66 FR 49349, September 27, 2001
                                                          A-508-809
                                                      Investigation
                                                    Public Document
MEMORANDUM 

DATE: September 14, 2001

TO:   Faryar Shirzad
      Assistant Secretary for 
        Import Administration

FROM: Richard W. Moreland
      Deputy Assistant Secretary, Group I
        Import Administration


SUBJECT: Issues and Decision Memorandum for the Final Determination in
the Antidumping Duty Investigation of Pure Magnesium from Israel



SUMMARY

We have analyzed the comments in the case and rebuttal briefs submitted
by interested parties in the antidumping duty investigation of pure
magnesium from Israel. As a result of verification and our analysis, we
have made changes in the margin calculations. We recommend that you
approve the positions we have developed in the Discussion of the Issues
section of this memorandum. Below is the complete list of the issues in
this investigation for which we received comments from the parties:

I. ISSUES RELATED TO DSM'S SALES

   Comment 1: Sales of 'Off Specification' Magnesium 

II. ISSUES RELATED TO DSM'S COST OF PRODUCTION/CONSTRUCTED VALUE

   Comment 2: Treatment of Chlorine and Sylvanite as Byproducts
   Comment 3: Identification of "Split-off" Point in the Production 
              of Joint Products
   Comment 4: Cost Allocation Methodology
   Comment 5: Allocation of Production Costs to Pure and Alloy Magnesium
   Comment 6: Calculation of Byproduct Offset
   Comment 7: Adjustment of Electricity Costs for Affiliated Party
              Transactions
   Comment 8: Calculation of Profit for Constructed Value


III. OTHER ISSUES

   Comment 9: Reconsideration of Industry Standing
   Comment 10: Scope


BACKGROUND

On April 30, 2001, the Department of Commerce (the "Department")
published the preliminary determination in this investigation. (1) The
products covered by this investigation are 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 primary magnesium, by weight (generally referred to as
"pure" magnesium); (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" (2) (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. Excluded from
this order are mixtures containing 90 percent or less pure magnesium by
weight and one or more of certain non-magnesium granular materials to make
magnesium-based reagent mixtures. The non-magnesium granular materials
which the Department is aware are used to make such excluded reagents are:
lime, calcium metal, calcium silicon, calcium carbide, calcium carbonate,
carbon, slag coagulants, fluorspar, nephaline syenite, feldspar, aluminum,
alumina (Al2O3), calcium aluminate, soda ash, hydrocarbons, graphite,
coke, silicon, rare earth metals/mischmetal, cryolite, silica/fly ash,
magnesium oxide, periclase, ferroalloys, dolomitic lime, and colemanite. A
party importing a magnesium-based reagent which includes one or more
materials not on this list is required to seek a scope clarification from
the Department before such a mixture may be imported free of antidumping
duties.

In the scope description above, we have made certain changes from the
Preliminary Determination (see, comment 10). We have also corrected a
scrivner's error that occurred in the Preliminary Determination.
Specifically, in the second paragraph under "(2)" we have replaced the
term "pure" with "primary." This is consistent with the description of the
subject merchandise in the petition. 

The period of investigation ("POI") is October 1, 1999, through September
30, 2000. This period corresponds to the respondent's four most recently
completed fiscal quarters prior to the filing of the petitions (see 19 CFR
351.204(b)). 



DISCUSSION OF ISSUES

Comment 1: Sales of "off-specification" magnesium

The petitioners claim that DSM has failed to report U.S., home market,
and third country sales of merchandise that fall within the scope of this
proceeding because DSM's databases do not include sales of off-
specification alloy magnesium (i.e., sales intended to be alloy magnesium,
but that fail to meet an ASTM specification for any particular magnesium
alloy). In support of this claim, the petitioners refer to the petition,
which cites Notice of Final Determinations of Sales at Less Than Fair
Value: Pure Magnesium and Alloy Magnesium from the People's Republic of
China, 60 FR 16437, 16439, (March 30, 1995), where the Department stated
that such off-specification alloy magnesium can be used to fill orders of
pure magnesium. Therefore, in this case, petitioners intentionally
included such merchandise in the scope. The petitioners state that DSM's
omission of its sales of off-specification alloy magnesium results in
incomplete databases and, therefore, they request that the Department
apply total adverse facts available. At a minimum, the petitioners request
that the Department apply partial adverse facts available to the U.S.
sales that DSM identifies as 'off-specification' alloy magnesium. 

DSM argues that it should not be required to add additional sales to its
U.S. sales database because it has complied fully with the Department's
requests. DSM states that its sales of off-spec alloy magnesium result
from production on its separate alloy magnesium line and are sold as a
type of alloy magnesium, are not referred to as 'off-specification pure'
magnesium and, therefore, should not considered subject merchandise. DSM
disagrees that it should be subject to adverse facts available as it has
cooperated fully in this investigation.

Department's Position:

We agree with petitioners that certain off-specification alloy is
included within the scope of this proceeding. Specifically, the scope of
the investigation includes "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' (generally referred to as 'off-
specification pure' magnesium)" (emphasis added, footnote omitted). In
general, solely because a product may not have been referred to as 'off-
specification pure' (as opposed to alloy) magnesium, does not mean that
the product is not included within the scope.

However, in the instant case, the petitioners did not allege that DSM
failed to report its sales until after the sales verification had taken
place. The Department, therefore, did not collect information at
verification necessary to prove or disprove petitioners' claim (e.g., such
as whether the referenced sales met an ASTM specification for magnesium
alloy, but were categorized by the respondent as 'off-specification' for
other, non-metallurgical reasons-as was found for DSM's sales of 'off-
specification' pure magnesium). Moreover, in its review of DSM's sales at
verification, the Department officials noted no information indicating
that the sales referenced by petitioners should have been reported as
subject merchandise. Lastly, we agree with DSM that it has cooperated
fully in this investigation. Therefore, application of adverse facts
available (partial or total) is not warranted.

If this proceeding results in an antidumping order, we may consider this
issue further in a future administrative review if it is raised in a
timely fashion.

Comment 2: Identification of split-off point in the production of joint
products

The parties disagree as to what point in the production process should be
considered the split-off point for cost allocation purposes. DSM claims
that the split-off point is the actual moment separation of the three
joint products occurs, even though it happens in the middle of a
cost/process center. The petitioners argue that the split off point for
cost allocation purposes must be the end of the cost/process center. 

DSM maintains that it has appropriately identified the split-off point in
its reported costs. DSM opines that regardless of whether magnesium,
chlorine, and sylvanite are treated as coproducts or byproducts, the
attribution of costs to specific processes and subsequent identification
of the split-off point is central to the Department's analysis. The split-
off point is the stage of the production process where separately
identifiable products exist. See, Notice of Final Determination of Sales
at Less Than Fair Value: Oil Country Tubular Goods from Argentina ("OCTG
from Argentina"), 60 FR 33539, 33547 (June 28, 1995). DSM contends that in
the cost verification report, the Department has erroneously assumed that
the output of the electrolysis cells is the split-off point.

DSM notes that the electrolysis stage of production has two functions.
First, electricity is required to split the magnesium chloride component
of the carnallite molecule into its constituent elements, i.e., magnesium,
chlorine, and sylvanite. Second, the three products resulting from the
electrolysis, i.e., crude magnesium, chlorine, and sylvanite, must then be
maintained at a high temperature so that they may be directed to the three
separate processes that ensue. DSM's position is that the split-off point
occurs during the electrolysis process, after the carnallite molecule is
split but prior to the output of the three products. Thus, according to
DSM, the costs incurred in the electrolysis process should be segregated
between those which relate to splitting the carnallite into separate
molecules (which would represent pre-split-off point costs), and those
which relate to maintaining the appropriate temperature allowing the three
distinct products to go to their respective separate processes (which
would represent post-split-off point costs). Lastly, DSM contends that the
scientific formula used to allocate the electrolysis production stage
costs between these two functions was reasonable and should, therefore, be
relied upon for the final determination.

The petitioners counter that although DSM appears to take issue with the
manner in which the Department re-classified costs incurred by DSM prior
to the split-off point, DSM appears to agree that chlorine, sylvanite, and
crude magnesium become separately identifiable products at the
electrolysis stage. See, DSM's March 22, 2001 Section D Response, at page
16. Moreover, at the cost verification the Department found that the
electrolysis process is the point where molten magnesium, chlorine gas,
and molten sylvanite are separated. Consequently, because the Department's
practice is to consider the split-off point in a joint production process
to be where the products become physically separable, the record
establishes that the proper split off-point is the electrolysis stage of
production.

