Affirmative Statement of Michael Arena International Trade Commission Hearing
February 27, 2018 Tin Mill Steel Products from Japan (Sunset Review)
Commissioners, Good Afternoon. My name is Michael Arena and I am the
Vice President for Logistics and Operations Support for Silgan Containers. One of
my major responsibilities is supervising Silgan's purchases of tin mill steel, and
other manufacturing inputs such as aluminum. I have been responsible for tin mill
steel purchases for 12 years.
Silgan is the largest provider of metal food packaging in the United States.
Silgan and its sister companies have 55 manufacturing plants located throughout
the United States. Silgan and its sister companies employ more than 6,500
American workers in high paying manufacturing jobs throughout the United States,
including multiple facilities located in the so-called rust belt.
Although Silgan officially became a company in 1987, Silgan traces its
history back to 1899 when the Carnation Company began making its evaporated
milk cans. Today, Silgan is -- by far -- the largest manufacturer of tin cans in the
United States.
As the largest US manufacturer of tin cans in the United States, Silgan is the
largest U.S. purchaser of tin mill steel. Every year Silgan purchases around
850,000 - 900,000 tons of tin mill steel, which is probably about half of all steel
consumed in the United States for food cans.
My office is in Woodland Hills California, just outside Los Angeles. I have
come to Washington because you will make a decision that will affect my
company's business and therefore my company believes very strongly that you
should have correct information and correct facts when you make your decision.
Quite honestly, what the US mills have told you about the US market, what they
have stated in their legal briefs and what they have told you here today conveys an
impression that is simply not true from Silgan's standpoint. What follows will be
what Silgan believes to be an accurate depiction of the US tin mill steel market
today. It's a subject I am passionate about as are others in our industry. We are
bearing witness today in front of our key strategic suppliers because it is the right
thing to do for our industry in this very unique situation.
I note that, unlike before, I am the only purchaser to have come to
Washington. My understanding is that this reflects more about complicated
schedules than any disagreement with what I will have to say. Indeed, based on
my long knowledge of the market, I am quite confident that my description today
of the competitive dynamics are shared by the other US can companies.
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In a few minutes I will address what specifically the US mills have said that
Silgan believes not to be true. But right now I want make a few, very important
overarching points.
Silgan is 100% supportive of free and fair trade. We believe our current tin
mill suppliers reflect that philosophy. We are trying very hard to support the
domestic tin mill steel industry. It is in our business interests to have a vibrant
domestic supply base. It is not in our business interest to be heavily reliant on
imports and our track record 100% supports that philosophy. The domestic tin mill
steel industry, however, has let us down. Collectively the U.S. tin mill steel
industry has been becoming less and less reliable as suppliers. They are making it
harder and harder for us to source domestic steel to meet our business needs.
Trade cases against other steel products have hurt two domestic suppliers,
who now struggle to obtain quality feedstock. Trade restriction on hot rolled steel
imports have severely restricted the ability of both UPI (which needs to buy hot
rolled steel) and OCC (which needs to buy tin mill black-plate) to obtain both the
volume and/or quality of substrate necessary to effectively supply tin mill steel to
their customers.
Data that we have collected in the ordinary course of our business shows that
the availability and reliability of tin mill steel has decreased each and every year
over the last five years. Domestic suppliers just been unable to supply Silgan's
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needs on a consistent and reliable basis. These failures have resulted in significant
disruption in Silgan's operations and chaos in trying to secure steel while delivery
performance decreases and forecasted volume is unmet. In my experience, the
domestic tin plate industry just cannot execute or fulfill against its promises. I
understand from the public version of the Commission Staff's pre-hearing report
that other buyers of tin plate have shared similar frustrations.
For these reasons, we have had to increase our imports from our European
and Canadian supply partners. Silgan also manufactures cans and closures in
Europe much as it does in the United States, and for this reason we have supply
relationships with the major European producers of tin mill steel to serve our
European manufacturing operations. When we cannot obtain needed steel from
our U.S. suppliers, we have no choice but to turn to our European and Canadian
supply partners to maintain our operations and fulfill our obligations in our
customer contracts. The alternative would be catastrophic.
We need a vibrant domestic tin mill steel industry. But even more
importantly, we need to run our business. And we cannot do that without reliable
suppliers able to meet our volume needs.
As context, contrast Silgan's experience with manufacturing aluminum cans.
Silgan manufactures 15 billion food cans annually in the United States. Of this
total, about 5 billion are made from aluminum. For these aluminum cans, 99% of
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that aluminum is sourced domestically, despite the availability of quality suppliers
across the globe. Why is that? The domestic aluminum industry can and does
satisfy our manufacturing needs on a consistent and reliable basis.
