Titanium Sponge Section 232 Petition Asks for Negotiated Solution With Japan

The sole U.S. producer of titanium sponge, TIMET, argued to the Commerce Department that two Japanese companies and TIMET should be given a price advantage and that all other countries' producers should be restricted through quotas or tariffs that are not subject to drawback. TIMET, which failed to win an antidumping case because the International Trade Commission said its production was not in direct competition with imports used by other U.S. processors, is asking for a preference pricing scheme, similar to those used in suspension agreements for antidumping cases.

"It’s obviously opportunistic and I think it’s maybe an attempt to take advantage of an administration that sees the rules of trade in a rather flexible manner," said trade attorney John Peterson, a partner at Neville Peterson in New York. "I was just amazed at how bald-faced the thing was."

TIMET first asked for a Section 232 investigation on titanium sponge in September, but recently chose to publicly post its petition. Titanium sponge is used in a variety of defense applications, such as helicopter blades, tank armor and fighter jet engines. "Essentially what they’re asking the government to do is shepherd a price fixing arrangement which would be illegal to do" if TIMET, Toho Titanium Company and Osaka Titanium Company agreed on their own, Peterson said. "That is kind of bizarre."

TIMET and the two Japanese companies could not succeed in that kind of arrangement without government help because they would be undercut by Chinese, Khazak and Russian exporters.

In the petition, TIMET wrote: "The last remaining domestic titanium sponge plant is Titanium Metal Corporation’s (“TIMET”) facility in Henderson, NV. Portions of the Henderson plant are approaching the end of their useful lives. As a result, the plant cannot continue operating without substantial near-term capital investments -- investments that cannot be justified in a market distorted by a flood of low-priced imports." It said its titanium sponge operations were profitable in 2014 and 2015, and suffered losses in 2016 and 2017.

Will the Commerce Department and the president agree with the argument that TIMET would have to cease production if it doesn't get relief from Asian imports, and that the lack of domestic titanium sponge would be hazardous for U.S. military aerospace manufacturing? Tami Overby, a senior director at McLarty Associates, said: "From my perspective we’re seeing [Section] 232 being used in creative new ways. So I've given up predicting what they’re going to try to do."

TIMET used the example of ATI's titanium sponge plant in Rowley, Utah, which opened in 2009 and closed in 2016. The company said that ATI spent nearly $500 million to open the plant but had to shutter it because imports were available -- even after an existing 15 percent duty -- at a price more than 15 percent below ATI's production costs. TIMET said imports of titanium sponge have grown from 20,000 metric tons in 2013 -- at the price level TIMET prefers -- to 23,400 metric tons in 2017.

TIMET wants the government to get Japan to agree to a reference price 30 percent or more above current prices -- that would increase importers' costs by $64 million, it said. Peterson said the idea of getting reference pricing isn't impossible under trade laws, but he also said the petition "was almost saying to government, under the guise of national security, you should create a cartel. I find that very, very strange."

TIMET also argued that disallowing drawback is critical to the fix. "Titanium sponge is currently classified under subheading 8108.20.0010 of the Harmonized Tariff Schedules of the United States (HTSUS). The current duty rate for imported titanium sponge is 15% ad valorem. However, the drawback regulations administered by United States Customs and Border Protection (“CBP”) significantly reduce the actual amount of customs duties paid by importers of titanium sponge because a substantial volume of titanium articles produced in the United States are later exported," the petition says.

Peterson said that although the U.S. is similarly limiting drawback for Section 232 tariffs on steel and aluminum, he doesn't believe that's legal. "Drawback isn’t a question of adjusting imports at all, drawback is getting a rebate based on the exports," he said. He said no challenge has been brought yet because no one has applied for drawback and gotten a rejection they can appeal.

Overby said she believes Japan could be open to the reference pricing idea. "If there is a way to do it that won’t damage them too much, I think they would consider it.... We’re in a brave new world when it comes to these things and the old rules don’t really seem to apply."

The Commerce Department said in a March 4 press release that it would be launching a Section 232 investigation that could result in tariffs, quotas or other import restrictions on titanium sponge.