Department's Position:

Cost accounting textbooks define split-off point as the juncture in the
production process when the products become separately identifiable. See
Charles T. Horngren and George Foster, Cost Accounting: A Managerial
Emphasis at 540 (Prentice Hall, Seventh Edition, 1991). In accordance with
the textbook definition, the Department determines the split-off point to
be the point in the production process where the joint product becomes a
separately identifiable product. See, OCTG from Argentina, 60 FR 33539,
33547 (June 28, 1995).

As a practical mater the split-off point must be at the end of the
cost/process center (i.e., electrolysis process) and not in the middle.
Identifying the split-off point at the middle of a process fails to
resolve the processing cost allocation issue inherent in joint production
processes, i.e., allocating common costs which are not directly
attributable to the distinct products in the joint production stream. It
is not until each distinct product is output from the electrolysis stage
of production that the company can associate production costs directly to
the various products. Accordingly, we consider the proper "split-off"
point to be the end of the electrolysis stage of production. Therefore,
for the final determination, all costs incurred in the electrolysis
process have been treated as having occurred prior to the split-off point
and, therefore, not assigned as costs of producing chlorine and sylvanite
(see, comments 3 and 4, below).

Comment 3: Treatment of chlorine and sylvanite as byproducts

The petitioners contend that in the preliminary determination, the
Department correctly rejected DSM's proposed classification of pure
magnesium, alloy magnesium, chlorine, and sylvanite as coproducts and,
instead, treated (1) chlorine and sylvanite as byproducts of the
production of crude magnesium and (2) pure magnesium and alloy magnesium
as coproducts. The Department should affirm this methodology for the final
determination.

The petitioners urge the Department to apply its longstanding five-factor
analysis for determining whether joint products should be considered
byproducts or coproducts. The five factors the Department examines are the
following: (1) how the company records and allocates costs in the ordinary
course of business; (2) the significance of each product relative to the
other 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. See, Final
Results of Antidumping Finding Administrative Review: Elemental Sulphur
From Canada ("Elemental Sulphur From Canada"), 61 FR 8239, 8241-42 (March
4, 1996). The petitioners claim that based on the application of these
factors in this investigation, the evidence establishes conclusively that
chlorine and sylvanite produced by DSM are byproducts of the production of
crude magnesium, and the Department should account for their costs
accordingly in the calculation of the cost of production ("COP") and
constructed value ("CV") of pure magnesium.

With regard to the first factor, the petitioners assert that DSM itself
considers chlorine and sylvanite to be byproducts. In its questionnaire
responses and at the cost verification, DSM made clear that it does not
maintain product-specific costs for chlorine or sylvanite in its cost
accounting system. Furthermore, according to the petitioners, DSM does not
track chlorine and sylvanite production through inventory, nor does it
assign an inventory value to these products. The petitioners claim that
the absence of any effort to account for the costs of chlorine and
sylvanite during the POI is probative evidence that the products are
byproducts, not coproducts.

The petitioners point to Elemental Sulphur From Canada, 61 FR at 8243,
where the Department found that the respondent did not assign any costs to
the alleged coproduct, sulphur, in its normal cost accounting, and that
the respondent also did not report inventory balances for sulphur on its
audited financial statements. In that case, according to the petitioners,
the Department determined that the respondent's normal accounting
practices were consistent both with the company's home market generally
accepted accounting principles {"GAAP") and with its view of sulphur as a
byproduct of its natural gas operations. The petitioners contend that in
this case, DSM has not assigned costs to chlorine and sylvanite or
reported inventory balances for these products on its audited financial
statements which are prepared in accordance with Israeli GAAP. Thus, the
petitioners maintain that DSM's normal accounting practices are consistent
with the classification of chlorine and sylvanite as byproducts.

Concerning the second factor, the petitioners claim that DSM's chlorine
and sylvanite productions are insignificant in comparison to pure and
alloy magnesium. Although, DSM produces a large volume of chlorine and
sylvanite as a result of the production process for magnesium, the
petitioners contend that the sales revenues generated by chlorine and
sylvanite are insignificant when compared to the sales revenues generated
from pure and alloy magnesium. Consistent with the decision in Elemental
Sulphur From Canada, 61 FR at 8242, the petitioners claim that the
insignificance of the chlorine and sylvanite sales revenues support
byproduct treatment for the final determination.

For the third factor, the petitioners claim that chlorine and sylvanite
are unavoidable consequences of the production of magnesium. The
petitioners contend that the facts in this case are similar to those in
Elemental Sulphur From Canada, 61 FR at 8242, where the Department found
that the amount of sulphur produced was dependent on the amount of natural
gas produced. The Department further found that the respondent did not
have the option of limiting its production of sulphur. In this case, the
petitioners note that the volumes of chlorine and sylvanite DSM produces
depend on the volume of magnesium produced. Accordingly, chlorine and
sylvanite are byproducts, because DSM cannot control its production other
than by regulating the production of magnesium.

For the fourth factor, the petitioners argue that because chlorine and
sylvanite are unavoidable consequences of DSM's production of magnesium,
DSM's management exerts control over their production only to the extent
that it controls production of magnesium. The petitioners reiterate that
there is no evidence on the record that DSM's management decides how much
magnesium to produce based on market demand for chlorine or sylvanite. To
the contrary, DSM decides how much magnesium to produce based on demand
for magnesium, and it disposes of whatever volumes of chlorine and
sylvanite are produced as a result of the production of magnesium.
According to the petitioners, this supports treating chlorine and
sylvanite as byproducts.

Concerning the fifth factor, the petitioners contend that although
chlorine and sylvanite require some further processing after the split-off
point, the level of further processing needed is minor compared with the
level of processing needed to produce magnesium. Further, the petitioners
note that DSM must incur costs to process chlorine to make it suitable for
disposal for environmental reasons. The petitioners refer to Elemental
Sulphur From Canada, 61 FR at 8244, where the respondent incurred
significant further processing costs. Nevertheless, the Department
determined that even significant processing costs were not inconsistent
with classification of sulphur as a byproduct, because the significant
processing of sulphur was necessary to produce natural gas. The
petitioners conclude that as was the case in Elemental Sulphur From
Canada, the costs incurred to process chlorine and sylvanite are
consistent with their classification as byproducts.

DSM argues that in the preliminary determination, the Department
incorrectly determined that chlorine and sylvanite are byproducts
generated during the production of crude magnesium. Instead, DSM contends
that based on the facts of this case, past practice, and GAAP, the
Department should find that chlorine and sylvanite are coproducts of pure
and alloy magnesium. DSM refers to the same five factors listed by the
petitioners in explaining why chlorine and sylvanite are coproducts of the
magnesium production process.

With regard to the first factor, DSM maintains that its accounting
records are prepared in accordance with Israeli GAAP. DSM asserts that the
fact it reports chlorine and sylvanite sales as revenue on its audited
financial statements as opposed to a reduction to total production cost
supports its position that chlorine and sylvanite are normally treated as
coproducts in the ordinary course of business. Thus, according to DSM the
first factor for classifying chlorine and sylvanite as coproducts is
satisfied.

DSM maintains that chlorine and sylvanite are also appropriately
recognized as coproducts under the Department's second factor, which is
the relative significance of the joint products in question. DSM notes
that an authoritative accounting text which the Department has relied upon
in other cases defines a byproduct as "a product that has a low sales
value compared with the sales value of the main or joint product(s)."
Charles T. Horngren and George Foster, Cost Accounting: A Managerial
Emphasis at 527 (1991). According to DSM, the Department has described
relative sales value as "the most important factor in determining whether
a product is a coproduct or a byproduct." OCTG from Argentina, 60 FR
33539, 33547 (June 28, 1995). According to DSM, its revenues from the sale
of chlorine and sylvanite account for a significant portion of total sales
revenue as shown in its 2000 audited financial statements. Thus, according
to DSM, the second factor is easily satisfied.

Regarding the Department's third factor, DSM contends that neither a
coproduct nor a byproduct can be produced independently of each other, and
so, the Department must exercise care in examining whether one joint
product is an unavoidable consequence of producing another product.
According to DSM, the more appropriate analysis, which is similar to the
fourth factor, is the extent to which a producer can control the output
volume of a particular joint product. 