Please understand that my critique of the US mills is done out of frustration,
not malice. Love not hate if you will. Silgan will continue to emphasize and
support the domestic tin mill steel industry. We have rewarded domestic suppliers
with quantities of volume that surpass logic given those suppliers performance and
contract execution. To dollarize we have given the domestic steel industry close to
$3.5 billion dollars of business since I was last in front of this commission. We will
do that amount and hopefully more over the next six years. We recognize the need
for these entities to remain viable. We also continue to reward the domestic
industry with fair prices relative to the global market. Prices in Europe from the
same supply sources are below what we pay in the US. The domestic tin plate
buyers have done their part in supporting the domestic tin mills. But we
collectively cannot be held accountable for the reported financial performance of
the domestic tin plate industry.
At the same time, Silgan just desperately needs to ensure supply options.
Silgan needs concrete and practical alternatives to keep our business running when
the domestic steel suppliers drop the ball and cannot meet their supply obligations.
I will now turn to more specific discussion of the market, including Silgan's
experience in the market and most importantly what changes have occurred over
the last six years since the Commission last examined this market.
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First Discussion Point: U.S. Can Companies Need To Buy from U.S. Mills
In the legal briefs that the US mills submitted to you and in their testimony
to you this morning, the US mills attempted to convey the impression that if you
allowed the Japanese mills back in the U.S. market, can companies like Silgan
would not purchase any more tin mill steel from US mills. Indeed, Arcelor Mittal
USA goes as far as saying that, given this fact, the US mills would be "devastated"
— "devastated", that is a quote.
Commissioners, such hysteria is a bit hyperbole. It is a bit hyperbole
because, given the demands of our business, Silgan has no choice but to purchase
the overwhelming majority of our needs from North American mills.
I have been involved in purchasing tin mill steel for Silgan for more than 12
years. Until recently, in each of those years more than 85 percent of the tin mill
steel that we purchased came from U.S. steel mills and the other North American
producer, Arcelor Mittal Dofasco. Until recently Silgan had rarely purchased more
than 10 percent of its needs from off-shore suppliers outside North America.
We have relied on North American suppliers by design. Silgan purposefully
limits the types and quantities of tin mill steel that we will source from off-shore
suppliers. Please refer to Silgan's confidential declaration for the various reasons
why domestic supply is preferred and required. In summary it should be much
easier and less complicated to manage a wide portfolio of specifications with
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domestic suppliers. Domestic lead times should theoretically be less than importers
and the risk of having the wrong material produced and on a boat is real given the
potential for change in customer requirements impacting the steel specifications
required.
This is a critical point in understanding the potential impacts of importers
replacing domestic producers in the US market. We simply cannot take this risk of
having the wrong steel at the wrong time. Therefore, we chose carefully any
specifications that we will purchase from off-shore suppliers. It is for precisely
this reason that the overwhelming majority of steel specifications are essentially
dedicated to domestic mills. In fact, in a typical year Silgan will buy over 400
different specifications of tin mill steel, but only a handful will come from off-
shore suppliers. That is why historically more than 85 percent of our steel ends up
coming from the North American suppliers who can react quickly to our changing
needs.
This is a market fact and this will not change no matter whether the Japanese mills
are allowed back in the market or not. It is a fact that, given the vagaries of the
harvest, food can companies like Silgan must purchase the overwhelming majority
of their tin mill steel needs from US mills. And so, demand for North American
tin mill steel will remain. From Silgan's perspective, off-shore suppliers and North
American suppliers are not largely substitutable. To think otherwise would be
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inaccurate. Indeed, as I will address in a minute over the lasts few years Silgan has
purchased every possible ton that it could from U.S. mills.
Second Discussion Point: Why Did Silgan Recently Increase Its Purchases from Off-Shore Suppliers
Given the fact that our own customer business needs require that we source
from North American mills, a fair question is why did Silgan increase its purchases
from imports over the past couple of years. There are two reasons.
The first reason is a change in customer requirements have resulted in a
movement to specifications that the domestic steel industry has not yet been
capable of supplying. Our only supply sources for this metal exist outside of the
US at this moment. And the second, and more important reason, is the increasing
difficulties that US mills have in supplying promised quantities of defect free steel
has forced Silgan to purchase more from import sources.
Let me unpack both of these. Let's take the first. Tin mill steel is not a
fungible commodity product. Rather, there are multiple different types and
specifications that Silgan requires. Only "qualified" suppliers can sell tin mill
steel to Silgan. And given the varied specifications that exist, qualification is
necessary for each type of steel, not by supplier. And so, it is quite possible that
certain suppliers will be qualified for some types of steel, but not others. Certain
suppliers may qualify for some of our manufacturing sites, but not for others.
