Anti-dumping and Countervailing Program

Undertaking Renewal - Oil and Gas Well Casing

OTTAWA, November 13, 1998

4258-59
AD/717

STATEMENT OF REASONS

IN THE MATTER concerning a review of undertakings pursuant to the Special Import Measures Act in respect of CERTAIN OIL AND GAS WELL CASING ORIGINATING IN OR EXPORTED FROM JAPAN

DECISION

On this date, the Deputy Minister of National Revenue, having reviewed the undertakings accepted from Japanese exporters on November 18, 1986 and renewed on November 17, 1989, November 16, 1992 and November 15, 1995 for three-year periods, determined that the undertakings with respect to the above-mentioned goods continue to serve the purpose for which they were intended and that they do not require termination under section 52 of the Special Import Measures Act. Therefore, the Deputy Minister, on this date, has renewed the undertakings for a further period of three years pursuant to subsection 53(1) of the Act.

This document is also available in French.
Cet énoncé des motifs est également disponible en français.

STATEMENT OF REASONS

SUMMARY

On July 7, 1998, the Department of National Revenue initiated a review of the undertakings originally accepted from Japanese exporters on November18, 1986, with respect to oil and gas well casing. These undertakings have been subsequently renewed on three previous occasions. The purpose of the review was to determine whether the undertakings should be renewed or allowed to expire.

The results of the review indicated that the Japanese exporters have a propensity to dump and would likely dump the subject goods into the Canadian market if the undertakings are allowed to expire. In addition, any renewed dumping would likely result in material injury to the Canadian industry.

On the basis of the information available, the Deputy Minister of National Revenue has, therefore, concluded that the undertakings continue to serve the purpose for which they were intended and has renewed the undertakings for a further period of three years, that is, until November 13, 2001.

INTERESTED PARTIES

Complainant:

Algoma Steel Inc.
Sault Ste. Marie, Ontario
P6A 5P2

Exporters/Producers:

See Appendix 1.

Importers:

See Appendix 2.

BACKGROUND

On August 20, 1986, as a result of a complaint filed by Algoma Steel Inc. (Algoma), the Department initiated a dumping investigation of certain oil and gas well casing from Japan and the Federal Republic of Germany.

Early in the investigation, the Japanese exporters indicated an interest in price undertakings that would eliminate the material injury to Algoma. Following extensive deliberations between the Department and the representatives for Algoma and the Japanese exporters, price undertakings by the Japanese exporters were accepted by the Deputy Minister on November 18, 1986. These undertakings accounted for all or substantially all imports of the subject goods and eliminated the material injury to the complainant. Accordingly, the investigation involving the Federal Republic of Germany and Japan was suspended on that date.

Since then, the undertakings have been renewed on November 17, 1989, November 16, 1992 and November 15, 1995 for three-year periods. The undertakings would have expired on November 14, 1998, unless they were renewed.

All references to sections of the Special Import Measures Act (SIMA) refer to the Act which was in place prior to the amendments introduced on January 1, 1995. The original investigation and undertakings were entered into prior to that date, and consequently, the Department is required to follow the former undertaking provisions of the law.

PRODUCT DEFINITION

The subject goods are defined as oil and gas well casing, made of carbon or alloy steel, having an outside diameter in the size range 114.3 mm to 298.5 mm (4.5" to 11.75") inclusive, seamless or welded, plain end, threaded or threaded and coupled, supplied to meet American Petroleum Institute (API) specification 5A in grades K55 and N80, API specification 5AC in grades C75, L80, C90 and C95, API specification 5AX in grade P110 and API specification 5AQ in grade Q125, or proprietary grades manufactured as substitutes for these specifications, originating in or exported from Japan and the Federal Republic of Germany, excluding the subject casing supplied to meet API specification 5A in grade K55, or a proprietary grade manufactured as substitute for this specification in the size range 114.3 mm to 273.0 mm (4.5" to 10.75") inclusive, originating in or exported from the Federal Republic of Germany. It should be noted that API specifications 5A, 5AC, 5AX and 5AQ are currently combined and known as API specification 5CT.

CLASSIFICATION OF IMPORTS

The subject goods are classified under the following Harmonized System classification numbers:

7304.29.00.11 7306.20.90.11
7304.29.00.19 7306.20.90.19
7304.29.00.21 7306.20.90.21
7304.29.00.29 7306.20.90.29

CANADIAN INDUSTRY

There are two producers of the subject goods, Algoma of Sault Ste. Marie, Ontario, and Ipsco Incorporated (Ipsco) of Regina, Saskatchewan. Algoma accounts for the bulk of domestic production of the subject casing. It produces the full range of grades and sizes covered by the product definition and is also the sole producer of seamless casing. Ipsco's production of casing in K55 and L80 grades using the electric resistance welding (ERW) method accounts for the remaining domestic production of the subject goods.

