Notice2021-24958
Publication of a Report on the Effect of Imports of Transformers and Transformer Components on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended
Primary source
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Published
November 18, 2021
Issuing agencies
Commerce DepartmentIndustry and Security Bureau
Abstract
The Bureau of Industry and Security (BIS) in this notice is publishing a report that summarizes the findings of an investigation conducted by the U.S. Department of Commerce (the "Department") pursuant to Section 232 of the Trade Expansion Act of 1962, as amended ("Section 232"), into the effect of imports of transformers and transformer components on the national security of the United States. This report was completed on October 15, 2020 and posted on the BIS website in July 2021. BIS has not published the appendices to the report in this notification of report findings, but they are available online at the BIS website, along with the rest of the report (see the ADDRESSES section).
Full Text
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[Federal Register Volume 86, Number 220 (Thursday, November 18, 2021)]
[Notices]
[Pages 64606-64685]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-24958]
[[Page 64605]]
Vol. 86
Thursday,
No. 220
November 18, 2021
Part II
Department of Commerce
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Bureau of Industry and Security
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Publication of a Report on the Effect of Imports of Transformers and
Transformer Components on the National Security: An Investigation
Conducted Under Section 232 of the Trade Expansion Act of 1962, as
Amended; Notice
Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 /
Notices
[[Page 64606]]
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DEPARTMENT OF COMMERCE
Bureau of Industry and Security
RIN 0694-XC085
Publication of a Report on the Effect of Imports of Transformers
and Transformer Components on the National Security: An Investigation
Conducted Under Section 232 of the Trade Expansion Act of 1962, as
Amended
AGENCY: Bureau of Industry and Security, Commerce.
ACTION: Publication of a report.
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SUMMARY: The Bureau of Industry and Security (BIS) in this notice is
publishing a report that summarizes the findings of an investigation
conducted by the U.S. Department of Commerce (the ``Department'')
pursuant to Section 232 of the Trade Expansion Act of 1962, as amended
(``Section 232''), into the effect of imports of transformers and
transformer components on the national security of the United States.
This report was completed on October 15, 2020 and posted on the BIS
website in July 2021. BIS has not published the appendices to the
report in this notification of report findings, but they are available
online at the BIS website, along with the rest of the report (see the
ADDRESSES section).
DATES: The report was completed on October 15, 2020. The report was
posted on the BIS website in July 2021.
ADDRESSES: The full report, including the appendices to the report, are
available online at <a href="https://www.bis.doc.gov/index.php/documents/section-232-investigations/2790-redacted-goes-report-20210723-ab-redacted/file">https://www.bis.doc.gov/index.php/documents/section-232-investigations/2790-redacted-goes-report-20210723-ab-redacted/file</a>.
FOR FURTHER INFORMATION CONTACT: Kevin Coyne, Industrial Studies
Division, Bureau of Industry and Security, U.S. Department of Commerce
(202) 482-4952, <a href="/cdn-cgi/l/email-protection#eca9bf9c9e8388998f989fdedfdeac8e859fc288838fc28b839a"><span class="__cf_email__" data-cfemail="c18492b1b3aea5b4a2b5b2f3f2f381a3a8b2efa5aea2efa6aeb7">[email protected]</span></a>. For more information about
the Section 232 program, including the regulations and the text of
previous investigations, please see <a href="http://www.bis.doc.gov/232">www.bis.doc.gov/232</a>.
SUPPLEMENTARY INFORMATION:
The Effect of Imports of Transformers and Transformer Components on the
National Security
U.S. Department of Commerce, Bureau of Industry and Security, Office of
Technology Evaluation
Final Report
October 15, 2020
Table of Contents
I. Executive Summary
II. Legal Framework
III. Investigation Process
IV. Description of Products Subject to the Investigation
V. Importance of Products to Critical Infrastructure and National
Security
VI. United States' and Global Markets for GOES, Transformers and
Transformer Components
VII. U.S. Production Capabilities, Industry Health and
Competitiveness, and the Impact of Imports on National Security for
Transformer Component Manufactures
VIII. U.S. Production Capabilities, Industry Health and
Competitiveness, and the Impact of Imports on National Security for
Transformers
IX. Competitiveness and Labor Issues
X. Findings and Recommendations
Appendices
Appendix A: Section 232 Investigation Notification Letters to U.S.
Department of Defense, U.S. Department of Energy, and Office of the
U.S. Trade Representative
Appendix B: Table of Acronyms
Appendix C: Federal Register Notice (85 FR 29926)
Appendix D: Summary of Public Comments
Appendix E: Department of Commerce Survey Instrument
Appendix F: Tariffs and Trade Agreements
Appendix G: Summary of Previous U.S. Government Studies
I. Executive Summary
On May 4, 2020, U.S. Secretary of Commerce Wilbur Ross announced he
would initiate an investigation into whether laminations for stacked
cores for incorporation into transformers, stacked and wound cores for
incorporation into transformers, electrical transformers, and
transformer regulators are being imported into the United States in
such quantities or under such circumstances as to threaten to impair
the national security. Secretary Ross officially initiated this
investigation on May 11, 2020, in response to inquiries and requests
from multiple Members of Congress, a grain-oriented steel manufacturer,
and producers of power and distribution transformers.
On May 19, 2020, the Department of Commerce (Department) published
a Federal Register Notice (See Appendix C--Federal Register, 85 FR
29926) announcing the initiation of the investigation and inviting
interested parties to submit written comments, opinions, data,
information, or advice relevant to the investigation. The Department
received 79 public comments and 30 rebuttal comments from a wide range
of interested parties, including industry participants, representatives
of state and local governments, foreign governments, and trade
associations. A summary of the public comments received is included in
Appendix D.
In addition, the Department surveyed (See Appendix E) 87 U.S.
companies identified as participating in production or distribution of
electrical steel, laminations and stacked and wound cores for
transformers, power and distribution transformers, and voltage
regulators. Survey responses provided the Department with detailed
industry information that is otherwise not publicly available and was
necessary to conduct a thorough analysis for this investigation.
The Department consulted with the Department of Defense (including
the Office of Industrial Policy and Defense Logistics Agency) regarding
methodological and policy questions that arose during the
investigation. Given the vital role that these products play in the
energy sector and the critical infrastructure of the country, the
Department also consulted with the Departments of Energy (Office of
Electricity) and Homeland Security. In addition, the Department
consulted with the Office of the United States Trade Representative,
given the trade implications of any actions taken with regard to
imports of these products.
The products subject to this investigation are essential inputs to
the manufacture and functioning of transformers, as well as the
finished transformers themselves. In particular, this investigation
focuses on transformers and transformer components (i.e., laminations
and cores) for which the crucial input is grain-oriented electrical
steel (GOES). Transformers are critical assets used to step-up and
step-down power voltages throughout the electrical grid. As such, they
are fundamental to the efficient transmission and distribution of
electricity across the bulk-power system of the United States. The U.S.
electricity grid supplies residential, commercial, and industrial
customers, as well as the power required to support military and
defense installations, including bases, arsenals, and laboratories. A
simplified schematic of the role of transformers in the electrical grid
is presented below.
[[Page 64607]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.000
In addition to transmission and distribution, transformers are used
widely in major industrial sectors such as mining, manufacturing, and
chemical processing. Large commercial users of transformers include
hospitals, hotels, office buildings, and airports. Sophisticated
military equipment, such as fighter jets and naval vessels, relies on
transformers of various types and capacities to provide the correct
voltage within subsystems. Due to its importance for certain defense
applications, the Defense Logistics Agency has included GOES among its
requests for inclusion in the National Defense Stockpile.
Large Power Transformers (LPTs) are among the most critical
elements of the United States Bulk-Power System (BPS), which was the
subject of an emergency declaration issued by President Trump on May 1,
2020. Executive Order 13920 (E.O. 13920 or Bulk Power Executive Order),
titled ``Securing the United States Bulk-Power System,'' noted that as
the backbone of our Nation's energy infrastructure, the BPS is
fundamental to national security, emergency services, critical
infrastructure, and the economy.\1\ The President determined that the
unrestricted foreign supply of electrical equipment constitutes an
unusual and extraordinary threat to the national security, foreign
policy, and economy of the United States. The President also determined
that the evolving threats facing our critical infrastructure have
highlighted supply chain risks and the need to ensure the availability
of secure components from American companies and other trusted
sources.\2\
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\1\ <a href="https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/">https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/</a>.
\2\ <a href="https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system">https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system</a>.
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The global transformer industry is dominated by large multinational
companies that offer a wide product range and benefit from economies of
scale. In addition to these large global players, in the United States
there are also a number of smaller domestic companies that manufacture
transformers of various power-handling capacities. Many manufacturers
have established production facilities in locations that allow them to
take advantage of lower labor costs and environmental standards.
Mexico, in particular, has become a significant player in transformer
manufacturing.
A. GOES
Grain-oriented electrical steel (GOES) is a critical material
essential to the performance of transformers and accounts for a
significant portion of the cost of transformer production (about 25
percent based on responses to the Department survey). AK Steel, Inc., a
subsidiary of Cleveland Cliffs Inc., is the sole U.S. domestic producer
of GOES, which it manufactures at facilities in Zanesville, Ohio, and
Butler, Pennsylvania. While still a leader in the domestic market, AK
Steel's electrical steel operations are not profitable, in part due to
years of pressure from lower cost imports.\3\ The CEO of Cleveland
Cliffs, Inc., has stated that it may shut down the two unprofitable
plants at which GOES is manufactured. If AK Steel's GOES operations
were to close, the United States would lack the ability to produce
transformers of any power handling capacity without relying on foreign
sources for the key material that is essential to their operation and
efficiency.
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\3\ AK Steel Public Comments.
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The threat to national security posed by imports of GOES (among
other steel products) was addressed by a Section 232 investigation
conducted in 2017, which resulted in the 2018 imposition of 25 percent
tariffs on imports of steel products from most countries. As a result,
imports of GOES in 2019 were dramatically lower than in 2018 (down 56
percent). [TEXT REDACTED]
[TEXT REDACTED].\4\ Moreover, many transformer companies, in public
comments or survey responses, indicated concern over AK Steel's
capabilities and capacity to supply a full range of GOES products,
especially the higher grades that are increasingly in demand due to
current DOE energy standards for distribution transformers as well as
general market trends toward energy efficiency.
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\4\ Department of Commerce, Section 232 Investigation into
Impact of Steel Imports on National Security, 2018.
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1. Transformer Components (Laminations and Cores)
This investigation sought to evaluate the status of domestic
production and the impact of imports for key subcomponents of
transformers, namely laminations for stacked cores for
[[Page 64608]]
incorporation into transformers, stacked cores for incorporation into
transformers, and wound cores for incorporation into transformers.
Arguably the most important part of a transformer is its core,
which is made up of thin layers of laminations, usually made of GOES.
Cores may have varying designs and specifications, but their function
is generally to facilitate the magnetic field necessary for the
induction of voltages between the two windings (i.e., in order to
``step-up'' or ``step-down'' the power voltage). The layered
composition helps reduce the core's energy losses. Transformer
lamination and core producers make up the primary customer base for
GOES suppliers such as AK Steel.
However, over the past few years, there has been a marked decline
in the domestic manufacturing of laminations and cores (both in-house
by transformer companies and by independent producers), and a movement
of production offshore (especially to Canada and Mexico). The United
States has become highly dependent on foreign sources for these
critical transformer components.
A corollary to the movement of lamination and core manufacturing
out of the United States is the decline of the domestic market for AK
Steel's GOES. Although not the only factor, the tariffs imposed on
imports of electrical steel under Section 232 have raised material
costs for lamination and core manufacturers, affecting their ability to
compete, because electrical steel accounts for a large percentage of
the cost of these items [TEXT REDACTED].
In 2019, laminations with a total value of $40.2 million were
sourced by surveyed companies. Of this $40.2 million, less than 12
percent came from domestic suppliers. This implies an import
penetration level of 88% for laminations. In the years immediately
prior, there was a dramatic increase in imports of these products--from
$18 million in 2017 to $33 million in 2019--which displaced U.S.
production. Over 95 percent of these imports came from Canada (68
percent) and Mexico (29 percent).
A similar situation exists with regard to stacked and wound cores.
Based on survey data, imports account for about 75 percent of wound
core purchases by surveyed transformer companies in 2019. With regard
to stacked cores, imports accounted for 54 percent of purchases by
respondents. [TEXT REDACTED]. However, this firm reported that it shut
down core production in February 2020 due to its inability to compete
with imports. [TEXT REDACTED]. With the exit of the leading domestic
non-captive supplier, future imports of stacked cores will also likely
exceed 80 percent of purchases, with China serving as a major source.
Imports of transformer cores (stacked and wound) rose from $22
million in 2015 to $167 million in 2019--a 650 percent increase--again
with Canada (52 percent) and Mexico (45 percent) accounting for more
than 95 percent of the total. Since domestic demand for laminations and
cores has not increased in parallel with the increase in imports, the
surge in imports represents displaced domestic production. Moreover,
neither Mexico nor Canada has indigenous production capability for
GOES. While Japan is the leading source of GOES for these countries,
they also import some of this material from China and Russia.
B. Transformers
This investigation evaluated the status of the domestic transformer
industry in several categories: Liquid-filled distribution transformers
and small power transformers, medium power transformers, LPT, dry-type
transformers, and voltage regulators.
Distribution transformers (both liquid-dielectric as well as dry-
type), and small and medium power transformers are used extensively in
the U.S. electrical grid--millions are installed and operating. This
investigation found that domestic industrial production and
capabilities in these sectors is generally adequate. In the liquid-
dielectric categories, imports account for less than a quarter of
apparent consumption, and companies in this sector are largely
financially sound and competitive in the market, based on responses to
the BIS industry survey. While import penetration is currently
relatively low, survey participants indicated competitiveness
challenges, especially from Mexico and China. Survey respondents also
mentioned workforce issues, such as difficulty finding and attracting
qualified labor, as a concern.
Imports play a major role in the dry-type transformer sector, and
leading U.S.-based producers also have overseas production facilities.
Countries with low cost labor--including China, Indonesia, and Mexico--
are major sources of imported dry-type transformers. Despite relatively
strong domestic production capabilities, an in-depth analysis of
suppliers found a heavy dependence on foreign sources among domestic
manufacturers in all transformer categories for critical components
including laminations and cores and the GOES from which they are made,
as described above.
This investigation found shortcomings with regard to domestic
production of LPTs that are critical elements of the United States BPS.
Because they serve the greatest number of customers, the failure or
destruction of just a single unit can have a large impact on U.S.
economic, public health, and security interests. Moreover, long
procurement lead times and limited availability of spare LPT and parts
have serious implications for the resiliency of critical
infrastructure.