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Indeed, this is the very situation we have with respect to our domestic
suppliers. Some are qualified to supply many, but not all of our tin can production
lines and facilities. And others are only qualified to supply a much smaller number
of specifications at our facilities.
This fact is important because, over the past few years, Silgan's customers
have changed their requirements requiring Silgan to utilize different assets and
manufacture with different specifications to produce the performance necessary for
our customers use. For example
Our customers are more and more migrating to convenience ends (ends with
pull open tab affixed). The type of steel used for these ends is a lower gauge, with
high elongation attributes currently not qualified by the domestic mills. This
situation has nothing to do with price of the steel. The migration of this volume to
importers more reflects the changing markets demands and Silgan's response to its
customer's needs. Indeed, Silgan often ends up paying a higher price and carrying
more inventory for this imported steel because it has more advanced technical
specifications.
The second, and quite honestly the most troubling reason, is the increasing
difficulties that US mills have had in supplying promised quantities of defect free
steel - forcing Silgan to purchase more from import sources to satisfy its operating
and customer's needs. The obligations we have to supply our customer's
requirements cannot be understated in this dialogue. I trust that you have seen the
confidential declaration that has been submitted on this subject. This declaration
provides comprehensive details about difficulties that we have had and our having
with our US tin mill suppliers. Suffice to say, we have hard data and records that
US based mills had increasing difficulties with both on-time delivery and quality
claims. And it is absolutely a true statement that Silgan could have and would
have purchased much more tin mill steel from US mills absent these difficulties. In
fact, it was our intention to do so. In each of the three last year's Silgan's forecasts
provided to our domestic mill partners was far greater than was eventually supplied
forcing Silgan to move to other supply sources to meet it and its customer's needs.
Third Discussion Point: ArcelorMittal's Ownership of Weirton and Dofasco
I now want to make an important point in changing market dynamics that
very much affects the quantity of tin mill steel sold by U.S. mills. Arcelor Mittal
North America has two tin mill operations, Dofasco Canada and Weirton, USA. By
way of observation, how tin mill customers are supplied out of those two facilities
seems to be managed based on legacy customer relationships and technology
capabilities and perhaps the balancing of optimal workload between the two
facilities. Silgan has consistently told Arcelor Mittal that we are indifferent on
supply point as long as quality and technical standards can be met. We are not
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looking to change the decisions made on how Silgan is supplied I might add. It is
simply an observation.
My understanding is that US mills have argued that they have considerable
excess capacity to supply the entire US market. It is an odd point to me in
evaluating how Arcelor Mittal North America balances its supply to its US
customers. The import volumes from Canada have continued to grow while there
appears be the potential for considerable harm to the US market if protections
against Japanese tin plate were not sustained. I'm having trouble reconciling those
two concepts.
It should be noted that Silgan has been told broadly there isn't any further
volumes available this year out of the US. My understanding is this message is
consistent across the industry. It is another element that I am having trouble
reconciling in this process. For those of us who manage the Sourcing functions at
our respective companies, access to quality steel day in, day out is a persistent
problem.
Fourth Discussion Point: Japanese Suppliers Will Not Offer the Lowest Prices
In their briefs US Steel and Arcelor Mittal assert that if Japanese suppliers
resume shipping subject tin mill steel to the United States they will do so at prices
lower than all other market participants, including U.S. mills and all other foreign
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suppliers. Based on my experience, this assertion is simply wrong, and
demonstrably wrong.
First at Silgan we have a long experience buying laminated tin mill steel
from Japanese suppliers. Although laminated tin mill steel is not subject to the AD
duties, it still is very much a tin mill steel product. The only difference is that a
protective coating has been added to the tin free (chromium coated) steel before
being shipped to can companies like us. Although several foreign suppliers offer
laminated tin mill steel, none of the North American mills offer laminated steel.
We have been purchasing laminated steel from Japanese suppliers for nearly
20 years. And we can confirm that Japanese suppliers are not aggressively trying
to increase shipments by lowering their selling price, even though it would be easy
for them to do so.
It is important to understand this dynamic. As long as the economics can
work, Silgan actually has a preference for laminated steel. The reasons are that
doing so allows a cleaner and safer operation than having Silgan apply the organic
liquid coating (paint) at our plants. Indeed, having can companies purchase
laminated tin mill steel is the preferred global regulatory solution. Certainly,
increasing our laminated tin mill steel purchases would allow us to optimize our
footprint if we didn't require the current coating operations.