With respect to fourth factor, DSM claims that there are two important
characteristics which distinguish chlorine and sylvanite from byproducts.
First, DSM made a deliberate business decision to further manufacture them
into higher value products. That is, even though chlorine may be sold in a
gaseous form after minor purification, and sylvanite may be poured right
away into block form, DSM decided to liquid purify the chlorine and prill
(granulate) the sylvanite products. Thus, DSM claims they are not an
unavoidable consequence of producing crude magnesium. As such, DSM argues
that there is no question that it retains a substantial measure of control
over chlorine and sylvanite production and, thus, they are coproducts of
magnesium production. Second, DSM maintains that the chlorine and
sylvanite output quantities are known with relative certainty from the
beginning of the production process, and are controllable to some degree
as evidenced by DSM's effort to increase the yield of products from the
carnallite input. 

Finally, DSM contends that it operates significant separate production
facilities after the split-off point devoted to separate processing of
chlorine and sylvanite. DSM reiterates that based on the facts detailed
above, chlorine and sylvanite satisfy each of the Department's criteria
for being classified as coproducts of the production process for pure and
alloy magnesium.

Department's Position:

Carnallite is the primary raw material used by DSM for the production of
pure and alloy magnesium, chlorine and sylvanite. The carnallite is
purchased in a slurry (wet) form. DSM dries the carnallite yielding
dehydrated carnallite. DSM heats the dehydrated carnallite in high
temperature cells until it becomes molten.

Molten carnallite is purified in the chlorination process and transferred
to electrolysis cells. The electrolysis cells split the magnesium chloride
component of the carnallite molecule into its constituent elements, i.e.,
magnesium, chlorine, and sylvanite. Molten crude magnesium, chlorine gas,
and molten sylvanite are separately output from the electrolysis cells.
The molten crude magnesium is transferred to the casting house, the
chlorine gas to the purification plant, and the molten sylvanite to the
cooling and prilling plant for further processing. At the casting house,
some of the crude magnesium is sent to the alloying unit where other
metals are added before the product is cast into alloy magnesium ingots.
The remaining crude magnesium is poured into pure magnesium ingots, i.e.,
the subject merchandise. At the purification plant, the chlorine gas is
purified. Some of the purified chlorine gas is reintroduced in the
chlorination process to increase the yield of crude magnesium and the rest
is converted into liquid form for sale. Molten sylvanite is transferred
from the electrolysis cells to the sylvanite area to be cooled,
granulated, and sold.

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 byproduct 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, it has been noted that 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 byproducts.
When two or more major products appear in the same group, they are called
coproducts. The term joint product includes major products, byproducts,
and coproducts because all are jointly produced. 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 joint products are to be considered coproducts or byproducts. See
Final Results of Antidumping Finding Administrative Review: Elemental
Sulphur From Canada ("Elemental Sulphur From Canada"), 61 FR 8239, 8241-42
(March 4, 1996). 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

For the first factor, the record is clear that DSM does not allocate
production costs to chlorine and sylvanite production in its normal
accounting records. Nor does DSM track production or inventory quantities
associated with either. While the chlorine and sylvanite are normally sold
shortly after being produced, there are still quantities of each on hand
at any particular point in time, i.e., these products are not shipped
immediately upon being produced. It is only upon sale that any activity
associated with these products is recorded in DSM's financial accounting
system.

In contrast, for magnesium, DSM tracks quantities produced and quantities
in ending inventory on a monthly basis. In addition, for financial
statement purposes, DSM assigns a value to magnesium in ending inventory
at the balance sheet date. Thus, there are stark differences in how the
chlorine and sylvanite are tracked and accounted for versus the magnesium
products. Because differences in the relative values of joint products
will influence the decision as to how much time and effort will be spent
measuring them, we consider DSM's disparate treatment an indication of the
relative insignificance it attributes to chlorine and sylvanite as
compared to pure and alloy magnesium.

Moreover, we disagree with DSM's assertion that the fact it reports
chlorine and sylvanite sales as revenue on its audited financial
statements, as opposed to a reduction to total production cost,
necessarily supports its position that it treats chlorine and sylvanite as
coproducts in the ordinary course of business. According to the cost
accounting textbook, Cost Accounting, A Managerial Emphasis by Horngren,
Foster, and Datar, (Prentice Hall 1994) at pages 582-84, there are four
ways to account to account for byproducts in a company's financial
accounts. The characteristics associated with one of those methods are:
(1) activity associated with byproducts is 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 (emphasis added); and (3)
byproduct inventories are not recorded. Therefore, since byproduct revenue
can also be presented in this manner, DSM's recognition of the sales
revenue does not support its assertion that its accounting treatment
demonstrates that they are necessarily coproducts. 

The combination of the fact that DSM accounts for chlorine and sylvanite
in accordance with the byproduct method identified above, and the fact
that DSM expends limited resources tracking their production activities,
supports the conclusion that DSM treats chlorine and sylvanite as
byproducts of the magnesium production process in its normal books and
records.

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, we have looked at the relative value of
each of the end products produced from the joint process stream. See
Elemental Sulphur From Canada. However, while the relative value of the
end products is important for financial reporting purposes, the relative
values of the joint products at the split-off point is more meaningful for
assessing the significance of each product as output from the split-off
point. We therefore analyzed the relative value each product generated
from the joint process both ways (i.e., the relative values for the end
products, and the relative values for the products output from the joint
process).

Because DSM does not track production quantities for chlorine and
sylvanite, we used DSM's POI sales quantities for chlorine and sylvanite
for our analysis of the relative values for the end products. We valued
the chlorine and sylvanite POI production quantity using DSM's average
sales prices for chlorine and sylvanite during the POI. We adjusted the
chlorine sales revenue figure to account for DSM's having sold chlorine to
an affiliate at prices higher than its sales to non-affiliates (i.e.,
market prices). For pure and alloy magnesium products, we used DSM's POI
production quantities. We valued the pure magnesium POI production
quantity using DSM's average sales price for pure magnesium during the
year prior to the POI. We did this to avoid using prices for pure
magnesium sold during the POI, a period during which DSM allegedly sold
the product at unfairly low prices. 

In order to convert the prices of the end products back to the relative
values at the split off point, we reduced each of the above adjusted sales
values by the cost of further processing each after the split-off point.
This was the only way to assess the significance of each product output
from the split-off point (i.e., chlorine gas, molten sylvanite, and molten
magnesium), because we were unable to obtain market prices for molten
magnesium, molten sylvanite, and chlorine gas. 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 values of chlorine gas/chlorine liquid and molten
sylvanite/sylvanite are not significant relative to the values of molten
magnesium/pure magnesium or alloy magnesium. Due to the proprietary nature
of the data, our analysis is reported in, Memorandum to Neal Halper, From
Sheikh Hannan, "Team Recommendation Related to the Cost Accounting
Treatment of Pure Magnesium from Israel," dated September 12, 2001.
Therefore, using this factor, chlorine and sylvanite are not coproducts,
but would be considered byproducts of pure and alloy magnesium. 

Factor 3

The third factor in determining whether joint products should be
considered coproducts or byproducts is whether any of the products result
because they are an unavoidable consequence of producing another product.
DSM's reliance on carnallite as an input and the method that DSM uses to
separate magnesium from chlorine and sylvanite necessarily result in
chlorine gas and molten sylvanite. Therefore, this factor does not support
treating chlorine and sylvanite as coproducts. Rather, it does not
indicate whether they are coproducts or byproducts.

Factor 4

The fourth factor in determining whether joint products should be
considered coproducts or byproducts is whether management intentionally
controls production of chlorine and sylvanite. This factor is similar to
factor 3, however, it recognizes that in situations where a series of
joint products are unavoidable, management may be taking steps to minimize
or maximize the out put quantities of one or more of the joint products.
We found little evidence that DSM's management can control to any extent
the relative production volumes. The output quantities of crude magnesium,
chlorine gas, and molten sylvanite at the split-off point are known with
relative certainty from the beginning of the production process. These
output quantities depend on the quality of carnallite used and the
production process. However, DSM reduces the saleable quantity of chlorine
by re-introducing some chlorine in the chlorination process in order to
increase the yield of crude magnesium. Thus, it appears that DSM intends
to maximize production of magnesium and not chlorine. As such, this factor
supports a finding that chlorine is a byproduct.