Domestic production capability falls far short of demand for the
LPT segment of the industry, with imports accounting for over 80
percent of consumption. This lack of domestic production capability and
the accompanying extreme dependence on imports has persisted for at
least a decade, creating a critical infrastructure vulnerability, which
has been raised in previous Department of Energy assessments.\5\
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\5\ ``Large Power Transformers in U.S. Electric Grid'',
Department of Energy, Office of Electricity and Energy Reliability,
June 2012 <a href="https://www.energy.gov/sites/prod/files/Large%20Power%20Transformer%20Study%20-%20June%202012_0.pdf">https://www.energy.gov/sites/prod/files/Large%20Power%20Transformer%20Study%20-%20June%202012_0.pdf</a>.
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Only six companies currently manufacture LPTs in the United States;
[TEXT REDACTED]. The largest domestic producer is Korean-owned Hyundai,
which has publicly noted that its Alabama facility will be utilized
``in maneuvering U.S. imposed anti-dumping tariff [sic] and its
protectionist policies.'' \6\
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\6\ <a href="http://hhiamerica.com/about/sub04.htm">http://hhiamerica.com/about/sub04.htm</a>.
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[TEXT REDACTED].\7\ Compounding the issue, domestic LPT producers
are highly dependent on foreign sources for GOES, laminations, and
cores.
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\7\ [TEXT REDACTED].
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C. Findings
[TEXT REDACTED]. While still a leader in the domestic market, the
market has eroded due to the migration of production of transformer
components (and finished transformers) out of the United States. If
this manufacturer were to shut down GOES production, the United States
would be completely dependent on foreign sources for material critical
to the manufacture of transformers.
There is insufficient or no domestic production capability for
certain grades and qualities of GOES that are increasingly in demand to
meet efficiency standards for distribution transformers as well as
general market trends toward more efficient transformers using higher
grades of GOES.
The United States lacks sufficient capacity to produce transformer
cores
[[Page 64609]]
and laminations, which are the key components in transformers.
Transformer manufacturers in the United States rely on foreign sources
(especially Canada and Mexico) for these critical components to meet
over 75 percent of (non-captive) demand.
The United States is also highly dependent on foreign-sourced
transformers, most significantly for the LPTs that form the backbone of
the BPS.
Based on the overwhelming dependence of domestic transformer
manufacturers on foreign sources, the Secretary finds that transformer
laminations, stacked cores and wound cores are being imported into the
United States in such quantities and under such circumstances as to
threaten to impair the national security. In addition, LPTs are being
imported into the United States in such quantities and under such
circumstances as to threaten to impair national security. This
dependence on imports leaves the United States with insufficient
production capability for LPTs to meet the needs of the critical energy
infrastructure of the United States.
II. Legal Framework
A. Section 232 Requirements
Section 232 of the Trade Expansion Act of 1962, as amended,
provides the Secretary with the authority to conduct investigations to
determine the effect on the national security of the United States of
imports of any article. It authorizes the Secretary to conduct an
investigation if requested by the head of any department or agency,
upon application of an interested party, or upon his own motion. See 19
U.S.C. 1862(b)(1)(A).
Section 232 directs the Secretary to submit to the President a
report with recommendations for ``action or inaction under this
section'' and requires the Secretary to advise the President if any
article ``is being imported into the United States in such quantities
or under such circumstances as to threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A).
Section 232(d) directs the Secretary and the President to consider,
in light of the requirements of national security and without excluding
other relevant factors, the domestic production needed for projected
national defense requirements and the capacity of the United States to
meet national security requirements. See 19 U.S.C. 1862(d).
Section 232(d) also directs the Secretary and the President to
``recognize the close relation of the economic welfare of the Nation to
our national security, and . . . take into consideration the impact of
foreign competition on the economic welfare of individual domestic
industries'' by examining whether any substantial unemployment,
decrease in revenues of government, loss of skills or investment, or
other serious effects resulting from the displacement of any domestic
products by excessive imports, or other factors, results in a
``weakening of our internal economy'' that may impair the national
security.\8\ See 19 U.S.C. 1862(d).
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\8\ An investigation under Section 232 looks at whether imports
threaten to impair the national security, rather than looking at
unfair trade practices as in an antidumping investigation.
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Once an investigation has been initiated, Section 232 mandates that
the Secretary provide notice to the Secretary of Defense that such an
investigation has commenced. Section 232 also requires the Secretary to
do the following:
(1) ``Consult with the Secretary of Defense regarding the
methodological and policy questions raised in [the] investigation;''
(2) ``Seek information and advice from, and consult with,
appropriate officers of the United States;'' and
(3) ``If it is appropriate and after reasonable notice, hold
public hearings or otherwise afford interested parties an
opportunity to present information and advice relevant to such
investigation.'' \9\ See 19 U.S.C. 1862(b)(2)(A)(i)-(iii).
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\9\ Department regulations (i) set forth additional authority
and specific procedures for such input from interested parties, see
15 CFR 705.7 and 705.8, and (ii) provide that the Secretary may vary
or dispense with those procedures ``in emergency situations, or when
in the judgment of the Department, national security interests
require it.'' Id., Sec. 705.9.
As detailed in the report, all of the requirements set forth above
have been satisfied.
In conducting the investigation, Section 232 permits the Secretary
to request that the Secretary of Defense provide an assessment of the
defense requirements of the article that is the subject of the
investigation. See 19 U.S.C. 1862(b)(2)(B). Upon completion of a
Section 232 investigation, the Secretary is required to submit a report
to the President no later than 270 days after the date on which the
investigation was initiated. See 19 U.S.C. 1862(b)(3)(A). The report
must:
(1) Set forth ``the findings of such investigation with respect
to the effect of the importation of such article in such quantities
or under such circumstances upon the national security;''
(2) Set forth, ``based on such findings, the recommendations of
the Secretary for action or inaction under this section;'' and
(3) ``If the Secretary finds that such article is being imported
into the United States in such quantities or under such
circumstances as to threaten to impair the national security . . .
so advise the President.'' See 19 U.S.C. 1862(b)(3)(A).
All unclassified and non-proprietary portions of the report
submitted by the Secretary to the President must be published. See 19
U.S.C. 1862(b)(3)(B).
Within 90 days after receiving a report in which the Secretary
finds that an article is being imported into the United States in such
quantities or under such circumstances as to threaten to impair the
national security, the President shall:
(1) ``Determine whether the President concurs with the finding
of the Secretary;'' and
(2) ``If the President concurs, determine the nature and
duration of the action that, in the judgment of the President, must
be taken to adjust the imports of the article and its derivatives so
that such imports will not threaten to impair the national
security'' See 19 U.S.C. 1862(c)(1)(A).
B. Discussion
While Section 232 does not specifically define ``national
security,'' both Section 232 and the implementing regulations at 15 CFR
part 705 contain non-exclusive lists of factors that the Secretary must
consider in evaluating the effect of imports on the national security.
Congress, in Section 232, explicitly determined that ``national
security'' includes, but is not limited to, ``national defense''
requirements. See 19 U.S.C. 1862(d).
The Department has determined that ``national defense'' includes
both the defense of the United States directly and the U.S. ``ability
to project U.S. military capabilities globally.'' \10\ The Department
also concluded that ``[i]n addition to the satisfaction of national
defense requirements, the term `national security' can be interpreted
more broadly to include the general security and welfare of certain
industries, beyond those necessary to satisfy national defense
requirements, which are critical to the minimum operations of the
economy and government.'' \11\ The Department deemed these certain
industries as ``critical industries.'' \12\ This report applies these
interpretations of the terms ``national defense'' and ``national
security,'' in defining ``critical industries.'' In doing so, this
report considers 16 critical infrastructure sectors identified in
Presidential Policy
[[Page 64610]]
Directive 21.\13\ Section 232 directs the Secretary to determine
whether imports of any article are being made ``in such quantities'' or
``under such circumstances'' that those imports ``threaten to impair
the national security.'' See 19 U.S.C. 1862(b)(3)(A). Accordingly,
either the quantities or the circumstances, standing alone, may be
sufficient to support an affirmative finding.
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\10\ Department of Commerce, Bureau of Export Administration;
The Effect of Imports of Iron Ore and Semi-Finished Steel on the
National Security; Oct. 2001 (``2001 Report'').
\11\ Id.
\12\ Id.
\13\ Presidential Policy Directive 21, Critical Infrastructure
Security and Resilience (Feb. 12, 2013) (``PPD-21'').
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The statute does not prescribe a threshold or a standard for when
``such quantities'' of imports are sufficient to threaten to impair the
national security, nor does it define the ``circumstances'' that might
qualify.
Likewise, the statute does not require a finding that the
quantities or circumstances are impairing the national security.
Instead, the threshold question under Section 232 is whether those
quantities or circumstances ``threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A). This demonstrates that Section
232 may be used to prevent a threatened impairment to the national
security from occurring before the national security is actually
impaired.
Section 232(d) contains a list of factors for the Secretary to
consider in determining if imports ``threaten to impair the national
security'' \14\ of the United States, and this list is mirrored in the
implementing regulations. See 19 U.S.C. 1862(d) and 15 CFR 705.4. While
the list provided by Congress in Section 232 provides mandatory factors
for the Secretary to consider, it is not exhaustive.\15\ Congress'
illustrative list is focused on the ability of the United States to
maintain the domestic capacity to provide the articles in question as
needed to maintain the national security of the United States.\16\
Congress split the list of factors into two equal parts using two
separate sentences. The first sentence focuses directly on ``national
defense'' requirements, thus making clear that ``national defense'' is
a subset of the broader term ``national security.'' The second sentence
focuses on the broader economy and expressly directs that the Secretary
and the President ``shall recognize the close relation of the economic
welfare of the Nation to our national security.'' \17\ See 19 U.S.C.
1862(d).
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\14\ 19 U.S.C. 1862(b)(3)(A).
\15\ See 19 U.S.C. 1862(d) (``the Secretary and the President
shall, in light of the requirements of national security and without
excluding other relevant factors . . .'' and ``serious effects
resulting from the displacement of any domestic products by
excessive imports shall be considered, without excluding other
factors . . .'').
\16\ This reading is supported by Congressional findings in
other statutes. See, e.g., 15 U.S.C. 271(a)(1) (``The future well-
being of the United States economy depends on a strong manufacturing
base . . .'') and 50 U.S.C. 4502(a) (``Congress finds that--(1) the
security of the United States is dependent on the ability of the
domestic industrial base to supply materials and services . . .
(2)(C) to provide for the protection and restoration of domestic
critical infrastructure operations under emergency conditions . . .
(3) . . . the national defense preparedness effort of the United
States government requires--(C) the development of domestic
productive capacity to meet--(ii) unique technological requirements
. . . (7) much of the industrial capacity that is relied upon by the
United States Government for military production and other national
defense purposes is deeply and directly influenced by--(A) the
overall competitiveness of the industrial economy of the United
States; and (B) the ability of industries in the United States, in
general, to produce internationally competitive products and operate
profitably while maintaining adequate research and development to
preserve competitiveness with respect to military and civilian
production; and (8) the inability of industries in the United
States, especially smaller subcontractors and suppliers, to provide
vital parts and components and other materials would impair the
ability to sustain the Armed Forces of the United States in combat
for longer than a short period.'').
\17\ Accord 50 U.S.C. 4502(a).
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In addition to ``national defense'' requirements, two of the
factors listed in the second sentence of Section 232(d) are
particularly relevant in this investigation. Both are directed at how
``such quantities'' of imports threaten to impair national security.
See 19 U.S.C. 1862(b)(3)(A). In administering Section 232 to
``[determine] whether such weakening of our internal economy may impair
the national security,'' the Secretary and the President are required
to ``take into consideration the impact of foreign competition on the
economic welfare of individual domestic industries,'' as well as to and
analyze whether there exist ``serious effects resulting from the
displacement of any domestic products by excessive imports.'' See 19
U.S.C. 1862(d). In certain key product categories, imports of
transformers and transformer components accounted for over 80 percent
of U.S. consumption in 2019. In the case of transformer cores and
laminations, imports have substantially displaced domestic production
of these items. Because these products are the primary market for GOES,
the displacement of domestic production by imports also threatens
threaten the financial viability of the only remaining domestic
producer of GOES.
Two other factors included in the statute that are also
particularly relevant to this investigation are ``loss of skills'' and
``loss of investment.'' See 19 U.S.C. 1862(d). As imports of GOES have
increased, losses of U.S. GOES production capacity have caused a
decline in the skilled workforce needed for the GOES manufacturing
process. Additionally, as a result of their impact on the revenues of
U.S. producers, these imports have mitigated investment in U.S. GOES
production facilities, precluding future sustainable development of
domestic GOES production. Similarly, these imports also create a
disincentive for needed investment in U.S. GOES production facilities;
without this investment, future production of domestic GOES is not
sustainable. These factors are illustrative of a ``weakening of the
internal economy [that] may impair the national security'' as defined
in Section 232.
III. Investigation Process
A. Initiation of Investigation
On May 4, 2020, the Secretary of Commerce announced that he would
initiate an investigation into whether laminations for stacked cores
for incorporation into transformers, stacked and wound cores for
incorporation into transformers, electrical transformers, and
transformer regulators are being imported into the United States in
such quantities or under such circumstances as to threaten to impair
the national security.\18\ Laminations and cores made of GOES are
critical transformer components, and transformers are a key element for
distribution of all types of energy--including solar, nuclear, wind,
coal, and natural gas--across the country. The decision to launch an
investigation under Section 232 of the Trade Expansion Act of 1962, as
amended (19 U.S.C. 1862), followed inquiries and requests from multiple
Members of Congress, a GOES manufacturer, and producers of power and
distribution transformers.
---------------------------------------------------------------------------
\18\ Department of Commerce Press Release, May 4, 2020.
---------------------------------------------------------------------------
On May 11, 2020, the Department officially initiated the
investigation. Pursuant to Section 232(b)(1)(b), the Department
notified Secretary of Defense Mark T. Esper of the investigation and
requested Department of Defense participation as it relates to
methodology, policy questions, and national defense requirements for
these products. Additionally, given that the products subject to this
investigation are used extensively in the electrical grid and critical
infrastructure of the United States, the Department also notified
Secretary of Energy Dan R. Brouillette and Acting Secretary of Homeland
Security Chad F. Wolf. Finally, the Secretary notified United States
Trade Representative Robert E. Lighthizer,
[[Page 64611]]
noting that Department staff will consult with counterparts in the
Office of the United States Trade Representative regarding
methodological and policy questions that arise during the
investigation. (See Appendix A).
On May 19, 2020, the Department published a Federal Register Notice
(See Appendix C--Federal Register, 85 FR 29926) announcing the
initiation of the investigation to determine the effect of imports of
Laminations for Stacked Cores for Incorporation into Transformers,
Stacked Cores for Incorporation into Transformers, Wound Cores for
Incorporation into Transformers, Electrical Transformers, and
Transformer Regulators on the national security. The notice also
announced the opening of the public comment period.
