Trade Court Sends Back Classification of Suspended Production Line Costs in AD Review

The case concerns the 2017-2018 administrative review on welded line pipe, one of a line of cases wherein Commerce said a PMS existed in the market for South Korean hot-rolled coil steel. The agency based the PMS finding on the confluence of subsidies from the South Korean government, low-priced imports from China, strategic alliances between HRC suppliers and welded line pipe producers, and the South Korean government's intervention in the electricity market. Commerce then applied this finding to adjust mandatory respondents SeAH's and Nexteel's cost of production for the sales-below-cost test.

Judge Claire Kelly in 2021 remanded every element of the PMS issue. The judge cited the recent U.S. Court of Appeals for the Federal Circuit opinion in Hyundai Steel v. U.S., which struck down Commerce's PMS adjustment in the sales-below-cost test (see 2112100039). Kelly also went through each of Commerce's reasons for establishing the PMS, remanding them for further consideration. For many, the judge ruled the agency failed to show how they combined with the other factors to establish the PMS. For instance, under the strategic alliances criteria, the judge said this conclusion amounted to speculation and was unsupported. On remand, Commerce dropped the issue (see 2207180061). Kelly upheld this position in the Dec. 6 opinion.

Elsewhere in the case, Nexteel argued Commerce erred in calculating the cost of the company's non-prime welded line pipe by valuing it at its sales price rather than the reported cost of production. Citing a key 2020 Federal Circuit opinion on this matter, Kelly originally ruled that Commerce must use the respondent's actual costs when calculating constructed value. On remand, the agency did just that, finding that Nexteel's reported costs reflect the full actual costs of making its prime and non-prime goods. "No party objects to Commerce’s decision to reverse the adjustment," the judge said. "Therefore, Commerce’s determination on this issue is sustained."

Nexteel also claimed Commerce's decision to reallocate the costs relating to its suspension of the production lines of certain non-subject goods and one forming line of subject goods from the cost of goods sold to general and administrative expenses is illegal. Kelly said Commerce failed to clarify whether any of the merchandise was produced on the suspended production lines during the review period and the extent to which losses over the non-subject merchandise production lines relate to Nexteel's general and administrative expenses incurred on the products. In her 2021 decision, the judge instructed Commerce to clarify both points on remand.

Commerce clarified it distinguishes between short- and long-term shutdown costs, explaining that it includes routine short-term shutdown expenses in the reported costs of goods and long-term shutdown costs to G&A expenses because a production line is akin to a depreciating asset. Kelly pointed out, however, that the agency did not explain whether any goods were made during the review period on suspended lines, meaning the agency "fails to support its assumption that NEXTEEL's allocation is not reasonably reflective of actual costs." While the "long-term/short-term construct may be a useful tool" when Commerce finds that a company's cost allocation is unreasonable, "here it does not establish that allocating suspension losses to cost of goods is unreasonable when NEXTEEL produced goods during the POR," Kelly said.

In particular, Commerce said that while goods may have been made during the review period on the shuttered lines, this production happened before the shutdown and revenues from products made before the shutdown should not be associated with the suspended losses incurred before the shutdown periods. "Commerce seems to conclude the court’s inquiry is irrelevant, because post-suspension costs cannot be attributed to the cost of goods sold for products produced during the POR," the judge said. "Commerce’s own statements about its practice undermine its view that NEXTEEL’s allocation is not reasonably reflective of actual costs. ... Commerce’s explanation is therefore not reasonable and conflicts with its stated practice."

Kelly did say, though, that Commerce addressed her second question over why it would be reasonable to allocate costs from suspended lines to G&A expenses. "Commerce’s explanation of how long-term suspension of product lines are considered akin to depreciating assets is helpful," the judge ruled. "But Commerce’s practice regarding the treatment of costs for long-term shutdowns does not lead to the conclusion that allocating expenses to the cost of goods sold, in cases where goods were produced during the POR on suspended lines, would not be reflective of the actual cost of the goods." As such, Kelly remanded the issue to Commerce.

(Nexteel v. U.S., Slip Op. 22-135, CIT Consol. #20-03898, dated 12/6/22, Judge Claire Kelly. Attorneys: David Park for plaintiff Nexteel; Jeffrey Winton of Winton & Chapman for plaintiff SeAH; Jarrod Goldfeder of Trade Pacific for plaintiff Hyundai Steel; Brady Mills of Morris Manning for plaintiff-intervenor Husteel; Robert Kiepura for defendant U.S. government; Timothy Brightbill of Wiley for defendant-intervenors American Cast Iron Pipe and Stupp Corporation)