Factor 5

Finally, with respect to the last factor, whether chlorine and sylvanite
require significant further processing after the split-off point, we
consider this factor to have conflicting implications. For financial
reporting purposes, this factor is relevant in that if there is
significant further processing required, presumably the end product's
value will increase to the point where its value may be significant in
relation to the other end products produced. On the other hand, however,
the fact that a product output from the split-off point requires
significant further processing may indicate that the value of the output
product is minimal, with the bulk of its value being added by the further
processing. In this instance, it would appear unreasonable to allocate
joint costs to the output product which is basically worthless at the
split-off point, but somewhat valuable after significant further
processing (see, comment 2). Regardless, we found that none of the
products resulting from the joint process required much additional
processing after the split-off point when compared to the total costs
incurred by the company. Due to the proprietary nature of this issue, for
further details, see Memorandum to Neal Halper, From Sheikh Hannan, "Team
Recommendation Related to the Cost Accounting Treatment of Pure Magnesium
from Israel," dated September 12, 2001. 

Conclusion

In summary, we find that the lack of record keeping concerning chlorine
or sylvanite supports a determination that they are byproducts rather than
coproducts. The relative value of the production of either chlorine or
sylvanite shows that they are significantly less valuable than pure and
alloy magnesium. Factor 4 (extent to which management controls production)
supports a finding that chlorine is not a coproduct, because its
production is reduced in order to generate more magnesium. Factors 3
(unavoidable consequence) and 5 (extent of further processing) do not
provide any significant indication as to whether the joint products are
either coproducts or byproducts. Therefore, in total, we believe the facts
support the conclusion that chlorine and sylvanite are byproducts, and for
the final determination, we have continued to classify them as byproducts
of pure and alloy magnesium production.

Comment 4: Cost allocation methodology for coproducts

The parties each comment on how an allocation of costs should be made if
chlorine and sylvanite are considered coproducts to pure and alloy
magnesium. However, due to our determinations in comments 2 and 3 above,
these issues are no longer relevant since we are treating chlorine and
sylvanite as byproducts. 

In treating chlorine and sylvanite as byproducts of magnesium production,
we calculated the magnesium cost of manufacturing consistent with the
methodology adopted in Elemental Sulphur from Canada, 61 FR 8239 (Mar. 4,
1996) and OCTG from Argentina, 60 FR 33539, 33547 (June 28, 1995). Thus,
we first attributed all common costs to the primary product, magnesium. We
then identified the post split-off costs directly attributable to
magnesium, chlorine, and sylvanite production. Sales revenues generated by
chlorine and sylvanite were netted against their respective post split-off
direct costs. Finally, we added the resulting net revenue or cost from the
chlorine and sylvanite to the total common costs and magnesium direct
costs in determining the total manufacturing cost attributable to
magnesium products.

Comment 5: Allocation of production costs to pure and alloy magnesium

The petitioners point out that for DSM's two true coproducts, pure
magnesium and alloy magnesium, the proper split-off point is the casting
house. Molten magnesium is sent to the casting house, where it is either
cast into pure magnesium ingots or mixed with alloying materials for the
production of alloy magnesium ingots. Thus, pure magnesium and alloy
magnesium become physically separable at the casting house. The
petitioners contend that the Department should revise DSM's reported costs
to allocate crude magnesium and common casting costs between pure and
alloy magnesium based on the respective sales values of these coproducts.
However, if the Department disagrees, then the basis for the joint cost
allocation should be production quantity, net of the weight of the
alloying materials added in the casting house.

DSM argues that it has properly relied on production quantities to
allocate production costs common to pure and alloy magnesium. Production
quantities of crude magnesium are not tracked when they enter the pure or
alloy production lines. Rather, the production quantities of crude
magnesium are tracked only in total at the transfer from the electrolysis
cells. DSM, therefore, contends that it did not have the data necessary to
quantify the quantities of crude magnesium used as input in the pure and
alloy magnesium lines, respectively.

DSM points out that the Department has indicated that it may be
appropriate to eliminate the quantities of alloying materials from total
production quantities to more accurately estimate the input quantities of
crude magnesium. See, Cost Verification Report, page 4. DSM contends that
this methodology does not account for total magnesium production
quantities and, therefore, does not accurately estimate the input
production quantities. Specifically, DSM maintains that this calculation
would ignore the production of scrapped alloy material. DSM manufactures
prime and off-spec pure and alloy magnesium products. In producing alloy
magnesium, DSM also produces scrap alloy products, which are referred to
as "half barrels." Thus, for the final determination, the Department
should rely on production quantities of pure and alloy magnesium in order
to allocate crude magnesium and common casting costs.

Department's Position:

We disagree with the petitioners that, for pure versus alloy magnesium,
we should use a value-based allocation for the costs associated with the
magnesium casting process. In the casting process, molten magnesium is
cast into either pure or alloy magnesium. Pure magnesium and alloy
magnesium are not coproducts. Rather they share a common input, molten
magnesium. Therefore, the question is simply what quantity of molten
magnesium should be assigned to each end product.

The problem that arose for the Department in answering this question is
that DSM does not track the quantity of crude magnesium input into the
alloy magnesium processing. Therefore, it was necessary to devise a method
for determining this quantity. To do this, we used the relative production
quantities of pure and alloy magnesium, adjusted for the weight of the
alloys added and scrap magnesium products produced. For other common costs
incurred at the magnesium casting process, i.e., costs other than molten
magnesium, we agree with DSM that using the relative weight of output for
pure and alloy magnesium production is reasonable because the processing
costs should be allocated to both the magnesium in the end product and to
the alloy added in the alloying process.

Thus, for the final determination, we have allocated crude magnesium
costs to pure and alloy magnesium based on the calculated quantity of
crude magnesium consumed by each, and we allocated common casting costs
based on the relative quantities of pure and alloy magnesium (including
scrapped alloy) production.

Comment 6: Calculation of the byproduct offset

The petitioners claim that in its preliminary determination, the
Department erroneously granted an offset to the reported cost of
manufacturing based on the revenue generated by the sale of chlorine and
sylvanite to affiliated parties, because it did not determine whether the
sales of these products were made at prices that reflect a market price
(i.e., arm's length). See, April 23, 2001 "Preliminary Cost of Production
and Constructed Value Adjustments Memorandum" from Stan Bowen to Neal
Halper, Attachment 1. The petitioners maintain that it has long been the
Department's practice to consider whether the transactions between
affiliated parties occurred at arm's length prices. This is true both with
respect to the sales of the foreign like product (19 C.F.R. 351.403 (c))
and the cost of inputs used in the production of the merchandise under
investigation (19 C.F.R. 351.407 (b)).

Only if the transactions are indeed at arm's length will the Department
accept the sales and/or cost data as normally maintained in the company's
books. Since, DSM did not provide the Department with market prices for
sales of chlorine and sylvanite, the petitioners contend that DSM did not
act to the best of its ability and, thus, the Department should resort to
adverse facts available. As adverse facts available, the petitioners urge
the Department to exclude all byproduct sales made to affiliates from the
COP and CV calculations. The petitioners continue that should the
Department determine adverse facts available are not warranted, the
Department should apply neutral facts available by setting the aggregate
revenues generated by the sale of the byproducts equal to the further
processing costs incurred. At a minimum, the petitioners argue that the
Department should reduce the byproduct revenue by the difference between
the market price and transfer price found for chlorine.

According to DSM, it has fully cooperated with the Department throughout
this investigation. Therefore, there is no basis for the Department to use
adverse facts available regarding the reported sales revenue for chlorine
and sylvanite. DSM claims that the two regulations cited by the
petitioners in support of their position that the reported sales prices
for chlorine and sylvanite cannot be relied upon are inapplicable.
According to DSM, 19 CFR 351.403(c) governs the use of affiliated sales in
calculating normal value, while 19 CFR 351.407(b) governs the
determination of cost under the major input rule. Neither of these rules
governs the use of affiliated party transactions for purposes of coproduct
costing.

DSM contends that these prices with the affiliated parties were
negotiated long before the petition was filed. Thus, there is no
possibility that they were manipulated in an effort to reduce the margin
of dumping. DSM admits that during the POI, it sold an insignificant
quantity of chlorine to unaffiliated parties and the average sale price of
chlorine to unaffiliated parties was less than the average sale price to
its affiliated party. According to DSM, the fact that it sold chlorine to
its unaffiliated customers at an average price that was lower than the
average price to its affiliated party proves nothing other than DSM
charged different prices to different customers.

Department's Position:

We disagree with petitioners that adverse facts available is appropriate
with regards to the reported sales prices for chlorine and sylvanite. DSM
has fully cooperated with the Department throughout this investigation.
With respect to these values, DSM provided a market price for chlorine and
indicated that it was unable to provide a market price for sylvanite
because DSM did not sell sylvanite to unaffiliated parties nor did its
affiliated party purchase sylvanite from an unaffiliated party (see, DSM's
supplemental section D response). As such, the only issue with regard to
sales revenue of chlorine and sylvanite is whether we have reason to
believe that the sales to affiliated parties should be disregarded because
they do not fairly reflect the price usually charged in the home market
(i.e., arm's length prices, see section 773(f)(2) of the Act). 