B. Public Comments
In the Federal Register Notice announcing the investigation, the
Department invited interested parties to submit written comments,
opinions, data, information, and advice relevant to the criteria listed
in Section 705.4 of the National Security Industrial Base Regulations
(15 CFR 705.4) as it affects the requirements of national security,
including the following:
(a) Quantity of the articles subject to the investigation and
other circumstances related to the importation of such articles;
(b) Domestic production capacity needed for these articles to
meet projected national defense requirements;
(c) The capacity of domestic industries to meet projected
national defense requirements;
(d) Existing and anticipated availability of human resources,
products, raw materials, production equipment, facilities, and other
supplies and services essential to the national defense;
(e) Growth requirements of domestic industries needed to meet
national defense requirements and the supplies and services,
including the investment, exploration, and development, necessary to
assure such growth;
(f) The impact of foreign competition on the economic welfare of
any domestic industry essential to our national security;
(g) The displacement of any domestic products causing
substantial unemployment, decrease in the revenues of government,
loss of investment or specialized skills, and productive capacity,
or other serious effects;
(h) Relevant factors that are causing or will cause a weakening
of our national economy; and
(i) Any other relevant factors, including the use and importance
of the Products in critical infrastructure sectors identified in
Presidential Policy Directive 21 (Feb. 12, 2013) (for a listing of
those sectors see <a href="https://www.dhs.gov/cisa/critical-infrastructure-sectors">https://www.dhs.gov/cisa/critical-infrastructure-sectors</a>).
At the request of several parties, and in light of the global
pandemic, the initial public comment period, as well as the rebuttal
period, were extended ten additional days. The department provided an
additional 24 days to submit public comments, with an additional time
period provided for the submission of rebuttals to such comments as
well. The final deadline for the submission of rebuttals to the public
comments July 24, 2020.
The Department received 82 written comments concerning this
investigation, 79 of which were responsive on <a href="http://Regulations.gov">Regulations.gov</a> for
public review. Parties that submitted comments included members of
industry, representatives of state and local governments, foreign
governments, and other concerned groups.
All 79 comments were available for response during the rebuttal
period. Thirty-four rebuttal comments from industry participants and
other stakeholders were received and 30 were responsive and were posted
on <a href="http://Regulations.gov">Regulations.gov</a> for public review. All of the appropriate comments
and rebuttals were reviewed and factored into the investigative
process. These responsive public comments received are summarized in
Appendix D, along with a link to the <a href="http://Regulations.gov">Regulations.gov</a> docket (BIS-2020-
0015), where comments can be viewed in full.
C. Information Gathering and Data Collection Activities
Because this investigation commenced during a pandemic during
which, many public and private sector organizations were shut down or
operating under limited conditions, the Department decided not to hold
a public hearing for this investigation. In lieu of a public hearing,
the Department issued mandatory surveys (See Appendix E) to 87
companies or divisions of companies identified as participating in the
production or distribution of electrical steel, laminations and stacked
and wound cores for transformers, and power and distribution
transformers. Survey responses were received from most of the major
participants in the domestic transformer supply chain. The surveys
collected both qualitative and quantitative information.
These mandatory surveys were conducted pursuant to Section 705 of
the Defense Production Act (DPA) of 1950, as amended (50 U.S.C. 4555),
and collected data on imports, exports, production, capacity
utilization, employment, operating status, global competition, and
financial information. The resulting aggregate data provided the
Department with detailed industry information that is otherwise not
publicly available, which was necessary to conduct a thorough analysis
for this investigation.
Information furnished in the survey responses is deemed
confidential and will not be published or disclosed except in
accordance with Section 705 of the DPA.\19\
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\19\ Section 705 of the DPA prohibits the publication or
disclosure of this information unless the President determines that
withholding such information is contrary to the interest of the
national defense. Unless or until such a determination is made,
information will not be shared with any non-government entity in
other than aggregate form.
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D. Interagency Consultation
The Department consulted with the Department of Defense (including
the Office of Industrial Policy and Defense Logistics Agency) regarding
methodological and policy questions that arose during the
investigation. Given the vital role that these products play in the
energy sector and the critical infrastructure of the country, the
Department also consulted with the Departments of Energy (Office of
Electricity) and Homeland Security. In addition, the Department
consulted with the Office of the United States Trade Representative,
given the trade implications of any actions with regard to imports of
these products.
The Department also consulted with other U.S. government agencies
with expertise and information regarding the domestic and global
transformer and GOES industries, including the Department's
International Trade Administration and the U.S. International Trade
Commission.
E. Product Scope of the Investigation
The scope of this investigation includes laminations for
incorporation into stacked cores, stacked cores for incorporation into
transformers, wound cores for incorporation into transformers,
electrical transformers, and transformer regulators. While GOES is not
the direct subject of this investigation, because it is the primary
material used in laminations, stacked cores, and wound cores, it is
included in the scope of products addressed in this report. Products
were examined in accordance with the Harmonized Tariff Schedule of the
United States (HTS) up to the ten-digit level. The products and their
associated HTS code are provided in Figure 1 below.
[[Page 64612]]
Figure III-1--Product Scope of the Investigation
------------------------------------------------------------------------
10 digit HTS Product description
------------------------------------------------------------------------
7226.19.1000........................... Non-Oriented Electrical Steel
(NOES) (300-600mm).
7226.19.9000........................... Non-Oriented Electrical Steel
(NOES) (<300mm).
7225.11.0000........................... Grain-Oriented Electrical Steel
(GOES) (>600mm width).
7226.11.1000........................... Grain-Oriented Electrical Steel
(GOES) (300-600mm).
7226.11.9030........................... Grain-Oriented Electrical Steel
(GOES) (<300mm; <.25mm thick).
7226.11.9060........................... Grain-Oriented Electrical Steel
(GOES) (<300mm; >.25mm thick).
8504.90.9634 (Post 2016), 8504.90.9534 Transformer Laminations
(2015). (Stacked).
8504.90.9638 (Post 2016), 8504.90.9538 Transformer Cores (Stacked).
(2015).
8504.90.9642 (Post 2016), 8504.90.9542 Transformer Cores (Wound).
(2015).
8504.21.0020........................... Liquid-Dielectric Transformer
Under 50KVA.
8504.21.0040........................... Liquid-Dielectric Transformer
50-100KVA.
8504.21.0060........................... Liquid-Dielectric Transformer
100-500KVA.
8504.21.0080........................... Liquid-Dielectric Transformer
500-650KVA.
8504.22.0040........................... Liquid-Dielectric Transformer
650-2,500KVA.
8504.22.0080........................... Liquid-Dielectric Transformer
2,500-10,000KVA.
8504.23.0041........................... Liquid-Dielectric Transformer
10,000-60,000KVA.
8504.23.0045........................... Liquid-Dielectric Transformer
60,000KVA-100,000KVA.
8504.23.0080........................... Liquid-Dielectric Transformer
Over 100,000KVA.
8504.32.0000........................... Dry-Type/Other Transformer 1-
16KVA.
8504.33.0020........................... Dry-Type/Other Transformer 16-
50KVA.
8504.33.0040........................... Dry-Type/Other Transformer 50-
500KVA.
8504.34.0000........................... Dry-Type/Other Transformer Over
500KVA.
9032.89.4000........................... Voltage Regulators.
------------------------------------------------------------------------
Source: United States International Trade Commission and U.S. Department
of Commerce, Bureau of Industry and Security.
IV. Description of the Products Subject to the Investigation
The products subject to this investigation are those that are
critical to the manufacture and functioning of transformers, as well as
the transformers themselves. In particular, this investigation focuses
on transformers and transformer components for which the crucial input
is GOES.
Transformers are passive devices that change (or transform) the
voltage or electrical current level using a magnetic circuit. They are
used to either increase (step-up) or decrease (step-down) voltage to
ensure the correct voltage for a specific electricity use application.
Transformers are available with a wide range of power-handling
capabilities, typically measured in kilo-volt-amperes (kVA), from less
than one kVA, to more than 100,000 kVA (which can also be expressed as
100 mega-volt-amperes where 1 MVA = 1,000 kVA). LPTs can be several
stories tall and weigh hundreds of tons, while transformers for
consumer products may be small enough to fit in your hand. No matter
the size, the basic purpose of any transformer is to transform
electrical power from one voltage to another.
There are many ways in which transformers can be categorized.
Common industry terminology may classify by specific type
(autotransformer, instrument transformer), current type (direct or
alternating), function (step-up, step-down), core type (shell-form or
core-form), or type of installation (pole-mounted, pad-mounted,
underground). The size of a transformer can be measured by the input
voltage (in kilovolts), the output voltage (in kilovolts), or the load
capacity (measured by kilovolt amperes). This report will generally
classify transformers based on their power load handling capacity (in
kVA) as well as their type of dielectric insulation (liquid or dry).
These categorizations were chosen because they correspond with the way
in which the U.S. Census Bureau collects information on imports of
these items. Transformers of most power-handling capacities are subject
to this investigation. The exception is very small transformers (under
1 kVA), such as those typically used in conjunction with power cables
for consumer electronics including laptops and cell phones, as these
generally do not use electrical steel cores.
The most ubiquitous use of transformers is in the electrical grid,
where they are used by electric utilities and power producers for the
transmission and distribution of electricity from power generation
plants to residential, commercial, and industrial customers. In
addition to the electrical grid, large industrial users such as mines
and major manufacturing, and chemical plants, as well as large
commercial users including hospitals, hotels, office buildings, and
airports may connect directly to the transmission grid and utilize
their own transformers to take advantage of lower marginal costs.
Transformers are crucial equipment used throughout the electrical
grid. Power leaves the generator and enters a transmission substation
located at the power plant. This transmission substation uses LPTs to
``step-up'' the generator's voltage to extremely high voltages (155 kV
to 765 kV volts) for efficient transmission over long distances (up to
300 miles). For the electricity to be used by commercial, industrial,
or residential users, it must be ``stepped-down'' by transformers to
distribution voltages (less than 10 kV; a standard line voltage is 7.2
kV at a substation). From there, the electricity is distributed locally
via overhead or sunk power lines before it is further stepped-down by
smaller transformers (such as pole mounted units) to the 240 volts that
is standard household electrical service. Additionally, as noted above,
some large commercial and industrial users may connect directly at
substation transmission levels. The diagram below presents a simplified
depiction of the use of transformers in the electrical grid.
BILLING CODE 3510-33-P
[[Page 64613]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.001
A. Types of Transformers
LPTs generally have power-handling capacities above 100,000 kVA
(100 MVA) and are used to step-up the voltage up to extremely high
levels at power generation sites for efficient transmission over long
distances. They are used again at substations to step-down the voltage
for more local distribution. LPT are also used by manufacturing sectors
that require high voltages in their production processes, such as steel
mills.
[GRAPHIC] [TIFF OMITTED] TN18NO21.002
Small and medium power transformers, which generally have power
handling capacities from 5,000 kVA to 100,000 kVA, are also used
extensively throughout the electrical grid. They are available in a
wide range of voltage ratings and power handling capacities, to meet
the specific needs of consumers. For example, they are used at
substations and at industrial facilities.
Distribution transformers (up to 5,000 kVA) are used to further
step-down the voltage at substations to deliver electricity to
customers. Distribution transformers provide the final voltage
transformation in the electrical grid. While they are energized for 24
hours a day, their load fluctuates throughout the day with changing
energy demands.
Also located along the electric grid are banks of voltage
regulators, which are used to compensate for voltage fluctuation during
power distribution. Voltage regulators play an important role in light
of the increasing use of distributed energy resources such as solar and
wind, which are intermittent.
Transformers can be classified by the material used in core-
insulation (e.g., ``Liquid-dielectric'' or ``Dry-Type''). Cooling is
important because transformers generate heat and pose potential fire or
explosion hazards. Liquid-dielectric transformers consist of the
transformer core placed in a metal sealed container filled with mineral
oil, which serves as a coolant and insulator.
Dry-type transformers have a metal housing for insulation but are
cooled by air convection or fans, or may be encased in resin. Oil-
filled liquid transformers are generally more efficient than dry-type,
which are more limited in their power-handling capacity and size.
However, oil-filled transformers require more maintenance, and because
the liquid may be flammable or toxic, dry-type may be more preferable
in public spaces.
[[Page 64614]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.003
Dry-type transformers are commonly used in light industrial and
commercial applications; some are used indoors or underground. They are
often used in cases in which liquid-dielectric transformers present
unacceptable environmental, explosion, or fire hazards.
Specialized transformers perform specific functions in the electric
grid. For example, instrument transformers step-down currents and
voltages for accurate and reliable measurement by secondary equipment
such as meters, protection relays, and other devices. Another
specialized type of transformer is the autotransformer, which is used
in power transmission systems to interconnect systems operating at
different voltage; this type of transformer can also be used as a
voltage regulators.
Transformers have been in use for over 100 years (Westinghouse
built the first reliable commercial transformer in 1886) and are
becoming more complex as they evolve to become part of the growing
interconnected ``smart grid.'' \20\ The smart grid is an automated
network with a two-way flow of energy and information that is capable
of monitoring and controlling energy metrics between the power plant
and the end user, as well as at the many points in between. To function
as part of the smart grid, transformers must be able to communicate in
real time, be capable of extensive customer interaction, feature remote
digital monitoring, and have the ability to self-diagnose and repair
malfunctions.
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\20\ <a href="https://global.abb/group/en/about/history/heritage-brands/westinghouse">https://global.abb/group/en/about/history/heritage-brands/westinghouse</a>.
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B. Transformer Construction
Regardless of their size or application, all transformers work
through electromagnetic induction, a process in which a coil of wire
magnetically induces a voltage into another coil of wire in close
proximity to it. The basic structure of a transformer is two coils of
copper wire: The ``primary winding'' and the ``secondary winding.'' The
primary winding takes the power into the transformer, and the secondary
winding delivers the power from the transformer. The difference in
voltage between the primary and secondary windings is achieved by
differences in the number of coil turns in each winding.\21\
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\21\ <a href="https://circuitdigest.com/tutorial/transformer-basics">https://circuitdigest.com/tutorial/transformer-basics</a>.
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The two windings are not in direct contact with one another, but
rather are each wound around a closed magnetic circuit that forms the
core of the transformer. The core is not solid, but is made up of thin
layers, or laminations, usually made of GOES. This layered composition
helps reduce energy losses (eddy flow and hysteresis) within the core.
Core laminations are the main material input in an electrical
transformer and can account for up to 50 percent of a transformer's
cost.\22\
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\22\ <a href="https://www.worldofsteel.com/Types%20of%20CRGO.html">https://www.worldofsteel.com/Types%20of%20CRGO.html</a>.
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[[Page 64615]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.004
Electrical transformers are typically produced with either stacked
or wound cores. Stacked cores are most often used in larger
distribution and power transformers, while wound cores are used in
small and medium distribution transformers that step-down the voltage
from the transmission line and provide power. In either case, GOES is
the most common material used.