Algoma, the complainant, accounts for the bulk of domestic production of the specific grades of casing included in the product definition and represents the domestic production of the subject goods for the purposes of this review.

LEGISLATIVE REQUIREMENTS FOR REVIEW OF UNDERTAKINGS

The Deputy Minister is required, pursuant to subsection 53(1) of SIMA, to review an undertaking before the expiration of three years from the date on which it was accepted and before the expiration of each subsequent period for which the undertaking is renewed. An undertaking may be renewed for a further period of not more than three years where the Deputy Minister is satisfied that the undertaking continues to serve the purpose for which it was intended and where he is not required to terminate it in accordance with the provisions of section 52 of SIMA.

Section 52 of SIMA provides that the Deputy Minister shall terminate an undertaking and make a preliminary determination of dumping, if any of the following three conditions exists:

the undertakings are violated;

new information is made available which, if such information had been available to the Deputy Minister at the time of acceptance of the undertakings, would have lead the Deputy Minister not to accept the undertakings;

circumstances change to the point where the undertakings would not have been accepted if the changed circumstances had prevailed at the time of acceptance.

Violation of the undertaking:

Since the last undertaking renewal, the Department has reviewed all importations of Japanese subject goods and determined that the Japanese exporters have not violated or circumvented the terms and conditions of the undertakings.

However, there was a violation in January 1996 by a United States exporter of subject goods, who was not a party to the undertaking. A review of the total quantity of imported subject goods, since 1996, indicates the goods which violated the undertaking accounted for a very small percentage of the subject goods.

Pursuant to subsection 52(2) of SIMA, the Deputy Minister shall not, unless he sees good reason to the contrary, take any action under subsection (1) if the undertakings that have not been violated and are not being violated account for substantially all the imports into Canada of the goods. Clearly in this case, substantially all the subject goods imported have been sold at prices which were above the undertaking prices and did not violate the undertaking. Accordingly, there is no good reason to terminate the undertakings because of the violation.

Change in circumstances:

In January 1996, Algoma mothballed its No. 1 seamless mill, which produced seamless casing ranging in diameter from 114.3 mm to 323.85 mm (4.5 " to 12 3/4"). The remaining tube mill, the No. 2 seamless mill, produces goods from 60.3 mm to 177.8 mm (23/8" to 7.0"). However, Algoma has stated that it has continued to manufacture seamless casing in diameters greater than 7" by importing the "green tubes" and finishing them in its No. 2 mill. The only product which it purchases finished is grade K-55, in diameters greater than 7 inches. Ipsco, however, continues to manufacture grade K-55 in diameters greater than 7 inches, in Canada.

As there has been a change in the manufacturing process for subject goods, in diameters greater than 7", an analysis was conducted to determine if the casing manufactured from "green tubes" would be considered to be Canadian production for purposes of this undertaking. In support of its position, Algoma noted that in order to process the "green tubes" they require facilities for heat treating the lengths of pipe and facilities for testing it. In addition, once the testing is completed it is Algoma that certifies that the casing complies with API specifications. It was noted that it is the heat treating process that alters the "green tubes" mechanical properties and determines the final specification of the pipe.

Based on this, it is the opinion of the Department that "green tube" which is imported into Canada and then heat treated, tested and certified would qualify as Canadian manufactured goods for purposes of this undertaking. Therefore, Algoma still produces a full range of subject goods and there is no reason to terminate the undertakings due to a change in circumstances.

CONSIDERATION AND ANALYSIS

Therefore, having determined that the undertakings need not be terminated under section 52 of the Act, the Department had to assess whether the undertakings continued to serve the purpose for which they were intended and whether they should be renewed for a further period of not more than three years. In doing so, the Department had to address two questions. First, if the undertakings were allowed to expire, what would be the likelihood of the resumption of dumping by the Japanese exporters? Second, if there is a resurgence of dumping, would it likely cause material injury to the production in Canada of like goods?

Position of the parties:

In order to resolve these two questions, the complainant, 16 exporters and 17 importers of the subject goods were requested to provide relevant information and were given an opportunity to make representations.

Responses to the Department's Request for Information were received from the complainant, 9 exporters and 8 importers. A summary of the representations made to the Department by the above-mentioned parties is outlined below.

Complainant: Algoma

Algoma would like to see the undertakings renewed for an additional three-year period as it believes that the Japanese exporters would dump the subject goods by significant margins in the absence of the undertakings. Algoma also believes that its tubular business unit that produces the oil and gas well casing is still vulnerable to dumping.