When a respondent sells the same byproducts to affiliated and
unaffiliated parties at different prices, the Department considers the
prices received from unaffiliated parties by the respondent to be at arm's
length. In this case, the average sale price of chlorine charged to the
affiliated party exceeded the average sale price charged to the
unaffiliated parties. Thus, for the final determination, we used the
average sale price of chlorine received from unaffiliated parties to
calculate the byproduct offset to production costs.

There are no recorded sales of sylvanite to non-affiliated parties in
this investigation, because DSM does not sell this product to non-
affiliated parties. However, in addition to selling sylvanite to DSW, DSM
purchases carnallite used to produce magnesium from DSW. At verification,
we tested the transfer price for carnallite purchased from DSW and found
that these transactions occurred at an arm's length price. We have no
reason to believe that the other transactions between these two affiliates
occurred at non-arm's length prices. Therefore, because the only other
transaction between these parties appears to be at arm's length prices,
because there is no evidence that sylvanite was sold to any non-affiliated
parties, and because DSM has fully cooperated in all other respects
throughout this investigation, we disagree that an adjustment should be
made to the reported sales prices of sylvanite to its affiliate DSW. 

Comment 7: Adjustment of electricity cost for affiliated party transactions

The petitioners contend that the price DSM paid to its affiliated
supplier for electricity does not properly reflect the market value of
electricity in Israel. According to the petitioners, the Department's
practice is to base the cost of goods and services purchased from
affiliated suppliers on the highest of transfer price, cost of production,
or market price. See, e.g., Tapered Roller Bearings and Parts Thereof,
Finished and Unfinished, from Japan, 63 FR 63,860, 63,868 (1998); Certain
Corrosion-Resistant Carbon Steel Flat Products and Certain Cut-To-Length
Carbon Steel Plate From Canada, 62 FR 18,448, 18,456 (1997). The
petitioners conclude that because the record of this investigation
establishes that the highest of the three possible values for electricity
is the average price between two unaffiliated parties, the Department
should value affiliated party electricity purchases at the average price
between non-affiliates.

DSM contends that the Department should continue to use the transfer
price for electricity purchased from its affiliated supplier because all
transactions occurred at arm's length prices. According to DSM,
electricity rates in Israel are determined by Israel's Public Utilities
Authority. In particular, DSM notes that the rates are based on cost
principles such that "every price must reflect the real cost of the
particular service" without cross-subsidization. See, Cost Verification
Exhibit 10 related to the June 22, 2001 Cost Verification Report. DSM
argues that because its affiliate's electricity plant is more efficient
than the unaffiliated supplier's plants, and because electricity rates for
all producers are determined by Israel's Public Utilities Authority based
on cost principles, the unaffiliated supplier's price is not a reliable or
appropriate price to compare to that from its affiliated supplier.

DSM concludes that in a case with nearly identical facts, the Department
determined that application of the major input rule was inappropriate and
accepted an affiliated supplier's electricity price where the government
set the rates that the supplier could charge to the respondent. The
Department stated in Notice of Final Determination of Sales at Less Than
Fair Value; Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products
from Brazil ("HRS from Brazil"), 64 FR 38756, 38786 (July 19, 1999) and
accompanying Issues and Decision Memorandum at Comment 46, that, because
the affiliated supplier's price was regulated by the government, "we have
not disregarded the transaction price between {the company and its
affiliated supplier} because they are government regulated prices that
cannot be affected by the relationship between the parties." Here, the
affiliated supplier's electricity rates are based on cost principles, and
"every price must reflect the real cost of the particular service" without
cross-subsidization. For all these reasons, DSM maintains that the
Department should continue to use the transfer price from DSM's affiliated
supplier.

Department's Position:

Respondent reports that electricity represents DSM's largest cost in the
production of magnesium and, consequently, that the Department may
classify electricity as a major input because it accounts for a large
percentage of the total cost of manufacturing. DSM's Rebuttal Case Brief
at 19 (July 8, 2001). 


Section 773(f)(3) of the Act allows the Department to test transactions
between affiliated parties for the sole purpose of examining whether major
inputs are above the affiliated supplier's COP. In other words, if an
understatement in the value of an input would have a significant impact on
the reported cost of the subject merchandise, the Department must be
satisfied that the transfer price or market price is above cost. Further,
we note that section 351.407(a) and (b) of the Department's regulations
sets forth certain rules that are common to the calculation of COP and CV.
This section states that for the purpose of section 773(f)(3) of the Act
the Department will determine the value of a major input purchased from an
affiliated person based on the higher of: 1) the price paid by the
exporter or producer to the affiliated person for the major input; 2) the
amount usually reflected in sales of the major input in the market under
consideration; or 3) the cost to the affiliated person of producing the
major input. We have relied on this methodology in Final Determination of
Sales at Less Than Fair Value: Stainless Steel Round Wire from Taiwan, 64
FR 17336, 17337 (April 9, 1999). In the stainless steel round wire case,
the Department concluded that in the case of a transaction between
affiliated persons involving a major input, we will use the highest of the
transfer price between the affiliated party and the producer, the market
price between unaffiliated persons involving the major input, or the
affiliated supplier's cost of producing the input. This methodology has
been upheld by the Court of International Trade ("CIT") in
Mannesmannrohren-Werke v. United States, Slip Op. 98-118 (CIT, October
29,1999) at 17. See, Notice of Final Results of Antidumping Duty
Administrative Reviews and Revocation in Part: Tapered Roller Bearings and
Parts Thereof, Finished and Unfinished, from Japan, and Tapered Roller
Bearings, Four Inches or Less in Outside Diameter, and Components Thereof,
from Japan, 65 Fed Reg. 11767 (March 6,2000) and accompanying Issues and
Decision Memorandum at Comment 2. 

We disagree with DSM that being required to charge rates that reflect the
real cost of the service without cross subsidization equates to rates
automatically occurring at fair market prices. This simply means that
utilities cannot sell electricity at prices below their cost of
production. In establishing a fair market price, the Department normally
looks to transactions between two unaffiliated parties. See, Notice of
Final Results of Antidumping Duty Administrative Reviews: Antifriction
Bearings (other than tapered roller bearings) and parts thereof from
France, Germany, Italy, Japan, Romania, Singapore, Sweden, and the United
Kingdom, 65 FR 49219 (August 4, 2000), and accompanying Issues and
Decision Memorandum at Comment 61. Consistent with past practice, we
consider the price paid by DSM's affiliated supplier to an unaffiliated
party for purchase of electricity in Israel to be reflective of market
prices. As such, for the final determination we adjusted the price paid to
its affiliated electricity supplier to reflect this market price. 

Lastly, we disagree with DSM that the Department's decision in HRS from
Brazil supports using the affiliated party's transfer price in this case.
In HRS from Brazil the respondent paid the same price for electricity to
both its affiliated and non-affiliated suppliers. We therefore concluded
that the price charged by the respondent's affiliated supplier fairly
represented a market value. In this case, DSM's affiliated supplier
charged DSM less than that which it paid to unaffiliated suppliers.

Comment 8: Calculation of Profit for Constructed Value

The petitioners contend that in the preliminary determination, the
Department improperly based the constructed value profit rate on
information concerning Dead Sea Periclase ("DSP") and, thus, implicitly
rejected the profit rate of DSW suggested by the petitioners in the
petition. The petitioners argue that the statute requires the Department
to select a "reasonable method" for determining the surrogate CV profit
rate, using profit earned on the sale in the home market of merchandise
"in the same general category of products as the subject merchandise." The
petitioners assert that: (1) the vast majority of DSW's sales were in the
home market, in contrast to very few of DSP's sales; (2) the products
produced by DSW are in the same general category of products as of DSM;
and (3) both DSW and DSM use carnallite as an input for production.
Accordingly, for the final determination the Department should rely
exclusively on DSW's profit information. However, the petitioners conclude
that if the Department finds that reliance on DSW's data would not satisfy
the statutory requirements for calculating profit, then the Department
must weight average the profit rates of DSW, DSP, and Dead Sea Bromine
Group ("DSBG") because of the similarity of the their products to DSM's
products.

DSM contends that the Department correctly used DSP's profit rate for its
constructed value calculation because: (1) DSP's production process and
applications are most similar to DSM's; and (2) both DSP and DSM have
customers in the steel industry.