When used in stacked cores, GOES is sheared or stamped into
individual laminations, which are then stacked together to form the
core. Stacked laminations often resemble letters of the alphabet,
including C, E, L, U, and I shapes. Commonly used core shapes include
E-I, E-E, L, and U-I. When used in wound cores, a continuous length of
GOES is wound around a mandrel multiple times to form the core. Copper
windings (electricity conductors) are wrapped around both stacked and
wound cores.
Transformers can be produced in ``single-phase'' or ``three-phase''
models. A single-phase transformer has one primary and one secondary
set of windings, while a three-phase transformer has three primary and
secondary windings around three core limbs. Most commercial electric
power applications use three-phase transformers, while lower voltage
and distribution level transmissions use single-phase transformers.
There are two typical configurations for the core and windings of a
transformer: Core-form and shell-form. In core-form, the windings are
in a cylindrical shape around the legs of the core. In shell-form, the
windings are wrapped around the center of the core. Core-form
transformers are the most widely used because they are generally
simpler in design and less expensive than shell-form transformers.
Shell form transformers typically use more electrical steel and are
more resistant to short circuit offering an advantage for extra high
voltage applications. For this reason, they are often used in
industrial applications, such as steel mills, where short circuits are
common.
C. Electrical Steel \23\
---------------------------------------------------------------------------
\23\ This section draws from USITC's report, Grain-Oriented
Electrical Steel From the People's Republic of China, the Czech
Republic, Germany, Japan, the Republic of Korea, Poland, and the
Russian Federation: Initiation of Antidumping Duty Investigations,
78 FR 65283 (October 31, 2013).
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As noted in the above description of transformer construction, the
key material used in the core of most transformers is GOES; this
application accounts for the majority of GOES consumption. The magnetic
properties of electrical steel are integral to the primary function of
transformers, i.e., converting voltage from one level to another.
Electrical steel is a flat-rolled silicon alloy. The benefits of
adding silicon to steel include increased electrical resistivity, high
permeability, and low hysteresis loss. There are two types of
electrical steel: GOES, also known as Cold-Rolled Grain Oriented Steel
(abbreviated CRGO), and non-grain-oriented electrical steel (NOES),
also known as Cold-Rolled Non-Grain Oriented Steel (abbreviated CRNGO).
GOES is the most energy efficient type of electrical steel used to
transport and transform mechanical energy to electrical energy. Its
primary application is in transformers where energy or core loss is
critical (particularly large and medium-sized electrical power and
distribution transformers. In contrast, NOES is more commonly used in
electric motors and generators, as well as in some smaller
transformers.
GOES is milled to yield exceptionally good magnetic properties. It
can be sold in sheets or strips in fully processed form (annealed by
the manufacturer) or semi-processed (requiring further heat treatment
by purchaser). GOES, which typically contains approximately 3.2 percent
by weight of silicon, is manufactured using specialized rolling and
annealing (heat treatment) processes, which produces grain structures
uniformly oriented in the rolling (lengthwise) direction of the steel
sheet. Compared with NOES, this uniformly oriented grain structure
permits the GOES steel sheets to conduct a magnetic field with a higher
degree of efficiency in the direction of rolling.
1. Types of GOES
GOES is produced in compliance with specifications issued by
standards organizations and various proprietary specifications. For
example, conventional GOES is available in standard gauges
(thicknesses), ranging from 0.007 inch (0.18 mm) through 0.0138 inch
(0.35 mm), and high-permeability GOES is found in two standard
thicknesses (0.23 mm and 0.27mm). Conventional products in the standard
thicknesses are often referred to as U.S. or American Iron and Steel
Institute grades M2 through M6. Thinner gauge GOES is often preferred
[[Page 64616]]
because thinner laminations yield lower core losses in transformers,
despite the added cost for both the steel and the manufacturing of the
transformer core. Within each type of GOES, magnetic characteristics
may vary, with producers manufacturing the same product with differing
average core losses.
In addition to differences in thickness, GOES is produced with
varying levels of magnetic permeability, distinguished by the size and
orientation precision of the grains within the steel. Conventional GOES
has smaller but less precisely oriented grains, while high-permeability
GOES has more precisely oriented but larger grains. High-permeability
products allow a transformer to operate at a higher level of flux
(flow) density than conventional products, thus permitting a
transformer to be smaller and have lower energy operating losses.
[GRAPHIC] [TIFF OMITTED] TN18NO21.005
High permeability GOES is also produced as a domain-refined
(surface-treated) type that has even lower core loss at high flux
density. Domain refinement occurs by using laser scribing, mechanical
scribing or electrolytic etching to scribe thin lines onto the surface
of the steel, which subdivides larger-oriented grains into smaller ones
to produce ``domain-refined GOES'' (DR-GOES). GOES that undergoes laser
scribing does not retain its enhanced magnetic characteristics when it
is annealed (heat treated) to relieve internal stresses. As a result,
laser-scribed GOES (or ``non-heat-proof GOES'') is not suitable for
producing wound-core transformers, which require superior core-loss
properties but must undergo heat treatment to relieve internal stresses
(which increase core losses) accumulated from the manufacturing
process. By contrast, domain-refined GOES produced by mechanical
scribing or electrolytic etching (``heat-proof'' or ``permanent'' DR-
GOES'') retains its enhanced magnetic characteristics, even though
stress-relief treatment. There is no known production of mechanically
scribed or electrolytically-etched heat-proof GOES in the United
States.
2. Amorphous Metal
Amorphous metal transformer cores are an alternative to traditional
cores made from GOES. Amorphous metal, called metglas, is an alloy of
iron that includes boron, silicon, and phosphorous in the form of thin
foil. Produced using rapid solidification of molten alloy (at a rate of
about one million degrees Celsius per second), it differs from GOES in
that it has a random rather than a crystalline structure. While more
expensive than GOES on a per kilogram basis and more labor intensive to
form into cores, the material has the potential to reduce costs in the
long run for utilities over the life of the transformer. Compared to
cores made from GOES, core losses from eddy currents can be 70-80
percent lower in transformers with amorphous metal cores, reducing
their operating costs and improving their energy efficiency. Amorphous
metal is most often used in industrial and distribution transformers
with power handling capacities in the 50 to 1000 kVA range.
D. Transformer Construction
The typical transformer manufacturing process consists of the
following steps:
1. Engineering and design: Design is complex, balancing the costs
of raw materials (copper, steel, and cooling oil), electrical losses,
manufacturing labor hours, plant capability constraints, and shipping
constraints.
2. Core building: The core is the most critical component of a
transformer, and it requires both a highly trained and skilled
workforce and a supply of GOES.
3. Windings production and assembly of the core and windings:
Windings are predominantly copper and have an insulating material.
4. Drying operations: Excess moisture must be removed from the core
and windings because moisture can degrade the dielectric strength of
the insulation.
5. Tank production: A tank must be completed before the winding and
core assembly finish the drying phase so that the core and windings do
not reabsorb moisture.
6. Final assembly: The final assembly must be done in a clean
environment; even a tiny amount of dust or moisture can deteriorate the
performance of a transformer.
7. Testing: Testing is performed to ensure the accuracy of voltage
ratios, verify power ratings, and determine electrical impedances.
V. Importance for Critical Infrastructure and National Security
A. Critical Energy Infrastructure
The Cybersecurity and Infrastructure Security Agency (CISA) has
identified 16 critical infrastructure sectors whose assets, systems,
and networks, whether physical or virtual, are considered so vital to
the United States that their incapacitation or destruction would have a
debilitating effect on security, national economic security, national
public health or safety, or any combination thereof.\24\ One of these
16 sectors is the Energy Sector. CISA has
[[Page 64617]]
determined that the U.S. energy infrastructure fuels the economy of the
21st century. Without a stable energy supply, health and welfare are
threatened, and the U.S. economy cannot function. In fact, CISA notes
that, among the sixteen sectors, the Energy Sector is uniquely critical
because it provides an ``enabling function'' across all critical
infrastructure sectors. The energy infrastructure is divided into three
interrelated segments: Electricity, oil, and natural gas. Items subject
to this investigation form the backbone of the electricity segment.
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\24\ <a href="https://www.cisa.gov/critical-infrastructure-sectors">https://www.cisa.gov/critical-infrastructure-sectors</a>.
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The U.S. electricity segment contains more than 9,700 power plants
with 1,200 gigawatts capacity, sourced by coal, petroleum, natural gas,
nuclear, hydroelectric, and renewable energy sources such as wind and
solar.\25\ The number of power plants has increased significantly in
recent years, due primarily to the expansion of solar and wind power
generation. The electricity generated by the plants is processed along
hundreds of thousands of miles of high voltage transmission lines and
millions of miles of local distribution lines through transformers
subject to this investigation. In addition to plant-generated power,
there is an evolution of sorts where distributed energy resources are
allowing energy resources such as solar, wind, and energy storage, to
be owned and operated at the customer level. However, the vast majority
of electric power is in plant-generated and delivered via traditional
means to consumers.
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\25\ EIA, Electric Power Annual, Table 4.1.
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In its Energy-Sector Specific Plan, CISA notes that the failure of
U.S. power infrastructure, and specifically LPTs, could present a
vulnerability to the electric grid. CISA further expresses concern that
the United States heavily depends on overseas manufacturers to meet its
demand for LPTs and that the supply and procurement of LPTs can be
challenging because it can take more than 12 months to replace an LPT
due to its long and complex procurement process and the uniqueness in
construction for the specific voltages and currents at the intended
substation.\26\
---------------------------------------------------------------------------
\26\ <a href="https://www.cisa.gov/sites/default/files/publications/nipp-ssp-energy-2015-508.pdf">https://www.cisa.gov/sites/default/files/publications/nipp-ssp-energy-2015-508.pdf</a>.
---------------------------------------------------------------------------
While the electrical grid, especially at the BPS level,\27\ has
operated at a high-level of reliability, there is a growing concern
that the ever-expanding list of threats, which could be physical and/or
cyber-related in nature, further increases the grid's vulnerability and
the need for enhanced security. In addition to their long manufacturing
and acquisition lead time, LPTs pose unique vulnerabilities because of
transformer's susceptibility to the serious and evolving threats and
hazards. Single or multiple failures of LPTs are becoming a
significantly greater concern to grid reliability.
---------------------------------------------------------------------------
\27\ The North American Electric Reliability Corporation defines
the bulk-power system to consist of all generation components and
transmission system elements generally operating at 100 KV or
higher. See: <a href="https://www.nerc.com/pa/Stand/Project%20201017%20Proposed%20Definition%20of%20Bulk%20Electri/bes_phase2_reference_document_20140124_llh.pdf">https://www.nerc.com/pa/Stand/Project%20201017%20Proposed%20Definition%20of%20Bulk%20Electri/bes_phase2_reference_document_20140124_llh.pdf</a>.
---------------------------------------------------------------------------
As a result of these concerns, several efforts by the federal
government and electric utility industry have been initiated and are
underway. For example, the North American Electric Reliability
Corporation (NERC) issued the NERC-CIP-14 Standard in 2015, requiring
transmission asset owners to apply risk assessments to identify and
protect transmission stations and substations, as well as their
associated primary control centers. Instability, uncontrolled
separation, or cascading failure within an interconnected transmission
system could result if these assets were rendered inoperable or damaged
as a result of a physical attack.
In addition, the Fixing America's Surface Transportation Act [Pub.
L. No. 114-94 (FAST Act)], signed into law in December 2015, requiring
the DOE to establish a plan for a Strategic Transformer Reserve that
could be tapped in the event of a major disruption to the electric
grid.\28\ DOE's responsive recommendation is that a voluntary industry-
based approach would be more feasible and effective than a national,
Government-owned stockpile of transformers. The DOE report, however,
noted the lack of domestic capacity to produce LPT and the extreme
dependence on foreign suppliers, especially for high-voltage
transmission (>345 kV).\29\
---------------------------------------------------------------------------
\28\ <a href="https://www.congress.gov/114/plaws/publ94/PLAW-114publ94.pdf">https://www.congress.gov/114/plaws/publ94/PLAW-114publ94.pdf</a>.
\29\ DOE Transformer Reserve Study, 2017.
---------------------------------------------------------------------------
President Trump signed Executive Order 13920 (E.O. 13920), titled
``Securing the United States Bulk-Power System,'' on May 1, 2020.\30\
The President determined that the unrestricted foreign supply of BPS
electric equipment constitutes an unusual and extraordinary threat to
the national security, foreign policy, and economy of the United
States.
---------------------------------------------------------------------------
\30\ <a href="https://www.federalregister.gov/documents/2020/05/04/2020-09695/securing-the-united-states-bulk-power-system">https://www.federalregister.gov/documents/2020/05/04/2020-09695/securing-the-united-states-bulk-power-system</a>.
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In this Executive Order, the President declared that threats to the
BPS by foreign adversaries constitute a national emergency. He also
found that as it serves as the backbone of our Nation's energy
infrastructure, the BPS is fundamental to national security, emergency
services, critical infrastructure, and the economy. Transformers
subject to E.O. 13920 include substation transformers, substation
voltage regulators, and instrument transformers, which are key elements
of the BPS. The E.O. notes that the BPS is a target of those seeking to
commit malicious acts against the United States and its people,
including malicious cyber activities, because a successful attack on
the U.S. BPS would present significant risks to the economy and human
health and safety and would render the United States less capable of
acting in defense of itself and its allies.
While BPS electric equipment supplied by potential adversaries
raises immediate concerns, the Secretary of Energy has also noted that
evolving threats facing our critical infrastructure have only served to
highlight the supply chain risks and the need to ensure the
availability of secure components from American companies and other
trusted sources.\31\ DOE is currently undertaking a rulemaking effort,
in consultation with other agencies, to implement the authorities
delegated to the Secretary of Energy in E.O. 13920. E.O. 13920
authorizes the Secretary of Energy to (1) prohibit any acquisition,
importation, transfer, or installation of BPS electric equipment by any
person or with respect to any property to which a foreign adversary or
an associated national thereof has any interest, that poses an undue
risk to the BPS, the security or resiliency of U.S. critical
infrastructure or the economy, or U.S. national security; (2) establish
and publicize criteria for recognizing particular equipment and vendors
in the BPS electric equipment market as ``pre-qualified'' for future
transactions and to apply these criteria to establish and publish a
list of pre-qualified equipment and vendors; (3) in consultation with
heads of other agencies, to identify existing BPS electric equipment in
which a foreign adversary or associated national thereof has an
interest that poses an undue risk to the BPS, the security or
resiliency of U.S. critical infrastructure or the U.S. economy, or U.S.
national security, and develop recommendations to identify, isolate,
monitor, or replace this equipment as appropriate; and (4) establish a
Task Force on Federal Energy Infrastructure Procurement Policies
Related to National Security, which will focus on the coordination of
Federal Government
[[Page 64618]]
procurement of energy infrastructure, the sharing of risk information
and risk management practices, and the development of recommendations
for implementation to the Federal Acquisition Regulatory Council (FAR
Council). DOE and the Department will coordinate efforts to ensure
consistency of rules and supporting program activities.