The complainant presented various arguments to support its contention that the Japanese exporters have a propensity to dump. Algoma pointed to the investigation in the United States respecting oil country tubular goods which resulted in an injury finding with respect to Japanese exporters. The complainant also stated that the Japanese exporters have sold similar but non-subject goods in the Canadian market at low prices. It also believes that the Japanese exporters have a substantial unused production capacity that would lead to a resurgence of dumped goods should the undertakings be allowed to expire.

With respect to vulnerability, Algoma indicated that sustained profitability at current operational levels is within reach. However, the continuing slowdown in drilling activity, which started in 1998, will have a negative impact on production. The decrease in demand for subject goods makes renewal of the undertakings imperative as a shrinking market will put upward pressure on per-unit costs and downward pressure on prices. Algoma added that it anticipates prices and market shares would remain relatively stable if the undertakings are renewed. Otherwise, Algoma expects that any unrestrained market penetration by the Japanese exporters could be very disruptive to the market as they would be forced to compete in a shrinking Canadian market.

Exporters

The Japanese exporters, in general, have indicated that the undertakings should be continued in the short term. They indicated that the global market for OCTG (oil country tubular goods) products has been decreasing since 1997, due to low oil prices, which has lead to a softening of prices. In addition, as world-wide demand decreases, exporters look for new markets to sell their products. This increase in supply, coupled with the decreased demand inevitably leads to additional downward pressure on prices.

Importers

In general, the importers noted that the demand for OCTG products is declining as drilling activity slows due to low oil prices. Several importers who responded, had no comment on whether the undertaking should be renewed. However, several did comment, that the undertakings were working well and should be extended.

FACTORS

Propensity to Dump:

The Department determined that the Japanese exporters have a propensity to dump the subject goods. In reaching this conclusion, the Department considered the following issues.

Japanese activity in the United States market

Japanese activity in the United States market supports Algoma's contention that Japanese exporters have a propensity to dump in the Canadian market.

First, confirmation on July 24, 1995, of dumping in the United States anti-dumping case, in itself, indicates that the Japanese exporters have a propensity to dump the subject goods in the absence of undertakings or anti-dumping duties. Between 1992 and 1994, Japanese exporters increased their United States market share while their average selling price fell. The United States anti-dumping finding indicated that Japanese exporters were dumping the subject goods by a margin of 44 per cent.

Second, Japan, the largest exporting country of oil and gas well casing by quantity into the United States in 1994, is effectively shut out of the largest oil and gas well casing market due to the United States anti-dumping finding. As a result, Japanese exporters will be forced to look to other markets to offset their lost opportunities in the United States marketplace. The expiry of the Canadian undertakings would likely expose Canada to a resurgence of dumped goods by Japanese exporters as they try to offset some of their lost United States sales volume.

Japanese production capacity

The Department considered the Japanese exporters' production capacity in assessing whether they have a propensity to dump. Algoma noted that the Japanese producers have a production capacity which allows them to produce and export large quantities of subject goods. Given the current state of the OCTG market, the Japanese producers have a significant under-utilized production capacity which would easily supply the entire Canadian market.

Figures from the 1995 United States, anti-dumping investigation indicate that Japan was the largest exporting country to the United States, by volume, in 1994. At the time of the last undertaking review one of the concerns expressed by Algoma was that Japan's annual exports to non-United States markets like Canada would likely increase substantially as the Japanese exporters' market share in the American market declined following the United States anti-dumping investigation. A review of the import statistics from 1995 to present clearly shows that Japanese exports to Canada have increased significantly since 1995.

• Effect of the Asian Crisis:

The Asian crisis has had a significant negative impact on the global economy. In addition, it appears that the Japanese steel industry, is also being severely impacted by this crisis. Japan's big six steel producers have recently announced that profits will be below forecasts and if the slump in demand for steel continues they will be forced to consider drastic measures. In fact, NKK Corporation announced on September 3, 1998, that it would liquidate its mini-mill subsidiary, Toa Steel, due to slumping domestic demand in the housing market. As the Asian economies continue to slow down, the likelihood that they will increase their exports to fill the void created by the decreased domestic demand, rises.

• Declining demand for OCTG products in Canada

Recent industry statistics indicate that oil and gas well drilling in Western Canada is in a downturn. The capacity utilization rate, for drilling rigs, has dropped from 41 per cent in August 1998 to 36 per cent in September 1998, with a corresponding drop in demand for OCTG products. Industry predictions are that the utilization rate will likely continue to decrease.