DSM gives several reasons why it would be inappropriate to rely on DSBG's
financial data for calculating CV profit, as the petitioners have argued
for in their earlier submissions. First, DSBG uses a different process to
extract bromine than DSM uses to extract magnesium. DSBG uses brine with a
low bromine content and introduces chlorine to extract the bromine in its
production process. In contrast, DSM uses an electrolysis process to
separate carnallite into its three components. Second, bromine is a heavy
liquid that is used in agricultural applications, such as soil
purification and sterilization. It is also used as a fire retardant for
the high-tech industry, in oil wells to stabilize the walls, and for uses
in the electronics and film industries. In contrast, DSM's magnesium is
used primarily by the steel and aluminum industries. Third, DSBG has a
small plant that requires relatively little capital investment, yet it
produces a large quantity of bromine. DSM's plant required substantial
capital investment and produces only a small quantity of magnesium.
Lastly, the energy requirements for DSBG are modest, used only for
pumping, and are only a minor cost in relation to DSBG's total production
costs. On the other hand, DSM's energy requirements represent a
significant portion of total costs. For all these reasons, according to
DSM, the Department should reject the petitioners' request to use DSBG's
profit for the CV profit calculation.

DSM further contends that the petitioners' reasons for using the profit
rate of DSW are equally unpersuasive. Therefore, DSM contends, the
Department should continue to use DSP's profit rate for the final
determination.

Department's Position:

DSM did not have any above cost comparison market sales (i.e., third
country sales) of foreign like product. Therefore, the Department has not
determined the CV profit under section 773(e)(2)(A) of the Act, which
requires sales by the respondent to be made in the ordinary course of
trade (i.e., above cost). In situations where we cannot calculate CV
profit under section 773(e)(2)(A), section 773(e)(2)(B) of the Act sets
forth three alternatives. The Statement of Administrative Action at 840
(H.R. Doc. 103-316 (1994)) states that "section 773(e)(2)(B) does not
establish a hierarchy or preference among these alternative methods."

Section 773(e)(2)(B)(i) specifies that profit may be calculated based on
"actual amounts incurred by the specific exporter or producer on
merchandise in the same general category" as subject merchandise. DSM also
produces alloy magnesium, which could be considered as the same general
category of merchandise as pure magnesium. However, there is insufficient
information on the record for us to determine the profit rate for DSM's
sales of alloy magnesium because sales of alloy magnesium were not
required to be reported.

Alternative (ii) of this section provides that profit may be calculated
based on "the weighted average of the actual amounts incurred and realized
by {other} exporters or producers that are subject to the investigation."
However, because there are no other respondents in this case, the
Department cannot calculate profit based on alternative (ii) of this
section. 

Thus, we must calculate CV profit for DSM under section 773(e)(2)(B)(iii)
("alternative (iii)"). Pursuant to alternative (iii), the Department has
the option of using any reasonable method, as long as the result is not
greater than the amount realized by exporters or producers "in connection
with the sale, for consumption in the foreign country, of merchandise that
is in the same general category of products as the subject merchandise,"
the so-called "profit cap." The profit cap cannot be calculated in the
instant case because, as we noted above, we do not have information
allowing us to calculate the amount normally realized by exporters or
producers (other than respondent) in connection with the sale, for
consumption in the foreign country, of the merchandise in the same general
category. We disagree with the petitioners that DSW must represent the
profit cap, as we cannot conclude based on the information on our record
that DSW produces merchandise which would be considered within the same
general category of merchandise as the subject merchandise. Neither do DSP
or DSBG. Moreover, even if DSW's profit is considered to be the profit
cap, DSP's profit rate is lower and thus would satisfy the "profit cap"
clause in (iii). Therefore, we are applying option (iii) based on facts
available (i.e., without quantifying a profit cap). 

To determine the most appropriate profit rate under alternative (iii),
the Department has weighed several factors in the instant case. Among them
are: (1) the similarity of the potential surrogate companies' business
operations and products to the respondent's; (2) the extent to which the
financial data of the surrogate company reflects sales in the United
States as well as the home market; and (3) the contemporaneity of the
surrogate data to the POI. The greater the similarity in business
operations and products, the more likely that there is a greater
correlation in the profit experience of the two companies. Concerning the
extent that U.S. sales are reflected in the surrogate's financial
statements, because the Department is typically comparing U.S. sales to a
normal value from the home market or third country, it does not want to
construct a normal value based on financial data that contains exclusively
or predominantly U.S. sales. Further, in accordance with section
773(e)(2)(B) generally, we seek to the extent possible home market profit
experience. Finally, contemporaneity is a concern because markets change
over time and the more current the data the more reflective it would be of
the market in which the respondent is operating. 

In this case, the Department has on the record the financial statements
of three surrogate companies from which to select a reasonable CV profit
rate or to calculate an average profit rate if more than one surrogate's
data is equally reasonable. The companies are DSW, DSBG, and DSP. All
three companies are generally in the business of processing chemicals
derived from Dea Sea brine into medical, agricultural and industrial
compounds. The respondent's main business is the refinement of these
chemicals into base metal magnesium. Of the three companies, we agree with
DSM that DSP appears to have the most similar production process and
product mix. In addition, DSP's customer base appears to be most similar
to DSM's, e.g., the steel and metal industry. A portion of the sales of
each of the three surrogate companies appears to be home market sales. DSP
and DSW have the highest level of home market sales, both at significant
levels. The majority of the sales of all three companies were export
sales. (3) The information on the record shows that the minority, but
still significant percentage of DSW's sales were to the United States,
with the remainder to third countries. The percentage of DSP's and DSBG's
sales to third countries are unclear. Finally, as to contemporaneity,
while the Department has on the record the 1999 fiscal year income
statements of DSW, DSBG and DSP, we have the 2000 fiscal year income
statement for DSP. Thus, the DSP data is more contemporaneous with the POI
than that of DSW or DSBG. 

Based on this analysis, we have applied a CV profit rate which was
calculated based on DSP's fiscal year 2000 income statement for the final
determination. DSP had significant home market sales, the production
process and product mix of DSP is most similar to DSM, and the data is
more contemporaneous than that of DSW or DSBG. Having concluded that DSP
is the appropriate source for profit data, we have not averaged the profit
information of the three possible surrogate companies. 

Comment 9: Reconsideration of Industry Standing

Rossborough Manufacturing Co. LP ("Rossborough"), a U.S. producer of
magnesium-based reagent mixtures and an importer of magnesium products,
argues that the Department should recognize that granular magnesium and
nongranular magnesium are not the same class or kind of merchandise and
constitute two separate domestic like products. Rossborough maintains that
granular magnesium is used principally as a desulfurization agent or in
the production of magnesium reagent mixtures, whereas magnesium ingots
cannot be used for such applications. As such, Rossborough states that
there is no overlap between the domestic producers of magnesium ingot and
the domestic producers of granular magnesium. Citing to past cases such as
Notice of Preliminary Determination of Sales at Less Than Fair Value: Pure
and Alloy Magnesium from Norway, 57 FR 6092 (Feb. 20, 1992) and
Preliminary Determination of Sales at Less Than Fair Value: Pure and Alloy
Magnesium from Canada, 57 FR 6094-5 (Feb. 20, 1992), Rossborough argues
that the Department has excluded granular magnesium from the scope of
previous investigations, having determined that granular and non-granular
magnesium are "two distinct products appealing to completely different
markets" and that these two products are not the same class or kind of
merchandise. Therefore, Rossborough urges the Department to rescind the
initiation of the investigation with respect to granular magnesium. 

Rossborough argues that the petitioners in this case lack standing to
represent the interests of the granular magnesium industry. Rossborough
claims that because one of the petitioners (i.e., MagCorp) has stated
publicly that is does not produce granular magnesium and it does not
intend to do so, it is not a member of the granular magnesium industry and
should not be deemed to represent the interests of that industry in this
investigation.

Rossborough contends that the petitioners do not meet the standing
requirements of the statute. Specifically, Rossborough claims that for
purposes of industry support as stipulated by section 732(c)(4)(A) of the
Act, the petition lacks the support of producers or workers accounting for
at least 25 percent of the total domestic production of granular
magnesium, or at least 50 percent of the total production of the granular
domestic like product produced by that portion of the granular magnesium
industry expressing support for, or opposition to, the petition.