---------------------------------------------------------------------------
\31\ <a href="https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system">https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system</a>.
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1. Role of Transformer Manufacturers in Critical Infrastructure
As part of its survey of industry conducted for this investigation,
the Department requested survey recipients to provide information on
which of the 16 critical infrastructure sectors their products support.
Respondents indicated support for all 16 sectors, with the Energy
Sector (not surprisingly) indicated most frequently. As mentioned
above, the Energy Sector is unique among the 16 sectors because it
provides an ``enabling function'' across all critical infrastructure
sectors, and survey responses validated this fact. Other critical
infrastructure sectors that received numerous mentions by survey
respondents were critical manufacturing, commercial facilities,
Government facilities, information technology, chemical sector, defense
industrial base, and food and agriculture (see Figure V-1).
[GRAPHIC] [TIFF OMITTED] TN18NO21.006
By product, all categories were again cited as providing support to
critical technology sectors (see Figure V-2). Most frequently mentioned
were dry-type transformers 16-500 kVA, followed by liquid-dielectric
transformers 60-100 MVA, and liquid-dielectric transformers under 650
kVA.
[[Page 64619]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.007
B. National Security/Defense Requirements
In today's technology-dependent environment, energy requirements
are inseparable from the Department of Defense's (DOD) mission
requirements, whether discussing weapons platforms or the installations
and systems that support those capabilities around the globe. As such,
energy resilience, which enables the capabilities of weapons platforms,
facilities, and equipment, is a critical investment that must be part
of the DOD's research, acquisition, operations, and sustainment
conversations.\32\
---------------------------------------------------------------------------
\32\ Department of Defense Annual Energy Management and
Resilience Report (AEMRR) for Fiscal Year 2018, <a href="https://www.acq.osd.mil/eie/Downloads/IE/FY%202018%20AEMR.pdf">https://www.acq.osd.mil/eie/Downloads/IE/FY%202018%20AEMR.pdf</a>.
---------------------------------------------------------------------------
DOD is the largest single energy-consuming entity in the United
States, both within the Federal Government and as compared to any
single private-sector entity. DOD operational and installation energy
consumption represents approximately 80 percent of total Federal energy
consumption, more than sixteen times the total energy consumption of
the next closest Federal agency (the United States Postal Service).\33\
In FY 2018, DOD spent approximately $3.49 billion on installation
energy, of which $2.5 billion was for electricity used to power, heat,
and cool buildings.
---------------------------------------------------------------------------
\33\ Id, p. 32.
---------------------------------------------------------------------------
The U.S. electrical grid, primarily under the ownership and control
of private organizations, supplies the power required to support DOD
installations, including military bases, arsenals, and laboratories.
This supply is a key part of the ``Defense Critical Electric
Infrastructure,'' which is defined as any electrical infrastructure in
the 48 contiguous States or the District of Columbia that serves a
facility designated by the Secretary of Energy as critical to the
defense of the United States and vulnerable to a disruption of the
supply of electric energy provided to such a facility by an external
provider, but that is not owned or operated by the owner or operator of
such facility.\34\ In 1998, with the issuance of Defense Reform
Initiative #49, the military services were directed to privatize their
utility systems. The Department of Defense's Defense Logistics Agency
Energy acts as the procurement agency for contracting with utilities
for this purpose.\35\
---------------------------------------------------------------------------
\34\ <a href="https://www.federalregister.gov/documents/2018/10/29/2018-23459/critical-electric-infrastructure-information-new-administrative-procedures">https://www.federalregister.gov/documents/2018/10/29/2018-23459/critical-electric-infrastructure-information-new-administrative-procedures</a>.
\35\ <a href="https://archive.defense.gov/dodreform/drids/drid49.html">https://archive.defense.gov/dodreform/drids/drid49.html</a>.
---------------------------------------------------------------------------
The Department of Defense operates 500 installations worldwide,
with nearly 300,000 buildings covering 1.9 billion square feet. Energy
needed to power these fixed installations accounts for nearly 30
percent of DoD's total energy use, and the installations rely
extensively on transformers of various power handling capacities to
distribute electricity at the appropriate voltage level.\36\
---------------------------------------------------------------------------
\36\ DOD AEMMR.
---------------------------------------------------------------------------
As noted above, DOD relies primarily on commercial power to support
its installations. Commercial power supplies can be threatened by a
variety of events, ranging from natural hazards and physical attacks on
infrastructure (including transformers), to cyber-attacks on networks
and Supervisory Control and Data Acquisition (SCADA) systems.
Disruption of power could affect critical DOD missions involving power
projection, defense of the
[[Page 64620]]
homeland, or operations conducted at installations in the United States
directly supporting warfighting missions overseas.
DOD's efforts to improve the energy resilience of its installations
mainly focuses on backup power generation to compensate when the
commercial grid experiences a disruption. However, emergency power
generation assets are ineffective if the surrounding distribution
system is unable to convey power between the generation asset and final
point of use. Therefore, DOD may also pursue upgrading distribution
system equipment, including transformers and power lines, as a
standalone solution if backup generation is already adequate or as an
integrated solution when new backup power generation assets are
implemented.
In addition to their vital role in the electricity grid to supply
power to military installations, transformers also play an essential
role in supporting military operations. Sophisticated military
equipment, such as missiles, fighter jets, and naval vessels, rely on
transformers of various types and capacities to provide the correct
voltage within subsystems. Additional military applications include
tactical displays and field operations equipment such as mobile power
supplies and reconnaissance equipment. In addition to reliability and
durability, military transformers must meet defense specifications (Mil
Spec) and often must be designed and manufactured to withstand extreme
environmental conditions, such as high humidity, salt spray, sand, high
altitude, shock, and vibration. Military transformers may be specially
encapsulated to withstand these types of harsh conditions.
[TEXT REDACTED].
Due to its importance for certain defense applications, the Defense
Logistics Agency (DLA) has included GOES among its requests for
inclusion in the National Defense Stockpile. In their Fiscal Year 2019
Report to Congress on Stockpile Requirements, DLA Strategic Materials
identified a potential shortfall for GOES of approximately [TEXT
REDACTED]. Per the Strategic and Critical Materials Stock Piling Act
(50 U.S.C. 98 et seq. Sec 14 (b)), shortfalls are estimated under
national emergency planning assumptions consisting of ``a military
conflict scenario consistent with the scenario used by the Secretary of
Defense in budgeting and defense planning purposes.'' In other words,
shortfall amounts are calculated based on surge requirements for the
military engaging in conflict, taking into consideration weapons and
munitions lost and expended during the conflict in an environment of
reduced foreign availability of supplies of strategic and critical
materials. If United States' sole domestic source of GOES were to cease
production, DLA's estimated shortfalls would be larger. DLA Strategic
Materials recommended a [TEXT REDACTED]. The stockpile recommendation
is lower than the estimated requirement due to competing stockpile
needs and budget constraints.
In the industry survey conducted as part of this investigation, the
Department queried participants as to whether their products were
provided, directly or indirectly, for U.S. defense systems,
installations, or known defense end-uses. The majority of survey
respondents were unable to provide specific information in this regard
because most defense-related sales are indirect; instead, respondents
noted that their products (especially liquid-dielectric transformers)
are used to provide power in the national grid that supplies power to
military bases. Most of those that responded to the question with
specifics reported that only a small percentage of sales, about 1-3
percent, involved defense-related uses. Moreover, in most cases, this
was just an estimate, as survey respondents typically did not have
insight into the ultimate end use of their products.
However, some survey respondents were able to provide precise
information on defense and military uses for their products. These
respondents supported every branch of the military, as well as the
Department of Energy/National Labs, the DLA, the State Department,
NASA, the Department of Defense's Missile Defense Agency, and the U.S.
Intelligence Community.
[[Page 64621]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.008
Based on survey responses, dry-type transformers (particularly of
higher power handling capacities) are suitable for inside installations
and thus play an important role in direct defense applications such as
onboard radars, missiles, ships, and aircraft.
[[Page 64622]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.009
No respondent attributed sales of voltage regulators, non-oriented
electrical steel, liquid-dielectric transformer 60,000-100,000 kVA, or
liquid-dielectric transformer over 100,000 kVA to direct defense
industrial base support.
[TEXT REDACTED].
[TEXT REDACTED].\37\ [TEXT REDACTED].
---------------------------------------------------------------------------
\37\ <a href="https://new.abb.com/news/detail/64657/abb-completes-divestment-of-power-grids-to-hitachi">https://new.abb.com/news/detail/64657/abb-completes-divestment-of-power-grids-to-hitachi</a>.
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VI. United States' and Global Markets for GOES, Transformers and
Transformer Components
A. GOES Market
The market for GOES is dominated by transformers, particularly
LPTs, which can weigh over 400 tons, and GOES constitutes a significant
portion of this weight. Although large transformers by sheer size
incorporate more GOES by weight, the market for them is small in terms
of units. In contrast, smaller transformers, such as distribution
transformers, utilize less GOES by weight, but they are sold in much
greater volumes and so also provide a significant market for GOES.
A recent report by a market research firm estimated that the global
market for GOES will reach $20.8 billion by 2025, with a compounded
annual growth rate (CAGR) of 5.8 percent. The average annual growth
rate in the United States is estimated to be 4.6 percent over the next
five years (adjusted downward from 5.7 percent due to the impacts of
COVID-19); the market in China will grow at 9.5 percent.\38\
---------------------------------------------------------------------------
\38\ <a href="https://www.reportlinker.com/p05798466/Global-Electrical-Steel-Industry.html?utm_source=GNW">https://www.reportlinker.com/p05798466/Global-Electrical-Steel-Industry.html?utm_source=GNW</a>.
---------------------------------------------------------------------------
AK Steel is the sole remaining U.S. supplier of GOES. Another
domestic producer, Allegheny Technologies, Inc. (ATI) stopped
production of GOES in 2016. However, industry reports indicate that Big
River Steel (Osceola, AR), a manufacturer of non-grain oriented steel,
intends to produce high quality GOES in the future, including high
permeability grades (such as Hi-B).\39\
---------------------------------------------------------------------------
\39\ <a href="https://bigriversteel.com/products/electrical/">https://bigriversteel.com/products/electrical/</a>.
---------------------------------------------------------------------------
Outside of the United States, there are 13 manufacturers of GOES,
as listed in Figure VI-1.
[[Page 64623]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.010
[TEXT REDACTED].\41\
---------------------------------------------------------------------------
\40\ <a href="http://www.corpin.cz/en/arcelorgosteel.html">http://www.corpin.cz/en/arcelorgosteel.html</a>.
\41\ [TEXT REDACTED]
---------------------------------------------------------------------------
A limited number of these global suppliers, such as those from
Japan and South Korea, are capable of producing the high permeability
GOES that the market is demanding in response to current DOE standards.
China is the world's largest producer of GOES but much of its
production is consumed internally, and Chinese firms have not dominated
export markets.
[TEXT REDACTED]
[[Page 64624]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.011
For GOES <600 Mm in width, the total trade in 2019 was $437.6
million, much smaller than GOES >=600 Mm in width, and the major
players were mainly Europen countries.
[[Page 64625]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.012
B. Transformer Laminations and Cores
Most of the major global transformer companies produce laminations
and cores for internal consumption, although manufacture of these items
does not necessarily occur in the same facility in which they are
consumed. However, there are also companies that manufacture these
products for transformer producers. Lamination and core manufacturers
tend to be small companies that produce specialized products, and there
is little information available on them as a distinct industry sector.
Based on data available from GTAA, the biggest players in the world
export market for the category including transformer parts (laminations
and cores but also products not subject to this investigation) \42\ is
China, including Hong Kong. In 2019, of the total $11.3 billion of
trade of transformer parts, China exported $2.8 billion and Hong Kong
exported $2.3 billion; together, China and Hong Kong accounted for 44.9
percent of the total trade. Germany was second, with exports of $924.4
million. Although Canada and Mexico are the main sources for U.S.
imports of transformer cores and laminations, neither country is
significant actors in global exports: Mexico ranked 8th with $283.5
million and Canada ranked 12th with $184.0 million.
---------------------------------------------------------------------------
\42\ Note: At the 6 digit HTS level for which global trade data
are available, this category (8504.90) includes parts and components
unrelated to transformers (e.g., parts of static converters and
inductors). There is no way to determine how much of this trade is
transformer laminations and cores. Therefore, this information
should be considered indicative of general trading patterns only.
---------------------------------------------------------------------------
[[Page 64626]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.013
The leading destination for China's exports of transformer parts
was the United States with $282.4 million total imports in 2019,
followed by India with $256.9 million. The leading destination for Hong
Kong's exports of transformer parts during the same year was also the
United States with $152.6 million, followed by Germany with $77.9
million.
C. Global and U.S. Transformers Market
[TEXT REDACTED]. Typical customers are companies in electricity
generation, transmission, and distribution industries. End-use
customers also include energy-intensive industries such as mining,
chemical manufacturing, and steel and pulp/paper mills, as well as
large commercial facilities.
The global transformer industry has undergone numerous mergers,
acquisitions, consolidations over the past several decades, resulting
in fewer, larger players that offer a wider product range and are able
to benefit from economies of scale. During the consolidation process,
many manufacturers moved their production offshore (e.g., Mexico,
India, Colombia), taking advantage of lower labor costs, lower labor
and environmental standards, and access to local markets with rapidly
increasing demands for electricity.\43\ Mexico, in particular, has
become a significant player in transformer manufacturing; among the
global transformer manufacturers with production facilities in Mexico
[TEXT REDACTED].
---------------------------------------------------------------------------
\43\ Large Power Transformers and the U.S. Electric Grid, DOE,
2014.
---------------------------------------------------------------------------
In addition to these large global players, in the United States
there are a number of smaller companies that manufacture transformers
of various power-handling capacities. These include [TEXT REDACTED].
In its most recent market assessment, Global Market Insights
estimated the global transformer market to reach $80 billion by 2024,
assuming a CAGR of 6.5 percent. Key markets for transformers are those
with rising electricity demands and investments in power distribution
infrastructure--namely, the Asia/Pacific region, Africa, and the Middle
East. The greatest market potential is in emerging markets such as
these; 15 percent of the world's population does not yet have access to
electricity.\44\
---------------------------------------------------------------------------
\44\ Draws from <a href="http://www.firstresearch.com/industry-research/Transformer-Manufacturing.html">http://www.firstresearch.com/industry-research/Transformer-Manufacturing.html</a> (Dun & Bradstreet).
---------------------------------------------------------------------------
In contrast, the U.S. market is mature, and demand for transformers
is largely based on upgrades and replacements of aging infrastructure,
including efforts to install smart grids to increase energy efficiency.
The average transformer in the United States is 38 years old, with 70
percent of U.S. transformers older than 25 years.\45\ New transformers
are also needed to distribute electricity from the growing number of
renewable energy generation plants. With over 9,000 power plants, 1.2
terawatts of power generating capacity, and 360,000 miles of high
voltage transmission lines, the United States remains one of the
largest markets for transformers.