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In addition, it is very easy to substitute laminated steel in our production
facilities. Only a few modifications would be required. What this means is that if
the selling price made it economical to do so, Silgan would in fact utilize and
review laminated steel for a more meaningful portion of its needs. Silgan would
readily switch certain applications to laminated steel if the economics work.
However, the economics do not work because the price of laminated steel remains
too high relative to the price of non-laminated steel.
And so, for many years, Japanese tin mill steel suppliers have known that
they could significantly increase the volume of their US exports of laminated steel
to the United States if they simply lowered their selling price to make the
economics of using laminated steel work. But Japanese suppliers have not done
so. This fact is direct evidence that the Japanese suppliers will not export
significant quantities of tin mill without regard to price. They have not been doing
so, even though they could have.
Second, Silgan has data demonstrating that Japanese selling prices for
subject tin mill steel do not undercut US mills or other import suppliers. As noted
above, "laminated" tin mill steel is simply tin free steel with a special coating
applied after the tin free steel was produced. And so, by definition, the price of the
laminated steel equals the combined cost of tin free steel phts the protective
coating. If one subtracts the cost of the protective coating from the purchase price
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of the laminated steel, you can derive a very accurate estimate of what the Japanese
mills believe the price of the tin free steel should be.
In Attachment D of my confidential sworn declaration submitted to you I
present this very analysis using Silgan's actual data. This worksheet shows our
prices for (1) non-laminated tin free steel from U.S. suppliers, and (2) the
comparable laminate steel from Japanese suppliers. We selected specification that
had the same underlying physical dimensions of the tin-free steel, so the
comparison would be apples to apples. We used data obtained from a commercial
third party of what it would cost to apply the lamination coating to the bare tin free
steel.
What this comparison shows is after backing out the cost of the lamination,
the Japanese prices are higher than the U.S. supplier price. For these examples, the
price premium of Japanese steel over domestic steel ranges from 1 percent to 8
percent. This evidence provides quantitative confirmation of my qualitative
assessment the Japanese mills are not likely to offer the lowest prices.
Finally, by virtue of our numerous can-making production plants outside the
United States, Silgan has bona fide experience with purchasing those types of tin
mill steel subject to the AD order. For its production plants located outside the
United States, Silgan purchases tin mill steel through two central purchasing
offices.
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As the Head of Strategic Sourcing for all of Silgan's U.S. plant needs, I have
regular communications with those offices in charge of purchasing tin mill steel for
Silgan's foreign plants. And based on these discussions, I can state that the
suggestions by the domestic mills that Nippon Steel and JFE Steel are aggressive
suppliers that will sell at any price, are simply not true. Indeed, my European
counterparts have reported to me that Japanese mills have reduced their
participation in the European market in recent years because the market prices
(determined by European mills) had fallen too low.
While our direct experiences are reflective of Silgan's expectations on how
Japanese tin mill suppliers would approach the US market, I think it is also import
to note the changed dynamics since this subject was last reviewed. Imports are up
significantly. Pricing relative to other markets is up significantly. New entrants
have come into the import market and were able to grow their volume at these
higher prices. Silgan's experiences and data reflect that imports are not cheaper
and we don't ask them to be. My opinion is that the US market has a supply and
technology void and importers have been able to fill the void on both fronts. I
cannot make the connection that this is an opportunity for the Japanese tin plate
suppliers to disrupt this on-going dynamic either logically or based on Silgan's
direct experience with them in other commercial areas.
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Fifth Discussion Point: Japanese Imports Will Simply Replace Other Import Supply Sources
Any future purchases that Silgan undertakes from Japanese suppliers will
simply replace other import supply sources. I can state this unequivocally because
Silgan is already purchasing every single ton possible from U.S. mills. And Silgan
would purchase more, if US mills could supply the additional quantity.
The only reason, beyond technology, that Silgan has increased its import
purchases over the past few years is because Silgan has been forced to do so by the
inability of US mills to supply the quantities desired when the steel is needed.
The tin plate market in the US can be broken down regionally. The West
Coast is predominantly supplied by UPI. Historical patterns in that region are easy
to follow. There are very few bigger volume buyers and very few supply options.
In fact, Silgan has not received an offer to supply any of its west coast operations
by a North American producer in at least a decade. USS has an obvious conflict
and others probably are freight prohibited. Silgan sources nearly all of its
requirements from UPI. It would be my guess that the rest of the canmakers either
split their buy between UPI and imports or are utilizing technology that UPI cannot
support. In any event, the import volumes for use on the west coast for non-
excluded products that UPI could supply today are relatively de minimus. And this
dynamic will not change. I am confident in that.
