Trade Court Upholds Parts, Sends Back Bits of CVD Investigation on Russian Phosphate Fertilizers

The Court of International Trade in a Sept. 2 opinion upheld parts and sent back parts of the Commerce Department's final determination in the countervailing duty investigation on phosphate fertilizers from Russia. In a case contested by respondents PhosAgro Cherepovets and EuroChem and petitioners LLC Industrial Group Phosphorite and The Mosaic Co., Judge Jane Restani found that Commerce erred in adjusting the natural gas benchmark price by adding the relevant 20% VAT and 5% import duty and misapplying its methodology in calculating EuroChem's total sales by relying on a number given by EuroChem that included sales from eight producers and input suppliers to export trading company EuroChem Trading Rus. The judge also sent back Commerce's cut-off date for measuring subsidies in the Russian economy.

Restani first addressed the petitioners' challenge to Commerce's use of adverse facts available over whether Rosneft is a government authority so that its provision of natural gas to a cross-owned affiliate of EuroChem's was a countervailable benefit. Commerce requested a information from the Russian government to figure out whether Rosneft is a government authority, including an explanation of the history of government ownership in the company and an explanation of the corporate governance structure of each of each entity in its chain of ownership.

Most important, though, was that the Russian government did not give information on the Index Producer Appendix information for Rosneftegaz, the agency said. The judge found that since the Russian government failed to cooperate with Commerce's requests to the best of its ability for important information, the use of AFA was justified.

EuroChem also challenged Commerce's de facto specificity finding over the provision of natural gas, challenging the agency's position of whether the fertilizer industry was the predominant user of natural gas. Commerce used Gazprom's 2019 annual report to find that the agrochem industry was the predominant user since its sector was the single largest industrial consumer of natural gas sold by Gazprom. Restani upheld this position.

"When comparing only industrial users’ purchases, the record reflects that the agrochemical industry purchased a far greater amount than any other industrial user, perhaps because of the specific uses here of natural gas, not just for power, but in the production of ammonia (a component in the production of phosphate fertilizer) and fertilizer," the brief said. "Thus, the agrochemical industry was 'a predominant user of the subsidy.'"

The respondents then challenged Commerce's use of a tier-three benchmark, sourced from the European Organisation for Economic Co-operation and Development natural gas export prices, to assess the unsubsidized value of natural gas used by EuroChem and PhosAgro. The parties argued that Commerce should have used actual transaction prices in Russia as a tier-one benchmark. The agency countered that it could not use a tier-one or tier-two benchmark since the market was distorted, seeing as the majority of gas production was attributable to companies the Russian government directly managed. The judge found this position to be backed by substantial evidence.

Where the agency erred, though, was in adjusting the benchmark price by adding the European 20% VAT and Russian 5% import duty to supposedly "reflect the price that a firm actually paid or would pay if it imported the product." Restani responded that "There appears to be no reason to treat the hypothetical market price here as an import price. Although the regulations give Commerce little guidance on how to conduct a tier-three analysis, it is important that Commerce’s choices do not result in an unreasonable comparison between the benchmark price and the government price. It is unreasonable to rely only on a regulation pertaining to tier-one and tier-two benchmarks to adjust a tier-three benchmark price without some compelling reason." The matter was sent back to Commerce to either drop the added VAT and import duties or to explain why they should be added.

EuroChem further contested whether Commerce improperly inflated the subsidy rate by adding VAT to the benchmark for the benefit by excluding VAT from the calculation of total sales. The respondent relied on Mannesmann-Sumerbank v. U.S., which required Commerce to ensure both the benefit and total sales take into account factors affecting the value such as inflation and foreign exchange rates. "EuroChem misunderstands the law," Restani replied. "Mannesmann-Sumerbank applies to profits and losses that occurred as a result of changes in the foreign exchange rate during the POI ... VAT does not fall into this category as it is a cost incurred rather than a factor affecting the exchange rate calculation. … Commerce did not err in this regard."

EuroChem also presented three challenges to Commerce's calculation of total sales: Commerce should have collapsed the sales from all companies owned by the respondent's Swiss parent as a single entity, it should have included external sales from two subsidiaries Commerce excluded from the calculation, and it erred mathematically in applying its methodology. Restani disagreed with the first two challenges but found merit in the third. The judge ruled that collapsing the entirety of Swiss EuroChem Group would missaply Commerce's regulations, which only call for the collapse of cross-owned affiliates related to the production of the subject merchandise and that the agency clearly explained why sales to countries like Lithuania and Kazakhstan are not relevant to calculations.

"The court takes no issue with Commerce’s asserted methodology," Restani said. "Nevertheless, Commerce’s calculations do not reflect this methodology. In the calculation of intercompany sales, Commerce wrongly relied on a number provided by EuroChem that included sales from the eight subject matter producers and input suppliers to Trading Rus. … This inclusion failed to follow Commerce’s stated methodology and artificially increased the ad valorem rate by subtracting the sales to Trading Rus from the total rather than adding them as external sales. In a letter to the court, Commerce confirmed this error." The issue was remanded.

Restani then remanded Commerce's cut-off date for measuring subsidies in the Russian economy, since the agency said it could only find subsidies via phosphate mining rights licenses granted before the date it was designated as a market economy country. "This is plainly incorrect," the judge said. "There is no legal impediment to calculating subsidies for previously designated [non-market economy] countries." The judge wrapped up the decision by sustaining Commerce's use of a tier-three benchmark for phosphate rock and its exclusion of freight, VAT and import duties from the benchmark.

(The Mosaic Company v. United States, Slip Op. 22-103, CIT Consol. #21-00117, dated 09/02/22, Judge Jane Restani. Attorneys: Patrick McLain of Wilmer Cutler for plaintiff Mosaic; Meen Geu Oh for defendant U.S. government; Jonathan Stoel of Hogan Lovells for defendant-intervenors PhosAgro and JSC Apatit; Peter Koenig of Squire Patton for defendant-intervenor Industrial Group Phosphorite)