The petitioners argue that as a matter of law, the Department is
prohibited from revisiting the issue of standing. According to the
petitioners, the statute provides that an interested party may challenge
the domestic industry's support for a petition prior to initiation of an
investigation, but may not revisit the issue after initiation. In support
of their argument, the petitioners cite to sections 732(c)(4)(E) and
702(c)(4)(E) of the Act (19 U.S.C. 1673a(c)(4)(E) and 19 U.S.C.
1671a(c)(4)(E)), which state that "after the administering authority
makes a determination with respect to initiating an investigation, the
determination regarding industry support shall not be reconsidered." The
petitioners also cite to the Statement of Administrative Action (SAA)
accompanying the Uruguay Round Agreements Act (4), which states that "the
question of industry support will be resolved conclusively at the outset
of a proceeding, thereby eliminating the burden on petitioners under
current law of potentially rearguing this issue after initiation." The
petitioners note that in prior investigations, the Department has
indicated that this statutory language prohibits reconsideration of the
petitioners' standing, even in cases where parties have argued that
petitioners would lack standing as a result of a redefinition of the scope
of the investigation. To illustrate their point, the petitioners cite to
Final Determination of Sales at Less Than Fair Value: Certain Preserved
Mushrooms from Chile, 63 FR 56613, 56616 (Oct. 22, 1998), Notice of Final
Determination of Sales at Less Than Fair Value: Fresh Atlantic Salmon from
Chile, 63 FR 31411, 31419 (June 9, 1998) (Salmon from Chile), and Notice
of Preliminary Affirmative Countervailing Duty Determination and Alignment
with Final Antidumping Duty Determination: Low Enriched Uranium from
France, 66 FR 24325-6 (May 14, 2001).

The petitioners further assert that the scope of the petition was
intended to cover pure magnesium, regardless of chemistry, form, or size,
and was written to include magnesium in both ingot and granular form. The
petitioners maintain that they have already submitted evidence
demonstrating that pure magnesium in ingot and granular form comprise a
single domestic like product, and that under this definition of scope the
petitioners have industry standing. Moreover, the petitioners point out
that challenges to the petition's definition of scope and to the
petitioners' standing have already been submitted by interested parties
prior to the initiation of this investigation. The petitioners cite to the
November 6, 2000, memorandum from the team to Richard W. Moreland, Deputy
Assistant Secretary, entitled "Like Product and Industry Support
Determinations in the Antidumping Duty Investigations of Pure Magnesium
from Israel, the People's Republic of China, and the Russian Federation
and the Countervailing Duty Investigation of Pure Magnesium from Israel,"
(the Like Product Memo), in which the Department concluded that "pure
magnesium in all forms" constituted a single like product and that the
petition was supported by the requisite share of the domestic industry
according to the Act. The petitioners assert that, since Rossborough
merely references arguments it submitted prior to the Department's
initiation of this investigation, and no new evidence or argument has been
placed on the record to support a re-examination of the Department's
determinations of like product and industry standing, the Department has
no reason to change its determinations.

DSM did not comment on this issue.

Department's Position:

Section 732(c)(4)(E) of the Act provides that, after the administering
authority determines that it is appropriate to initiate an investigation,
the determination regarding industry support shall not be reconsidered.
Therefore, consistent with our decision in Salmon from Chile, we have not
reconsidered our determination regarding industry support in this
investigation. We refer interested parties to our notice of initiation and
companion memorandum, which set forth in detail the methodologies followed
in establishing industry support. See Initiation of Antidumping Duty
Investigations: Pure Magnesium from Israel, the Russian Federation, and
the People's Republic of China, 65 FR 68121 (Nov. 6, 2000), and the Like
Product Memo. 

Regarding Rossborough's argument that pure magnesium in ingot and
granular forms represent two classes or kinds of merchandise and
constitute two separate domestic like products, the Department determined
prior to initiating this investigation that ingot and granular magnesium
are a single like product (see the Like Product Memo). While Rossborough
contends that ingot and granular magnesium constitute separate classes or
kinds of merchandise, it has not addressed the criteria for determining
separate classes or kinds as set forth in 19 CFR 351.225(k) (i.e., the
physical characteristics of the products, the expectations of the ultimate
purchasers, the ultimate use of the product, the channels of trade in
which the product is sold, and the manner in which the product is
advertised or displayed) to support its claim. Accordingly, since no new
information or argument concerning whether ingot and granular magnesium
constitute separate classes or kinds of merchandise or distinct like
products has been placed on the record since the preliminary
determination, we continue to find that ingot and granular magnesium
constitute the same class or kind of merchandise and a single domestic
like product.

Comment 10: Scope


The scope of the investigation currently excludes certain magnesium-based
reagent mixtures. Specifically, the relevant language states the following:

    mixtures containing 90 percent or less pure magnesium, by weight,
    when mixed with lime, calcium metal, calcium silicon, calcium 
    carbide, calcium carbonate, carbon (5) slag coagulants, and/or 
    fluorspar, are excluded.

See the Preliminary Determination, 66 FR at 21325. 


We received comments on the scope definition from Rossborough. According
to Rossborough, the Department has defined the reagent mixtures excluded
from the scope too narrowly. Specifically, Rossborough contends that the
Department failed to exclude mixtures made with any of the following
additional additives: magnesium oxide, periclase, ferroalloys, dolomitic
lime, nepheline syenite, feldspar, aluminum, alumina (Al2O3), calcium
aluminate, soda ash, hydrocarbons, graphite, coke, silicon, rare earth
metals/mischmetal, cryolite, colemanite, and silica/fly ash. 

Alternatively, Rossborough contends that this issue could be resolved by
excluding from the scope any mixtures containing additional additives used
to make magnesium-based reagents. Specifically, Rossborough proposes that
the Department delete the list noted above and substitute the following
language: "except that mixtures containing 90 percent or less pure
magnesium, by weight are excluded." 

In addition, Rossborough requests that the Department should insert an
"actual use" provision into the scope in order to exclude magnesium in
granular form imported for use in producing reagent mixtures. According to
Rossborough, the U.S. granular magnesium industry has been adversely
affected by the provisional measures entered under the antidumping and
countervailing duty laws in response to the current petition. Rossborough
contends that all domestic producers of reagent mixtures depend upon
imports of magnesium (principally granular magnesium) for their grinding
and mixing operations to remain competitive, and that if the antidumping
and countervailing duty orders are put into place, then reagent mixtures
would simply be imported in finished form and the domestic industry
producing those reagent mixtures would be devastated. As a result,
Rossborough argues that the petitioners would, in turn, have no domestic
or export market for future sales of pure magnesium to producers of
mixtures, whether in ingot or granular form.

Rossborough acknowledges that the petitioners have previously opposed an
"actual use" provision in their June 20 letter, but it asserts that the
petitioners' arguments on this matter are without merit, since the
petitioners do not produce granular magnesium and will most likely be
unable to supply the needs of the U.S. granular magnesium industry in the
foreseeable future, regardless of the outcome of the antidumping and
countervailing duty investigations. Rossborough also maintains that while
"actual use" provisions are not common in U.S. tariff law generally, they
are not unprecedented and have been adopted to achieve particular
objectives. Rossborough further argues that U.S. tariff law contains
established procedures for the effectuation of actual use procedures which
would be available for the purpose contemplated here. (6) According to
Rossborough, the burden of proof of the actual use would fall on the
importer, and because the U.S. Customs Service may liquidate entries
adversely to the importer if satisfactory and timely proof of the required
use is not shown, the established actual use procedures contain safeguards
against possible circumvention. Moreover, Rossborough argues that false
certifications of use would subject the importer to substantial penalties
under 19 U.S.C.  1592 and other provisions of the law.


The petitioners assert that they have agreed to a clarification of the
scope that results in the exclusion of all known magnesium-based reagent
mixtures. (7) Furthermore, the petitioners do not object to the inclusion
of additional substances in the comprehensive list of known magnesium-
based reagent mixtures in the proposed scope language. (8) 


While the petitioners agree with the specific reagent exclusions proposed
by Rossborough, they oppose the alternative scope language proposed by
Rossborough which would make the list of additives illustrative rather
than comprehensive. The petitioners oppose Rossborough's proposal that all
granular magnesium, if imported for use in producing reagent mixtures, be
excluded from the scope of the order. The petitioners argue that the very
purpose of the inclusion of granular pure magnesium in the petition
against imports of pure magnesium from the PRC is to obtain relief from
such imports, which have unfairly displaced domestic pure magnesium,
primarily in the production of magnesium-based reagent mixtures for the
desulfurization segment of the market. Moreover, the petitioners note that
granular magnesium has been included in the scope of the petitions against
pure magnesium from the Russian Federation and Israel to prevent
circumvention of the order through the simple mechanical process of
grinding the subject ingot into granular form. (9) The petitioners contend
that any alteration of the scope of the investigation to exclude granular
pure magnesium imported for use in magnesium-based reagent mixtures would
directly contradict the express intent of the petition.