---------------------------------------------------------------------------
\45\ DOE LPT Study, 2014 update.
---------------------------------------------------------------------------
Trade data available through GTA show the major players by country
in export markets for transformers of various power handling
capacities. While only available at broad (6 digit HTS) product
categories, these data are useful to show the relative global export
market sizes and which countries dominate exports in each broad
segment.
Among all transformer categories, the product with the greatest
value of world exports is the liquid-dielectric transformers with a
handling capacity of
[[Page 64627]]
more than 10,000 kVA (HTS 8504.23). This category includes large power
transformers, as well as medium sized power transformers and larger
distribution transformers. It accounted for nearly 45 percent of total
world trade in transformers, based on average annual value of global
exports over the 2014-2019 period. In this category, China is the top
exporter with an average annual export value of $893.9 million,
followed by South Korea with $635.9 million, and Germany with $371.8
million.
For liquid-dielectric transformers with smaller power handling
capacities (distribution transformers, HTS 8504.21 and 8504.22), as
well as mid-sized dry-type transformers (HTS 8504.32 and 8504.33),
Mexico is a major exporter. Virtually all of Mexico's transformer
exports are destined for the United States.
[GRAPHIC] [TIFF OMITTED] TN18NO21.014
[[Page 64628]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.015
D. United States Transformers Market
In the United States, there are about 250 establishments involved
in transformer manufacturing (including units of companies with
multiple locations), with a combined annual revenue of about $5 billion
according to Global Market Insights. The National Electrical Equipment
Manufacturers Association (NEMA) is the major sector-specific trade
association that represents companies in this industry. NEMA states
that there are over two dozen companies and over 15,000 employees
involved in transformer manufacturing in the United States.\46\
---------------------------------------------------------------------------
\46\ NEMA Public Comments.
---------------------------------------------------------------------------
Transformer manufacturing is most highly concentrated in
Mississippi, Wisconsin, Virginia, North Carolina, and California. The
industry is highly regulated by local, state, and federal agencies for
environmental protection reasons, as well as to ensure workplace
safety. DOE sets energy efficiency standards for distribution
transformers,
[[Page 64629]]
with the standards last increased to achieve stricter efficiency in
2016.\47\
---------------------------------------------------------------------------
\47\ <a href="https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing">https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing</a>.
---------------------------------------------------------------------------
The industry is made up of large companies, such as GE
(headquartered in the United States but with most transformer
manufacturing facilities abroad) and ABB (now called Hitachi ABB Power
Grids), which offer a variety of transformer products to utilities and
industrial customers. In addition, there are numerous small companies
that manufacture specialty transformers and niche products to
industrial and consumer products customers. However, the 50 largest
companies account for 90 percent of industry revenue.\48\
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\48\ <a href="https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing">https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing</a>.
---------------------------------------------------------------------------
According to the Census Bureau, in 2018 (the most recent year for
which data are available), the U.S. power, distribution, and specialty
transformer manufacturing industry employed 19,227 people, operated in
285 locations, and totaled $6.15 billion in revenue. The Census Bureau
classifies data using the North American Industry Classification System
(NAICS) codes. Because the NAICS code representing power, distribution,
and specialty transformer manufacturing is broader and more inclusive
than the scope of this investigation, the data below should be
interpreted to represent industry trends.
[GRAPHIC] [TIFF OMITTED] TN18NO21.016
[[Page 64630]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.017
BILLING CODE 3510-33-C
Imports account for about 35 percent of the U.S. market for
transformers (of all power handling capacities combined); primary
sources of imports are Mexico, Canada, South Korea, and China. About 10
percent of U.S. production is exported, mainly to Mexico and Canada.
With regard to specific subsectors of the transformer industry,
there are few companies worldwide that manufacture LPTs; in the United
States, as previously discussed, there are six manufacturers but their
capability is limited. Distribution transformers are produced by a
greater number of companies, including U.S. manufacturers.
DOE has gathered extensive information about the distribution
transformer market as a result of the energy conservation standards
that the Energy Efficiency and Renewable Energy (EERE) Office is
required to set under the Energy Conservation and Policy Act of 1975,
as amended. DOE determined that there is significant domestic
manufacturing of these products, finding that 75 percent of the
employees who work for manufacturers that provide medium-voltage dry-
type transformers are located domestically.\49\
---------------------------------------------------------------------------
\49\ DOE, EERE, Technical Support Document (TSD), Ch. 12,
Manufacturer Impact Analysis, filed in Docket No. ERE-2010-BT-STD-
0048 (Apr. 2013), at 12-48.
---------------------------------------------------------------------------
The Edison Electric Institute (EEI), which represents investor-
owned electric companies that provide power to about 220 million
Americans, estimates that its members have procured about four million
transformers, at a total cost of more than $20 billion, over the last
five years. The vast majority of these were distribution transformers.
EEI estimates that investments in the grid will continue at similar
levels in the coming years. EEI members also reported that transformers
were sourced both domestically and internationally, with a majority of
the reported distribution transformer purchases sourced
domestically.\50\
---------------------------------------------------------------------------
\50\ EEI et al. Public Comments.
---------------------------------------------------------------------------
VII. U.S. Production Capabilities, Industry Health and Competitiveness,
and the Impact of Imports on National Security for Transformer
Component Manufacturers
A. Introduction
This chapter evaluates the state of U.S. production capabilities,
industry health and competitiveness, and the impact of imports on
national security for GOES, transformer lamination, and transformer
core manufacturers. In particular, it presents data on U.S. GOES
production, as well as production of key transformer components
primarily composed of GOES: Transformer laminations, stacked cores, and
wound cores.
B. Grain-Oriented Electrical Steel
GOES is a highly specialized, technically challenging product that
requires dedicated equipment, advanced manufacturing process know-how,
and well-trained, experienced employees. This product is absolutely
critical to the performance of transformers, as it is the key material
used in transformer cores, which constitutes the primary market for
GOES.
AK Steel is the only domestic producer of GOES.\51\ The company,
then known as Armco Steel, invented and introduced GOES products to the
[[Page 64631]]
market in 1926.\52\ Another manufacturer, Allegheny Ludlum, a
subsidiary of Allegheny Technologies, Inc. (ATI), ceased manufacturing
of GOES in 2016, with a loss of 350 jobs. [TEXT REDACTED] \53\
---------------------------------------------------------------------------
\51\ Paul J. Bough, ``ATI to Permanently Close Midland, Bagdad
Metal Plants,'' Pittsburgh Business Times, October 25, 2016, <a href="https://www.bizjournals.com/pittsburgh/news/2016/10/25/ati-to-permanently-close-midland-bagdad-metals.html">https://www.bizjournals.com/pittsburgh/news/2016/10/25/ati-to-permanently-close-midland-bagdad-metals.html</a>. Another U.S. company, Big River
Inc. (Osceola, Arkansas) has indicated an intention to enter the
GOES market. The company currently produces a wide variety of non-
grain oriented steels for motor laminations. It has invested in
plant equipment and infrastructure to expand production to include
high permeability grain-oriented electrical steels. It also has
expressed interest in utilizing the facility at which Orb Steel
formerly manufactured grain oriented electrical steel in the United
Kingdom (owned by Tata of India, which is attempting to sell the
plant). However, the company's production capacity and product range
is unknown at this time so cannot be counted as domestic production
capability.
\52\ <a href="https://www.aksteel.com/our-products/electrical-steel/grain-oriented-electrical-steels">https://www.aksteel.com/our-products/electrical-steel/grain-oriented-electrical-steels</a>.
\53\ [TEXT REDACTED].
---------------------------------------------------------------------------
AK Steel melts, rolls, and finishes electrical steel at its Butler
Works facility in Butler, Pennsylvania (which employs about 1,300
employees; this plant also processes other rolled steel products
including Non-Grain Oriented Electrical Steel) and finishes electrical
steel at its Zanesville Works plant in Zanesville, Ohio (which employs
about 100 employees). However, electrical steel represents only a small
percentage of AK Steel's business, accounting for [TEXT REDACTED] of
revenues (the automotive industry is AK Steel's primary customer). AK
Steel was acquired by Cleveland Cliffs Inc., the nation's largest
producer of iron ore pellets, in March 2020.\54\
---------------------------------------------------------------------------
\54\ <a href="http://www.clevelandcliffs.com/English/news-center/news-releases/news-releases-details/2020/Cleveland-Cliffs-Completes-Acquisition-of-AK-Steel/default.aspx">http://www.clevelandcliffs.com/English/news-center/news-releases/news-releases-details/2020/Cleveland-Cliffs-Completes-Acquisition-of-AK-Steel/default.aspx</a>.
---------------------------------------------------------------------------
While still a leader in the domestic market, AK Steel's electrical
steel operations are in poor financial condition, in part due to years
of pressure from lower-cost foreign imports. In his testimony before
the Congressional Steel Caucus in March 2020, Lourenco Goncalves, the
President & CEO of Cleveland Cliffs, warned that the company would be
forced to close the Butler and Zanesville facilities, both of which are
unprofitable, unless the U.S. Government were to take action to limit
imports of GOES in the form of transformer laminations and cores.\55\
If AK Steel's GOES operations were to close, the United States would
lack the ability to produce transformers of any power handling capacity
without relying on foreign sources for the key material that is
essential to their operation and efficiency.
---------------------------------------------------------------------------
\55\ <a href="http://www.butlereagle.com/article/20200306/NEWS12/200309971">http://www.butlereagle.com/article/20200306/NEWS12/200309971</a>.
---------------------------------------------------------------------------
The charts below present the current status of AK Steel specific to
several important industry measures.
------------------------------------------------------------------------
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED].\56\ [TEXT REDACTED] \57\ [TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED].\58\
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
---------------------------------------------------------------------------
\56\ [TEXT REDACTED].
\57\ [TEXT REDACTED].
\58\ [TEXT REDACTED].
---------------------------------------------------------------------------
[TEXT REDACTED].<SUP>59 60</SUP> [TEXT REDACTED] \61\ [TEXT
REDACTED].\62\ [TEXT REDACTED].
---------------------------------------------------------------------------
\59\ U.S. Department of Commerce, Bureau of Industry and
Security, Section 232 Investigation on Impact on National Security
of Imports of Steel, 2017.
\60\ [TEXT REDACTED].
\61\ Ibid.
\62\ Ibid.
---------------------------------------------------------------------------
[TEXT REDACTED]. As a result of its inadequate investment, AK Steel
says it will not be able to innovate in order to keep pace with the
latest production technology or be able to meet increasingly stringent
DOE efficiency standards. AK Steel states (and transformer companies
validate) that the company can make high-permeability GOES products
that have very low losses and are highly efficient. However, if the DOE
increases its efficiency standards to require more high-permeability
GOES, AK Steel would likely need to invest in more capacity to meet
U.S. demand. Under current market conditions and pricing, AK Steel
claims it cannot justify investments to achieve such additional
capacity.\63\
---------------------------------------------------------------------------
\63\ AK Steel Public Comments.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
1. U.S. GOES Production, Consumption and Import Penetration
[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
The United States imported about 27,000 metric tons of GOES in
2019, for which Japan and Korea were the main sources. Imports of GOES
in 2019 were dramatically lower than in 2018 (down 56 percent), a
result of 25 percent tariffs imposed on imported GOES from most
locations (Steel 232 tariffs). However, the steel tariffs did not
achieve the intended result of increased production and consumption of
domestic GOES.
BILLING CODE 3510-33-P
[[Page 64632]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.018
[[Page 64633]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.019
[[Page 64634]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.020
Thus, based on production and trade data for GOES (presented in
Table VII-11), imports accounted for less than 20 percent of domestic
consumption (on a tonnage basis) in 2019. This is down from a high of
37 percent in 2017, prior to imposition of the steel tariffs. On a
value basis, penetration is even lower, at 13 percent. These simple
calculations do not present an accurate picture of the dependence of
the domestic transformer industry on imported GOES, however, as will be
discussed in the section analyzing suppliers to U.S. transformer
manufacturers provided in the BIS industry survey.
2. Analysis of BIS Survey Supplier Data: GOES
The Department's industry survey provided additional data and
insight on domestic consumption of GOES. Thirty-nine survey respondents
reported that they directly sourced GOES and provided details on their
suppliers and purchases. The aggregated amount of GOES that they
procured on an annual basis was relatively stable between 2015 and
2019, [TEXT REDACTED]. This figure is roughly consistent with estimates
for domestic GOES demand. Moreover, the total amount supplied by AK
Steel as reported by survey respondents is consistent with that
company's GOES production data. This data indicates that the
Department's survey accurately captured most of the market.
The survey respondents reported obtaining GOES from a wide variety
of global suppliers. Purchases were made from suppliers in Japan,
China, Mexico, Germany, Russia, Canada, France, Brazil, Poland, and
South Korea, as well as the United States. In addition to the steel
mills that produce GOES sheets in coils, some respondents included in
their responses information on purchases from suppliers that provide
GOES in slightly more processed forms. These suppliers typically start
their production with electrical steel sourced from a steel mill
producing electrical steel and perform additional processing such as
cutting, slitting, stamping, and/or coating. In this regard, the line
between GOES and transformer laminations is seemingly quite indistinct,
as other survey recipients recorded purchases from these same suppliers
under the ``laminations'' category.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
Four GOES suppliers accounted for 93 percent of purchases by the
survey population in 2019. [TEXT REDACTED]. The remainder of the market
shifted considerably among other players, with the most significant
development the exit of ATI (Allegheny Ludlum) from the market in 2016.
[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED].
[TEXT REDACTED].
[TEXT REDACTED].
[TEXT REDACTED].
3. Sufficient Quantity and Quality of Domestic GOES
A number of transformer companies have indicated, through their
public comments, through the Section 232 steel tariff exclusion
process, and through survey responses, that the sole domestic source of
GOES (AK Steel) lacks the capacity to meet the domestic demand for the
full range of GOES products. U.S. consumption of GOES is estimated at
approximately 220,000 metric tons per year, [TEXT REDACTED].\64\
However, AK Steel's stated capacity does not take into consideration
the production of variable grades of GOES. For example, much of the
company's production is of conventional grades of GOES (M class); its
production capacity for higher grades is limited.
---------------------------------------------------------------------------
\64\ Core Coalition Public Comments.
---------------------------------------------------------------------------
In its public comments, the Core Coalition noted that although AK
Steel is widely recognized in the industry as a supplier of high-
quality GOES. However, it is a high-cost supplier compared to foreign
sources, which the Core Coalition attributes to the company's lack of
capital investment and its continued use of obsolete production
equipment and processes. AK Steel notes that the Department's
[[Page 64635]]
antidumping investigations have found that foreign GOES manufacturers
sell at unfair prices (dumping) or are subsidized by their governments.
The European Union has found AK Steel practices dumping.