• Conclusion

On the basis of the Japanese exporters' activity in the United States market, their production capacity, the effect of the Asian crisis and the declining demand for OCTG products, the Department has concluded that the Japanese exporters have a propensity to dump the subject goods.

Industry Vulnerability:

At present, Canadian domestic industry is vulnerable and its financial position would worsen with a resurgence of dumped imports if the undertakings were allowed to expire. The Department considered the following factors.

Algoma's tubular business unit

The tubular business unit's financial position, though improved since the last undertaking review, remains weak. Given the drop in demand for oil and gas well casing, it appears that no major improvements in the tubular business unit's financial position will occur in 1998 and 1999. In addition, the expiry of the undertakings would impede Algoma's efforts to improve the tubular business unit's financial position.

Effect of shrinking market on price suppression and increased costs

Based on oil and gas price projections, 1998 drilling activity and demand for oil and gas well casing will continue to decline and 1999 drilling activity is forecast to be close to the 1998 level. This shrinking market will further amplify Algoma's price-cost squeeze as it will increase per-unit costs and suppress prices. As the steel industry is capitalintensive, it is especially dependent on high volumes to reduce per-unit costs.

This shrinking market will make Algoma vulnerable to price suppression as it may be unable to increase its selling prices to cover increases in unit costs. The complainant believes that the downward pressure on prices caused by existing suppliers competing for market share would be sustainable only if the undertakings are renewed.

As the Japanese exporters have a propensity to dump, their entrance into a shrinking Canadian market following the expiry of the undertakings would increase the number of participants competing for market share and this would likely magnify Algoma's problems of price suppression and per-unit cost increases. The Department concluded that the negative effects of a shrinking market on both costs and prices continue to make Algoma vulnerable to a resurgence of dumped imports from Japan should the undertakings be allowed to expire.

Investment plans

Recently, Algoma made capital investments in order to reduce its cost of production of steel. In addition, there are long-term plans to invest in a round caster to reduce finished tubular costs. However, the complainant indicated that these investment plans are dependent on the prospects for achieving acceptable returns from the subject goods. The Department concluded that, in a shrinking market, Algoma's investment plans may be canceled as its share of the market required to implement these plans is vulnerable.

• Conclusion

The Department concluded that Canadian industry continues to be vulnerable based on the tubular business unit's weak financial position, price suppression, increased costs caused by a shrinking market and possible cancellation of investment plans.

CONCLUSION

The Department has concluded that there is a strong likelihood of the resumption of dumping by the Japanese exporters should the undertakings be allowed to expire and that such a resurgence of dumping would likely cause material injury to Canadian production of like goods.

In view of the above, the Department is satisfied that the undertakings accepted on November 18, 1986, with respect to certain oil and gas well casing originating in or exported from Japan continue to serve the purpose for which they were intended and do not require termination under section 52 of the Act. As a result, the Deputy Minister, today, renewed the undertakings for a further three-year period, that is, until November 13, 2001.

FURTHER ACTION

The Department will continue to monitor imports of the subject goods into Canada to verify compliance with the terms and conditions of the undertakings. Unless the undertakings are terminated pursuant to subsection 52(1) of SIMA, the Deputy Minister will be required to review them again on or before November 13, 2001.

The Department will contact Algoma and the Japanese exporters in order to update the undertaking price grid to reflect market or price changes since the last undertaking price grid was established. In the meantime, the undertaking prices in effect prior to this renewal will remain in effect.

INFORMATION

For additional information, please contact Richard Pragnell, Senior

Program Officer, Anti-dumping and Countervailing Directorate, 16th floor, Sir Richard Scott Building, 191 Laurier Avenue West, Ottawa, Ontario, K1A 0L5 or by telephone at (613) 9540032 or by telefax at (613) 9412612.

R. Tait
Director General
Anti-dumping and Countervailing Directorate

Ottawa, November 13, 1998

File No. 4258-59
AD/717

APPENDIX 1

EXPORTER LIST

Mr. Kenji Muro
General Manager
Kawasaki Steel Corporation
Hibiya Kokusai Bldg.
2-3, Uchisaiwaicho 2-Chome
Chiyoda-Ku
Tokyo 100, Japan

Mr. T. Konishi
General Manager
Overseas Steel Tubular Products Department
Marubeni Corporation
C.P.O. Box 595
Tokyo 100-91, Japan

Mr. H. Oka
General Manager
Tubular Product International Trade Dept.
Mitsubishi Corporation
6-3, Marunouchi 2-Chome
Chiyoda-Ku
Tokyo 100-86, Japan

Mr. K. Yoshizawa
General Manager
Oil Country Tubular Goods Sect. 1
Nisho Iwai Corporation
4-5, Akasaka 2-Chome
Minato-Ku
Tokyo 107, Japan