Citing to the decision reached in Mitsubishi Heavy Industries, Ltd. v.
United States, 986 F. Supp 1428, 1432-33 (CIT 1997) (Mitsubishi Electric),
the petitioners assert that, although the Department has the authority to
alter the scope of an investigation, the Court of International Trade has
recognized that any alterations must reflect the intent of the petition.
Based on that finding, the petitioners argue that the Department may not
alter the scope in the manner suggested by Rossborough, because it would
contradict the express intent of the petition.

DSM did not comment on this issue.

Department's Position:

It is well established that the Department has the ultimate authority
under the statute to define the class or kind of merchandise subject to
its proceedings. (10) Thus, the Department has the authority both to limit
and to expand the class or kind alleged in the petition. (11) This
authority notwithstanding, it has generally been the policy of the
Department to accept the class or kind of merchandise alleged in the
petition absent some overarching reason to modify that class or kind. This
policy stems from the fact that the domestic industry is in the best
position to identify the imports that they compete against and believe to
be unfairly traded.

In letters dated January 30, June 20, and August 27, 2001, the
petitioners stated that they had no objection to clarifying the scope to
exclude mixtures made using each of the additives noted by Rossborough,
given that their intent was to exclude all legitimate magnesium-based
reagent mixtures from the scope of the investigation. Therefore, we have
added each of these materials to the list contained in the existing scope.
(12)

Concerning Rossborough's proposal that all granular magnesium, if
imported for use in producing reagent mixtures, be excluded from the scope
of the order, we note that the petitioners revised their position on this
issue in their August 27, 2001, submission. In that submission, the
petitioners state that they do not object, in theory, to the idea that the
list of excluded magnesium-based reagents is "illustrative only" and not
comprehensive, as originally intended. Petitioners agree that legitimate
reagent mixtures should be excluded from the scope of the orders, but are
concerned about possible circumvention through the importation of non-
legitimate reagent mixtures. The petitioners have agreed not to limit the
exclusions to reagent mixtures explicitly identified in the above list
under the condition that the Department revise the scope language to
require that importers seek a scope ruling from the Department regarding
reagent mixtures composed of materials not specifically provided for in
the scope. The petitioners note that this language has three advantages:
1) it will protect against circumvention through the importation of non-
legitimate reagent mixtures; 2) it is enforceable by U.S. Customs; and 3)
it creates a transparent process in which all parties are accorded due
process. In their August 27, 2001, submission, the petitioners proposed
that the Department insert at the end of the list of reagent mixture
substances the following additional scope language: 

     and/or any other non-magnesium granular material(s) to make 
     magnesium-based reagent mixtures, are excluded. If an imported
     mixture contains 90 percent or less pure magnesium, by weight,
     and any other non-magnesium granular materials not identified 
     in the above list, the importer is required to seek a scope 
     clarification from the Department of Commerce before such a 
     mixture will be excluded from the scope of this order.

According to the petitioners, as long as the reagent mixture imported is
a legitimate mixture used in specific applications, it should be
considered a downstream product which should be excluded from the scope of
this investigation.

Because petitioners' position is in accordance with the intent of the
petition (i.e., it provides for the exclusion of magnesium-based
reagents), we are amending the scope to account for this. We note that the
addition of language instructing importers to request scope rulings by the
Department in cases where the mixtures in question contain additives other
than those specifically identified above addresses the petitioners'
concern that the Department might otherwise be improperly delegating to
Customs the authority to determine the scope of the order.


Regarding Rossborough's proposed "actual use" provision, we disagree with
Rossborough's proposal that we exclude granular magnesium imported for use
as an input into the production of magnesium-based reagents. In this case,
we find that such an exclusion is not only contrary to the intent of the
petition, but it is particularly inappropriate because it would allow
companies to circumvent the intent of the dumping order (should one be
issued). Specifically, we find that Rossborough's argument in its simplest
form is that the U.S. reagent industry needs a continuous source of
cheaply-priced (i.e., dumped) magnesium in order to survive. We find that
this argument fails because U.S. antidumping law does not allow the
Department to consider the effect of dumping duties on downstream
industries. Indeed, given its remedial nature, we find that the
Department's active sanctioning of dumping of products intended to be
covered by the scope of a petition would be contrary to both the spirit
and the letter of the law.

The purpose of the antidumping law is to allow domestic industries to
compete for sales at prices that are fair. For this reason, the Department
generally follows the intent of a petition in determining what products
are covered, and this practice has been upheld by the courts. See, e.g.,
Mitsubishi Electric. Because the intent of the petition is clear in this
case, we have continued to include granular magnesium in the scope,
regardless of the use for which it is imported.



RECOMMENDATION

Based on our analysis of the comments received, we recommend adopting all
of the above positions and adjusting all related margin calculations
accordingly. If these recommendations are accepted, we will publish the
final determination in the Federal Register.

AGREE ____ DISAGREE ____



______________________

Faryar Shirzad
Assistant Secretary for
Import Administration

______________________
(Date)


__________________________________________________________________________
footnotes:


1. Notice of Preliminary Determination of Sales at Less Than Fair Value
and Postponement of the Final Determination: Pure Magnesium from Israel,
66 FR 21325 (April 30, 2001) (Preliminary Determination). 

2. 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. 

3. Contrary to the petitioners' claim that the "vast majority" of DSW's
sales were in the home market, the record indicates otherwise (see,
exhibit 17 of DSM's response to section A of the antidumping
questionnaire, which contains DSW's 1998/99 Financial Statements (footnote
22)). 

4. The petitioners refer to the SAA, H.R. Doc No. 103-316, Vol. I, 103d
Cong., 2d Sess. At 861-63 (1994). 

5. Rossborough notes that the comma after "carbon" which was included in
the petitioners' scope language was excluded from the preliminary
determination notice. This error has been corrected. 

6. Rossborough refers to the Additional U.S. Rule of Interpretation
1(b), HTSUS (2001), and 19 CFR 10.131-10.139. 

7. In addition to their case brief, on June 20 and August 27, 2001, the
petitioners filed submissions in this investigation and in the companion
countervailing duty investigation of pure magnesium from Israel and in the
antidumping duty investigations of pure magnesium from the People's
Republic of China (PRC) and the Russian Federation confirming that they
agreed to the exclusion from the scope of the magnesium-based reagents
proposed by Rossborough in its June 21, 2001, case brief. 

8. In the antidumping investigation of pure magnesium from the PRC, ESM
Group requested that melamine and silicone oil be in the list of excluded
magnesium-based reagent mixtures. In their August 27, 2001, submission,
the petitioners object to the inclusion of both melamine and silicone oil
in this list because they may easily be separated from granular pure
magnesium by being "burnt-off" from the granular pure magnesium. According
to the petitioners, once burnt-off, they would leave little residue that
would alter the chemical composition or purity of the pure magnesium. The
petitioners assert that, because this would allow these mixtures to be
used in place of pure magnesium in applications where pure magnesium is
normally used, with little cost consequences, there would be the potential
for easy circumvention of any resulting order through mixing of subject
merchandise with these substances.

9. The petitioners cite to arguments contained in their October 17,
2000 Petition, Vol. I at pages 31, 33 and 78-79, and Exhibit 24. 

10. See Mitsubishi Elec. Corp. v. United States, 898 F.2d 1577, 1582
(Fed. Cir. 1990); and Diversified Products Corp. v. United States, 572
F.Supp. 883, 887 (1983). See also Smith-Corona Group v. United States, 713
F.2d 1568, 1582 (Fed. Cir. 1983), cert. denied, 465 U.S. 1022 (1984). 

11. See Mitsubishi Elec. Corp. v. United States, 700 F.Supp. 538, 555
(1988), aff'd, 898 F.2d 1577 (Fed. Cir. 1990); and Torrington Co. v.
United States, 745 F.Supp. 718, 721 n4 (CIT 1990). 

12. We have not included melamine or silicone oil in this list (as
requested by ESM in the companion antidumping duty investigation from the
PRC), however, because: 1) the petitioners' object to their inclusion; and
2) sufficient information does not exist on the record at this time to
evaluate whether these materials are used to make legitimate magnesium-
based reagents.