In addition, AK Steel does not manufacture or offer an intermediate
grade of GOES, called MOH, which is widely available from suppliers in
South Korea, Japan, and China. While AK offers a higher grade GOES that
can be used instead of MOH, it is more expensive and is not optimal for
use in certain standard-issue transformers where GOES price weighs more
heavily than energy efficiency in sourcing decisions.
Another concern expressed by domestic transformer manufacturers is
the maximum width of AK's Steel's product. The company does not produce
steel wide enough (>932mm) to form the laminations and cores of larger
transformers. According to the technical specifications on AK Steel's
website, the maximum width of its domain-refined products (TRAN-COR) is
920mm.\65\ While two pieces of steel can be patched together, this
process leads to increased production costs and loss of efficiencies in
the core.\66\
---------------------------------------------------------------------------
\65\ <a href="https://www.aksteel.eu/files/downloads/TRAN-COR_H_%20Grain_Oriented_Electrical_Steel.pdf">https://www.aksteel.eu/files/downloads/TRAN-COR_H_%20Grain_Oriented_Electrical_Steel.pdf</a>.
\66\ Public comments of Domestic Transformer Producers.
---------------------------------------------------------------------------
Many transformer companies submitting public comments during the
investigation indicated that AK Steel's lack of capital investment over
many years has affected the company's ability to supply the highest
grades of steel grades that steel transformer manufacturers prefer to
use in the cores of distribution transformers subject to DOE energy
standards. In addition, in general, utility companies are increasingly
seeking to install transformers with high efficiency/lower losses (that
tend to require higher grades of GOES) that reduce costs and are
environmentally friendly. For example, European and Asian manufacturers
offer a high permeability GOES called HI-B (originally developed by
Nippon Steel of Japan but licensed the technology to other
companies).\67\
---------------------------------------------------------------------------
\67\ Public comments of Domestic Transformer Producers.
---------------------------------------------------------------------------
A summarized list of concerns with AK Steel's capabilities and
capacity expressed through the public comments process is provided in
the table below.
[[Page 64636]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.021
[[Page 64637]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.022
[TEXT REDACTED].\68\
---------------------------------------------------------------------------
\68\ Joe Paladino Technical Advisor, DOE Office of Electricity,
in written comments to BIS submitted on 9/21/202.
---------------------------------------------------------------------------
A number of transformer manufacturers indicated that the sole
domestic source of GOES does not offer the full range of efficient
GOES, with the result that the manufacturers must seek foreign
suppliers. For example, transformer manufacturers indicated that they
are unable to obtain permanent, heat resistant domain-refined grain
oriented steel (PDR GOES) from the sole domestic manufacturer.\69\ DOE
energy efficiency standards for distribution transformers that came
into effect in 2016 have reduced demand for lower-permeability,
conventional grades of GOES, and increased the demand for high grades,
such as PDR-GOES. PDR-GOES is capable of being annealed after core
production while retaining its domain-refined properties, which is
important for use in wound cores often used in distribution
transformers.\70\ Nippon Steel of Japan is recognized as the primary
source of this product.
---------------------------------------------------------------------------
\69\ For example, in its public comments, Central Moloney, a
domestic manufacturer of distribution transformers, expressed
concern over the quality of AK Steel's GOES. They said that the
company's manufacturing equipment and processes are antiquated, and
it lacks the capability to produce electrical steel that it prefers
to use to meet DOE efficiency standards for distribution
transformers--namely Permanent Domain-Refined GOES (PDR). In
addition, tariff exclusion requests from Sumitomo, ABB, Eaton/
Cooper, and SPX cited lack of domestic capabilities.
\70\ <a href="https://Agmetalminer.com/tag/grain-oriented-electrical-steel/">https://Agmetalminer.com/tag/grain-oriented-electrical-steel/</a>.
---------------------------------------------------------------------------
[TEXT REDACTED]. However, while there is some degree of
interchangeability among different grades of GOES in transformer core
construction, doing so could result in higher core losses/decreased
efficiencies and/or require a larger size transformer. As a result,
using non-permanent DR-GOES in lieu of PDR-GOES could affect the
competitive position of the transformer manufacturer when bidding for
contracts.\71\
---------------------------------------------------------------------------
\71\ See, e.g., SPX Exclusion Request.
---------------------------------------------------------------------------
This apparent deficiency in U.S. production capabilities for GOES
with superior magnetic qualities helps explain continued imports of
GOES (especially from Japan) despite the additional cost due imposition
of tariffs. In fact, the Department has granted some requests for
exclusion from the 25 percent tariffs on imported steel due to lack of
domestic capability of the particular product grade. Additionally, some
imports of GOES from South Korea and Brazil continue to be economical
because the Section 232 remedy resulted in a quota, rather than tariffs
for steel from those countries.
While just a rough estimate, the average unit value by country
(based on value imports divided by unit imports) is broadly
illustrative of the varying grades of GOES from different suppliers.
Other than the United Kingdom, which is not a major source of GOES
imports, GOES imported from Japan has an average unit value
significantly higher than from other sources. This suggests that Japan
is the source of the highest grades GOES imported into the United
States.
[[Page 64638]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.023
BILLING CODE 3510-33-C
C. Laminations and Cores
Transformer lamination and core producers make up the primary
customer base for GOES suppliers. There are very few companies in the
United States that manufacture only transformer laminations and cores;
some major transformer companies produce laminations and cores for in-
house use in their transformers. Manufacture of these critical
transformer components requires expensive, specialized equipment which
can only produce laminations within a specific size range. This limits
the ability of independent companies to offer laminations in the varied
sizes required across transformer product categories. Over the past few
years, there has been a marked decline in domestic manufacturing of
laminations and cores (by both transformer companies and independent
producers), and a movement of production offshore (especially to Canada
and Mexico). A corollary to the movement of lamination and core
manufacture out of the United States is the loss of a potential
domestic market for AK Steel's GOES.
Because electrical steel accounts for such a large percentage of
the cost of transformer laminations and cores (averaging about 60
percent for the surveyed companies), the 25 percent import tariff
raised material costs and decreased transformer manufacturers' ability
to compete. The CEO of one of the remaining domestic producers of these
items, Orchid Monroe LLC (Wisconsin), stated that imported laminations
and cores often cost less than the price at which its company can
procure domestic electrical steel, without any processing or
manufacturing costs included.\72\
---------------------------------------------------------------------------
\72\ Public Comments from Gordon Bibby, Orchid Monroe LLC.
---------------------------------------------------------------------------
Global transformer companies with multiple facilities have adapted
to changes in raw material prices by shifting their lamination and/or
core production or sourcing offshore in order to continue to utilize
foreign-origin GOES without the price premium for domestically produced
GOES. Smaller companies that specialize in these products either moved
their operations offshore or ceased production.
The trend toward moving lamination production offshore occurred
prior to the Section 232 steel tariffs, but the situation worsened
after their imposition. The expansion of core-making capacity in Canada
and Mexico began in the mid-2010s, at which time the United States had
initiated antidumping investigations on GOES from many foreign sources.
In the antidumping investigations conducted by the Department, many
foreign suppliers of GOES were found to be selling at less than fair
value, or in the case of China, with the benefit of government
subsidies. However, the International Trade Commission did not find
material injury to U.S. industry was not found, no duties were
imposed.\73\ Despite this, partly to avoid potential duties,
transformer and transformer component manufacturers began to shift
production offshore where they are able to use foreign origin GOES
without the risk of increasing costs due to the imposition of duties.
---------------------------------------------------------------------------
\73\ See Grain-Oriented Electrical Steel from Germany, Japan,
and Poland, Inv. Nos. 731-TA-1233, 1234, and 1236, USITC Pub. 4491
(Sep. 2014), at 2.
---------------------------------------------------------------------------
Another factor in the movement of core and lamination toward
offshore outsourcing was the new DOE energy efficiency standards for
distribution transformers that were implemented in 2016. To meet these
standards, transformer companies had to redesign their products,
including the choice of electrical steel and core construction. [TEXT
REDACTED].\74\ [TEXT REDACTED].\75\
---------------------------------------------------------------------------
\74\ [TEXT REDACTED].
\75\ [TEXT REDACTED].
---------------------------------------------------------------------------
As a result, there are very few remaining domestic producers of
laminations and cores. The Department's survey included responses from
10 small businesses in the United States that reported production of
laminations, stacked core, and/or wound cores using GOES. The table
below presents the state of transformer lamination and core
manufacturing in the United States by these non-captive producers.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]. Moreover, analysis of these companies' financial
reports reveals additional weaknesses.
[[Page 64639]]
Respondents were assigned a comprehensive financial risk score by the
Department, which incorporated yearly scores and trends in financial
health. Based on this scorecard, respondents were categorized as low/
neutral risk, moderate/elevated risk, or high/severe risk.\76\
---------------------------------------------------------------------------
\76\ For how BIS assessed financial health, see note [45],
infra.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
All of the companies noted in their survey responses that they face
serious negative impacts from foreign competition. Three of the 10 have
shut down their domestic operations in recent years [TEXT REDACTED]. A
fifth company has reduced its capacity in an attempt to return to
profitability. The five companies remaining have had to increasingly
rely on niche markets, including aerospace and defense, to counter the
loss of demand from other customers (which have either shifted sourcing
or are themselves impacted by foreign competition).
Among the domestic laminations and core manufacturers that have
been negatively affected is [TEXT REDACTED].
[TEXT REDACTED].
[TEXT REDACTED].
As mentioned above, in addition to these specialized manufacturers,
several transformer companies produce laminations and/or cores in the
United States for their own internal consumption. [TEXT REDACTED].
These captive producers, too, have changed production and sources for
laminations and cores, either completely or partially outsourcing.
[TEXT REDACTED].
[TEXT REDACTED]. The new company (80 percent owned by Hitachi and
20 percent by ABB) is called Hitachi ABB Power Grids.\77\ Although
Hitachi's long-term plans for the facility are unknown, the sale may
impact domestic production of laminations and cores.
---------------------------------------------------------------------------
\77\ <a href="http://www.hitachi.com/New/cnews/month/2020/07/f_200701.pdf">http://www.hitachi.com/New/cnews/month/2020/07/f_200701.pdf</a>.
---------------------------------------------------------------------------
1. Lamination Suppliers
The lack of domestic production capability is validated by the
lamination and core supplier data provided by survey recipients.
Twenty-two survey participants reported sourcing stacked laminations
for use in transformer cores. They sourced laminations from suppliers
in a variety of countries, including the United States, South Korea,
Mexico, Canada, Turkey, Italy, and India.
In 2019, laminations with a total value of $40.2 million were
sourced by surveyed companies.\78\ Of this $40.2 million, less than 12
percent came from domestic suppliers, while 88 percent were from
foreign sources. [TEXT REDACTED].
---------------------------------------------------------------------------
\78\ This figure exceeds the value of imports of laminations
(HTS 8504.90.9634) according U.S. Census trade statistics, which was
$33 million in 2019; purchases in an annual period and export
shipments in an annual period do not necessarily match.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED].\79\ [TEXT REDACTED]. In addition to these two
companies, survey respondents reported several other suppliers from
Mexico along with minor suppliers located in South Korea, Italy,
Turkey, India, and China.
---------------------------------------------------------------------------
\79\ <a href="https://magneticsmag.com/jfe-gains-foothold-in-na-with-acquisition-of-cogent-power-from-tata-steel/">https://magneticsmag.com/jfe-gains-foothold-in-na-with-acquisition-of-cogent-power-from-tata-steel/</a>.
---------------------------------------------------------------------------
It is clear from respondents' replies to the supplier question that
there is an ambiguity between what is considered GOES and what is
considered a lamination; data from the survey show that 60 percent of
the value of laminations is accounted for by the cost of GOES. Among
the suppliers listed, as noted earlier, there is overlap between the
two categories. [TEXT REDACTED].
2. Stacked Core Suppliers
Outside of captive production by several transformer manufacturers,
16 transformer companies participating in the Department's survey
procured a total of $114.7 million worth of stacked cores in 2019.
Their suppliers were located in Canada, Mexico, Italy, and China, as
well as the United States. Of the $114.7 million total, [TEXT
REDACTED]. The other leading core suppliers were [TEXT REDACTED]. As
with the lamination sector, this would mean that foreign fabricated
cores could account for over 80 percent of the future market.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
As noted above, Cogent Power was recently purchased by JFE Shoji.
This Japanese steel trading company also acquired an unspecified
interest in another leading source of stacked cores, [TEXT REDACTED].
[TEXT REDACTED], several Chinese companies were minor suppliers of
stacked cores.
3. Wound Core Suppliers
Twenty-nine respondents to the Department's survey indicated that
they procured wound cores for use in manufacturing transformers during
the 2015-2019 period. The total value of the wound cores that these
companies purchased increased markedly in the last three years of the
time period, from $132 million in 2017 to $410 million in 2019. The
increase may be because wound cores are often used in distribution
transformers that are subject to the DOE energy efficiency standards.
PDR-GOES, which is not produced in the United States, is desirable for
use in wound cores because it is capable of withstanding the annealing
process.
By far the leading source of wound cores for the survey sample was
[TEXT REDACTED].
[TEXT REDACTED] mentioned that make up the other 25 percent of
consumption are domestic companies that have shut down their U.S.
facilities since 2019.
4. U.S. Imports of Laminations and Cores
U.S. import statistics affirm the Department's survey data with
regard to the dominant role that foreign sources play in the United
States domestic transformer market. The dramatic increase in imports of
these products, particularly from Canada has resulted in the
displacement of U.S. production of transformer components.
BILLING CODE 3510-33-P
[[Page 64640]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.024
[[Page 64641]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.025
U.S. imports of transformer laminations rose from $18 million in
2017 to $33 million in 2019, with most of the increase due to imports
from Canada. For stacked and wound transformer cores, imports rose from
$22 million in 2015 to $167 million in 2019--a 650 percent increase--
with Canada and Mexico accounting for more than 95 percent of the total
imported. Data for the first six months of 2020 indicate that the trend
toward increased imports is continuing. As domestic demand for
laminations and cores has not increased, this surge in imports
represents displaced domestic production.
The United States-Mexico-Canada Agreement (USMCA) establishes a
country of origin (COO) rule for transformers and transformer
components, including laminations and cores. These rules of origin,
which will come into force in five years (2025), will consider
transformer laminations and cores as derived from the country in
[[Page 64642]]
which the electrical steel from which they are made was produced, based
on the high percentage of these products' value that is accounted for
by the electrical steel. As Canada and Mexico have no electrical steel
production, those cores will not be considered products of either
Mexico or Canada when full implementation of USMCA is achieved.\80\
However, even when this new requirement for preferential treatment
comes into effect, it will likely not discourage the production of
these items in Canada or Mexico (using foreign GOES) for export to the
United States, because that the general, most-favored-nation U.S.
tariff rate on imports of these items is zero.
---------------------------------------------------------------------------
\80\ <a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/04-Rules-of-Origin.pdf">https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/04-Rules-of-Origin.pdf</a>.