Mr. Y. Ando
General Manager
Tubular Products Import and
Export Dept. No. 1
Sumitomo Corporation
C.P.O. Box 1524
Tokyo 100-91, Japan

Mr. M. Tanaka
General Manager
1st Iron and Steel Department
Tokyo Boeki Ltd.
13-8, 2-Chome
Hatchobori
Chuo-Ku
Tokyo, Japan

Mr. K. Omori
General Manager
Steel Export Department 2
Tomen Corporation
C.P.O. Box 183
Tokyo 100-91, Japan

Mr. Michio Mizukoshi
General Manager
Tubular Product Export Department
Sumitomo Metal Industries Ltd.
Ote Center Bldg.
Chiyoda-Ku
Tokyo 100, Japan

Mr. Akira Ide
General Manager
Steel International Trade Department
Okura and Co., Ltd.
3-6 Ginza Nichome
Chuo-Ku
Tokyo 104, Japan

Mr. Takeo Aoyama
Manager
Export and Overseas Project Division
Nippon Steel Corporation
6-3, Otemachi 2-Chome
Chiyoda-Ku
Tokyo 100, Japan

Mr. S. Miura
Assistant General Manager
Steel Pipe Overseas Division
Mitsui and Co. Ltd.
C.P.O. Box 822
Tokyo 100-91, Japan

Mr. S. Tsujil
General Manager
Iron and Steel Overseas Dept. No. 1
Kawasho Corporation
World Trade Centre Building
4-1 Hamamatsu-Cho 2-Chome
Minato-Ku
Tokyo 105, Japan

Mr. N. Takai
Senior Manager
Seamless Pipe & Tube Export Department
Steel Division
NKK Corporation
1-1-2, Marunouchi
Chiyoda-Ku
Tokyo 100, Japan

Mr. Tohji Hirano
Manager, Sect. No. 1
Steel Tubular Products
International Trade Department
Itochu Corporation
5-1, Kita-Aoyama 2-Chome
Minato-Ku
Tokyo, Japan

Export Manager
Cinco Pipe & Supply
1601 Welch Street
Houston, Texas
United StatesA., 77006

Export Manager
Grant Prideco
5301 Polk Street
Houston, Texas
77049, United StatesA.

APPENDIX 2

IMPORTER LIST

Argo Sales Ltd.
Suite 580
727 7th Avenue S.W.
Calgary, Alberta
T2P 0Z5

Canadian Hunter Explorations Ltd.
700, 435-4 Ave. S.W.
Calgary, Alberta
T2P 3A8

Canadian Oilfield Supply Canada
#250, 3700-78th Avenue SE
Calgary, Alberta
T2C 2L8

C.Itoh and Company (Canada) Ltd.
World Trade Centre
#770-999 Canada Place
Vancouver, B.C.
V6C 3E1

Itochu Project Management Corp.
#720, 255-5th Avenue, S.W.
Calgary, Alberta
T2P 3G6

Marubeni Canada Limited
Suite 2880, Bow Valley Square
205-5th Avenue S.W.
Calgary, Alberta
T2P 2V9

Mitsubishi Canada Ltd.
Suite 2181
Commerce Court West
Toronto, Ontario
M5L 1A5

Mitsubishi Corporation of Canada Ltd.
Steel Department
2800-200 Granville Street
Vancouver, B.C.

Mitsui and Company (Canada) Ltd.
2903, 3 Bentall Centre
P.O. Box 49046
595 Burrard Street
Vancouver, B.C.
V7X 1E6

Mobil Oil Canada Limited
P.O. Box 800
Calgary, Alberta
T2P 2J7

Nissho-Iwai Canada Ltd.
Sun Life Plaza
Suite 1700
Calgary, Alberta
T2P 3N4

Okura and Company, Canada,Ltd.
1618-1055 West Georgia Street
P.O. 11181, Royal Centre
Vancouver, B.C.
V6E 3R5

Summit Tubular Corporation
3310 First Canadian Centre
350 7th Avenue S.W.
Calgary, Alberta
T2P 3N9

Vinson Supply Company
Suite 1600
444 - 5th Avenue S.W.
Calgary, Alberta
T2P 2T8

Wilson Oilfield Supply Ltd.
5240-1A Street S.E.
Calgary, Alberta
T2H 1J1

R & R Trading Company
4860 Larkspur Avenue
Richmond, B.C.
V7C 2J5

Sumitomo Canada Limited
#1690, 701 West Georgia Street
Box 10141, Pacific Centre
Vancouver, B.C.
V7Y 1E9