day thereafter, at the U.S. Department of Commerce, 14th Street and Constitution Avenue, NW, Washington, DC 20230. Individuals who wish to request a hearing must submit a written request within 30 days of the publication of this notice in the Federal Register to the Assistant Secretary for Import Administration, U.S. Department of Commerce, Room 1870, 14th Street and Constitution Avenue, NW, Washington, DC 20230. Parties should confirm by telephone the time, date, and place of the hearing 48 hours before the scheduled time. Requests for a public hearing should contain: (1) The party's name, address, and telephone number; (2) the number of participants; and, (3) to the extent practicable, an identification of the arguments to be raised at the hearing. In addition, six copies of the business proprietary version and six copies of the nonproprietary version of the case briefs must be submitted to the Assistant Secretary no later than 50 days from the date of publication of the preliminary determination.

As part of the case brief, parties are encouraged to provide a summary of the arguments, not to exceed five pages, and a table of statutes, regulations, and cases cited. Six copies of the business proprietary version and six copies of the non-proprietary version of the rebuttal briefs must be submitted to the Assistant Secretary no later than 5 days from the date of filing of the case briefs. An interested party may make an affirmative presentation only on arguments included in that party's case or rebuttal briefs. Written arguments should be submitted in accordance with 19 CFR 351.309 and will be considered if received within the time limits specified above.

This determination is published pursuant to sections 703(f) and 777(i) of the Act. Effective January 20, 2001, Bernard T. Carreau is fulfilling the duties of the Assistant Secretary for Import Administration.

Dated: February 14, 2001.

Bernard T. Carreau,

Deputy Assistant Secretary, AD/CVD Enforcement II.

Footnotes

1.  The meaning of this term is the same as that used by the American Society for Testing and Materials in its Annual Book of ASTM Standards: Volume 01.02 Aluminum and Magnesium Alloys.

2.  The GOI stated that it only provided subsidies to DSW/DSM because its parent company, ICL, is a holding company and was, therefore, not eligible to receive any of the reported subsidies.

3.  DSM was incorporated in 1996.