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If Silgan were interested in imports to the west coast, we would have already
done so. This would be the primary opportunity for import growth. It is not in
Silgan's best interest to jeopardize UPI's financial stability. Historically, the two
parties have agreed on fair pricing given all elements in play in the market. UPI
has been granted the majority of Silgan's volume (approx.. 200k tons). A few years
ago, UPI's supply was best in class both from a quality and delivery standpoint. At
the time, there was no reason to envision this changing. At the time, neither party
was interested in this changing. We are not interested in changing it today but UPI
and its suppliers will help determine that and we have had recent challenges
making west coast tin plate supply more difficult for all can makers.
The ITC report summarizing the respective questionnaires highlights the
deteriorating quality and supply issues tin plate buyers are facing. In certain cases,
trade actions have contributed to the changing quality situation as new substrate
suppliers enter the equation. The tin plate buyers are catching the "foul ball" of
some of these actions. Silgan highlights some of the impacts to its business in its
confidential declaration.
I was asked what the impact of a decreasing quality means to a can maker
and potentially a tin plate supplier so would offer this opinion. Quality manifests
itself in many ways. In its simplest form it's a distraction that our plant folks work
hard to navigate around in conjunction with the supplier. There is little in the way
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of hard costs associated but our plants readily see the value of steel that runs
seamlessly in our operations. In its extreme it results in a claim back to the steel
mill. Basically, this means the steel was sufficiently out of specification that it
could not be used in can making for its intended use. In this case, the canmaker
claims back the full value of the steel it could not use plus any processing costs
incurred. I'm led to believe based on declarations that US tin mills operate under
very thin margins. That being the case, the cost of quality claims for a steel mill
would be meaningful and would certainly highlight a challenged financial
performance. As an example, let's say US mills make $100/ton on $1000/ton coil
and a can maker processed the coil and added $100 / ton in cost to it. The can
maker would charge the steel company $1100/ton lets say after scrapping the steel.
To get back to break-even, the steel maker would need to sell 10 more coils. So
when claim rates or quality performance deteriorates it can dramatically reduce
financial performance. And if margins are tighter than this simple example, the
problem compounds. The point is, the bigger concern should be on internal
improvements for our domestic tin plate industry. Can customers should not be
asked to subsidize these inefficiencies. More volume doesn't solve this inherent
issue.
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Sixth Discussion Point: Silgan Does Not Use Import Prices To Lower Prices Paid To US Mills
In their briefs submitted to the Commission, US Steel and Arcelor Mittal
USA argue that removing the AD duties will allow customers like Silgan to use the
Japanese price to force US mills to offer a lower price. Such allegation is not
accurate, and more so, unfair.
I don't know where the facts are that support this declaration by the US tin
mills. The presence of imports, whether they are from Canada, Europe or Asia are
now a given market condition. Silgan maintains the US tin mill industry was the
primary contributor to allowing this dynamic. As we reiterate, US can makers offer
US tin plate manufacturers the highest prices in the world. I think the ITC is now
well aware of the overall dissatisfaction with domestic supply despite these prices
that should incent volume and operational execution. The concept that can makers
are going to get a Japanese quote and leverage it for volume that the domestic
industry hasn't proven to be able to supply doesn't really make a whole lot of sense
to me. This hasn't occurred as other suppliers have entered the market to fill the
supply void. Silgan will continue procuring tin plate as it does today. I don't expect
any tin mill supplier will suggest using Silgan as an example of using foreign
imports to drive down domestic prices. If they do, it's unfortunate and inaccurate.
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Final Discussion Point: Why Silgan Wants To Buy Japanese Steel
Given that Silgan only intends to import quantities it cannot source from US
mills, and Silgan is currently happy with our foreign suppliers, a fair question is
why does Silgan want to have the ability to purchase from Japan? It is not about
the price. As I just explained, Silgan fully anticipates having to pay a price to
Japanese mills that is likely higher than what we pay US mills and certainly higher
than certain other import sources.
It is not about getting a low price. Rather, it is about ensuring adequate
supply. Commissioners, the real world in which I live is not static. Supply
sources can change, they can become scarce. On this topic, I ask you to examine
paragraph 76 of my confidential declaration.
ReCap
In closing, I want to echo something that Dan Porter said. 18 years is a long time.
The US tin mill market today is very different now. In fact, I am not sure what is
similar beyond the product itself. Today it is simply not credible to maintain that
imports from Japan will harm US tin mill suppliers.
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