---------------------------------------------------------------------------
5. Consumption of GOES Contained in Transformer Cores
Due to the movement offshore of lamination and core production,
U.S. imports of these products must also be considered as part of U.S.
GOES consumption that is not captured in the trade statistics for GOES.
In 2019, the United States imported an estimated 68,000 metric tons of
GOES in the form of transformer laminations and cores.\81\
---------------------------------------------------------------------------
\81\ Trade data for cores are not collected by weight, but
rather by units. Estimate of the weight of lamination and core
imports is based on the estimates provided by the Core Coalition in
its public comments.
---------------------------------------------------------------------------
[TEXT REDACTED]. Based on these figures, the import penetration for
GOES was approximately 44 percent in 2019. (Note: this number could
include double counting from U.S. exports of GOES that is then imported
into the United States in the form of cores, but this is likely minimal
because Canada was not a major destination for U.S. GOES exports or a
major source of Canadian imports).
A public comment by the Core Coalition estimates that total U.S.
core imports, in kilograms, will be much higher in 2020 than in 2019
(due primarily to an anticipated increase in imports of wound cores;
trade data from the first half of 2020 validates this). Based on the
Coalition's estimate of 2020 core imports of 96,000 metric tons, and
assuming steady U.S. GOES production and export and import levels,
import penetration is estimated to reach over 50 percent this year.
6. Dominance of Suppliers for Laminations and Cores
As discussed, Canada and Mexico are by far the leading suppliers of
components for U.S. transformer manufacturers. [TEXT REDACTED].
[TEXT REDACTED]. Until 2019, Cogent was owned by Tata of India,
which also owned Orb Steel, which may explain why Orb was a major
supplier to Cogent. Now that Cogent is owned by JFE Shoji, it is likely
that JFE Steel will emerge as one of its major suppliers.
[TEXT REDACTED].
7. Consumption of GOES Imported in Finished Transformers
Despite the grim results that the inclusion of the GOES-derivative
products discussed above presents, the complete picture with regard to
the true dependency of the U.S. electricity grid on foreign sources for
GOES, laminations, and cores remains incomplete until the impact of
finished transformers is included. Given that transformers have a high
percentage value of GOES, domestic GOES production (and transformer
production) is adversely impacted by imports of complete transformers.
The vast majority of imported transformers contain cores composed of
foreign-origin GOES. In 2019, the United States imported a total $2.56
billion worth of transformers (of all power handling capacities),
representing about 35 percent of the market (per Global Insights/D&B).
For LPT (which by nature of their size contain the most GOES by
weight), imports accounted for over 80 percent of the domestic market.
8. Source of GOES for Mexico and Canada
Corresponding to the migration of core and lamination production to
Canada and Mexico from the United States was an increase in imports by
these countries of GOES. As neither Canada nor Mexico have domestic
GOES production capability, both needed to increase their imports of
GOES in order to increase core and lamination production. The table
below shows total imports of GOES by Canada and Mexico over the past
ten years. Both are substantial consumers of GOES. The table shows that
imports of GOES has been rising substantially over the ten year period,
particularly between 2014 and 2016. For both countries, imports of GOES
declined significantly in 2019 from 2018 levels, but are still higher
than earlier in the decade.
[[Page 64643]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.026
The leading sources of GOES imports in Canada in 2019 were Japan
and South Korea, but China and Russia were also sources. Note that the
United Kingdom was also a major supplier to Canada throughout the
period. There was one producer of GOES in the United Kingdom, Orb Steel
(owned by Tata of India), which, as previously discussed, shut down
production in 2019. One of Canada's leading transformer lamination and
core manufacturers, Cogent Power, was, at the time, also owned by Tata
and this might explain why the United Kingdom was such a major
supplier. As discussed above, JFE Shoji recently acquired Cogent Power.
In the case of Mexico, Japan was the leading supplier in 2019, with
China and Russia ranked second and third. Imports of GOES from the
United States declined to virtually zero in Mexico in 2019. In the case
of Canada, 2019 imports of GOES from the United States accounted for
less than three percent of the total (2,609 metric tons of 97,889 total
metric tons), compared to about a third of imports as recently as 2015
(23,210 metric tons out of 68,929 total metric tons).
[[Page 64644]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.027
Moreover, transformer components produced in Mexico and Canada were
largely destined for the U.S. market. Virtually all of Mexico's exports
of transformer components were to the United States (>99 percent), as
were over 90 percent of Canada's exports of these items.\82\ Mexico,
also a significant manufacturing center for transformers, had domestic
GOES requirements. However, here again, the United States is the
primary destination for Mexico's transformer production so the GOES
contained in them is also part of U.S. GOES consumption. Based on the
data and statistics on Mexican and Canadian imports of GOES, some
transformers in the United States likely contain GOES originating from
China and Russia.
---------------------------------------------------------------------------
\82\ Global Trade Atlas.
[GRAPHIC] [TIFF OMITTED] TN18NO21.028
9. Amorphous Metal
While not technically subject to this investigation, amorphous
metal (also known as metallic glass or metglas) competes with GOES as a
material for transformer cores in certain power handling categories.
Demand for amorphous metal cores increased as a result of the 2016
distribution transformer efficiency standards. As is the case with
GOES, there is only one domestic source for amorphous metal ribbon--
Metglas, Inc., based in Conway, South Carolina, which is a subsidiary
of Hitachi Metals of Japan. In 1999, AlliedSignal bought Honeywell and
took on the Honeywell name. In 2003, Hitachi Metals of Japan bought
Metglas from Honeywell.
Just as AK Steel (then Armco Steel) invented GOES, Metglas
pioneered amorphous metal in the 1970s (when the company was known as
AlliedSignal). The first commercial transformer using the product in
its core was installed in the United States in 1982; and commercial
production of transformer core alloy began in 1989.\83\
---------------------------------------------------------------------------
\83\ <a href="https://metglas.com">https://metglas.com</a>.
---------------------------------------------------------------------------
While more expensive than GOES on a per kilogram basis, and more
labor intensive to form into cores, the material has the potential to
reduce costs in the long run for utilities over the life of the
transformer due to lower core losses. The production technology has
been widely adopted in developing countries, including China and India.
As producing transformers cores using metglas is more labor intensive,
it is more economical in countries with low labor costs. There are
about 600,000 amorphous metal transformers installed in the United
States, compared to over 1 million in China and 1.3 million in
India.\84\
---------------------------------------------------------------------------
\84\ Ibid.
---------------------------------------------------------------------------
Metglas's patent on the production technology has expired; Metglas'
competitive strength is its proprietary production process. The company
has accused former employees of divulging
[[Page 64645]]
confidential information to Chinese competitors and in 2017 filed a
case under Section 337 of the Tariff Act of 1930 (investigations
conducted by the International Trade Commission involving patent
infringement or intellectual property theft in imported goods) against
five Chinese companies. The case was suspended without prejudice.
Metglas has lost 50 percent of its employees due its inability to
compete with imports from China that have flooded the world market.
Metglas alleges that the same avoidance of tariffs that occurred with
GOES is happening on amorphous metal; in other words, that imported
metal goes to Canada and Mexico, where it is made into cores that are
shipped to the United States.
Despite this trend in imported amorphous metal cores (the trade
statistics for which are combined with GOES cores), in June 2020,
Metglas announced the commercial launch of its own amorphous metal
transformer core business. The company now has in-house capability to
produce distribution transformer cores using its amorphous alloy.
The use of amorphous metals in future innovations of the electric
grid is an area of research interest to the Department of Energy/
National Labs. The National Labs have partnered with Metglas to supply
the metal ribbon to support this research; loss of domestic capability
to imports would leave the U.S. Government dependent on foreign
suppliers for this promising research.
VIII. U.S. Production Capabilities, Industry Health and
Competitiveness, and the Impact of Imports on National Security for
Transformers
A. Introduction/Summary
As discussed in Chapter V, LPTs are a critical component of the
BPS. Distribution transformers and smaller power transformers are used
extensively and play an essential role in the electrical grid of the
United States in providing power to commercial and residential
customers. In addition to their essential role in the electrical grid,
distribution transformers, smaller power transformers, and, in
particular, dry-type transformers that can be used indoors play a vital
role in other critical infrastructure sectors such as manufacturing,
hospitals, and in weapons systems. However, they are not considered to
be part of the BPS, the security of which is subject to the
Presidential Bulk Power Executive Order.
The Department's survey included 36 companies with domestic
manufacturing of transformers of various types and power handling
capacities, from 1 kVA to over 100,000 kVA. Table VIII-1 below lists
these survey participants, as well as the type(s) of transformers that
they manufacture. The survey responses indicate that companies tend to
produce either liquid-dielectric transformer or dry-type transformers,
although some major producers manufacture both types.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
Aggregated data on U.S. production of transformers in various power
handling capacities by survey participants are presented in Figure
VIII-1. Note that most companies produce transformers in multiple
categories. In all, the transformer companies participating in the
Department's survey employed 15,238 production workers in the United
States and had total transformer sales of $4.42 billion in 2019.
Over the five-year period covered by the survey, domestic
production in each transformer product category was been relatively
steady. Survey data indicated that the smaller the transformer in terms
of power handling capacity, the greater the volume of production, with
over one million liquid dielectric transformers with under 650 kVA
capacity produced in 2019, compared to just 137 of the largest power
transformers (>100,000 kVA).
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
Figure VIII-3 (below) illustrates the import penetration of a range of
transformers of various power handling capacities, using the
calculation (apparent consumption = domestic production + imports-
exports). These import penetration figures are based on unit production
of transformers as reported by respondents to the Department's survey,
as well as export and import statistics from the U.S. Census Bureau.
Note that actual domestic production is likely higher than listed
because the Department's survey did not capture all producers (while
the major players in each sector participated in the survey, it is
possible that smaller manufacturers did not). This implies that the
import penetration levels in the table are overstated, further
verifying the conclusion that, with the exception of the largest
transformers, import penetration in liquid dielectric transformer
categories remains relatively low and domestic production is robust.
In comparison, dry-type transformers have higher levels of imports.
However, particularly for the small dry transformer category (under <16
kVA), the Department's survey may represent an incomplete sample of the
industry. Millions of these small transformers are produced (and
imported) on an annual basis. Due to the lack of sufficient data on
U.S. production of dry transformers, a reasonable estimate of import
penetration is not possible.
[[Page 64646]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.029
The remainder of this section presents industry data and evaluates
the status of the domestic industry, as well as the impact of imports,
by grouping the transformer industry in general categories:
Distribution transformers and small power transformers (liquid
dielectric transformers with a power handling capacity up to 10,000
kVA); small and medium power transformers (with power handling capacity
of 10,000-100,000 kVA); LPT (100,000 kVA and up); dry-type and other
transformers (1 kVA-500 kVA); and voltage regulators.
B. Distribution and Small Power Transformers (Up to 10,000 kVA)
There were 19 survey respondents reporting domestic production of
small power transformers (up to 10,000 kVA) during the 2015-2019
period. Companies in this sector employed more than 10,000 production
workers and sold more than a million transformer units, with a total
value of $2.5 billion, in 2019.\85\
---------------------------------------------------------------------------
\85\ Note that there is overlap with employment in other
transformer categories as some survey recipients participate in
multiple sectors.
---------------------------------------------------------------------------
[TEXT REDACTED].
The data received via the Department's survey is largely consistent
with DOE's 2009 market study, which identified that, from a
manufacturing point of view, the six largest companies operating in the
liquid-immersed distribution transformer market at that time were (in
alphabetical order): [TEXT REDACTED]. Together, these six companies
represented more than 80 percent of the sales revenue of liquid-
immersed distribution transformers in the United States (up to 2,500
kVA) in 2009. [TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN18NO21.030
[[Page 64647]]
[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TN18NO21.031
Both dollar sales and unit sales of transformers in this category
have risen consistently over the past five years. The average price of
transformers in this category was $55,000. A slight majority of these
transformers use cores comprised of GOES (as opposed to other core
materials, such as metglas), and on average GOES accounted for about 20
percent of the cost of each transformer.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
Figure VIII-X assesses the financial status of the major players in
this industry segment. The four market leaders all ranked as
``moderate/elevated risk'' based on the Department's financial risk
metric.
Overall, the companies manufacturing distribution transformers and
small power transformers did not devote a high level of funding to
research and development (R&D), as compared to R&D spending in other
industry sectors. In total, the 19 companies spent about $650 million
on R&D each year between 2015-2019, with one company--[TEXT REDACTED].
In part, the low level of R&D spending is because transformers are a
mature technology. Other factors include the relatively poor financial
status of domestic manufacturers.
Capital investment by the companies in this industry subsector
showed a similar pattern: Capital expenditures ranged between $560 and
$660 million per year, with [TEXT REDACTED]. The relatively low levels
of capital investment is likely due to the factors listed above,
including the maturity of the technology and the financial status of
domestic manufacturers.
1. Apparent Consumption and Import Penetration
U.S. imports of distribution and small power transformers have
remained consistent over the past ten years, averaging about 200,000
units and $500 million per year. Imports in 2019 were slightly above
the long-term average, and imports for the first part of 2020 are
significantly higher than during the same period in 2019. Mexico is by
far the largest source of these imports, accounting for over 80 percent
of the units in 2019. Many major global transformer companies have
manufacturing facilities in Mexico [TEXT REDACTED], taking advantage of
lower labor costs and duty-free access to the U.S. market. The
significant suppliers of transformers of this power handling capacity
located outside of Mexico are in Canada and China. However, imports
from China have declined in recent years from 2013-2014 levels (likely
due to the tariffs on many imports from China imposed in recent years),
with an increase in the first part of 2020. Imports from Canada
remained steady throughout the period.
[[Page 64648]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.032
[[Page 64649]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.033
Based on sales information provided through survey responses and
Census import and export statistics, import penetration was about 18
percent for this industry segment (liquid dielectric transformers up to
10,000 kVA) in 2019. Based on production data for transformers in these
power handling capacities from the survey, import penetration was 20.6
percent.
2. Reliance on Foreign Sources for Transformer Components
Despite the relatively low level of the market for finished
transformers accounted for by imports, domestic transformer producers
rely heavily upon foreign sources for critical components. Using
imported laminations and cores contributes to their competitiveness by
reducing costs. Many of them never had or no longer have in-house
capability to manufacture transformer cores. Even those that do have
this capability have either begun to source some of these items from
abroad in order to stay competitive or have eliminated in-house
production all together. For the major companies in this industry
segment:
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
C. Medium Power Transformers (10,000 kVA-100,000 kVA)
Ten survey respondents indicated that they domestically produced
transformers with power handling capacities between 10,000kVA and
100,000 kVA. The sales price of transformers in this broad category
averaged about $500,000. About 90 percent of these transformers used
GOES in their cores, and the cost of GOES accounted for about 13
percent of transformer production costs.
Total domestic employment in this industry segment was about 7,200
production workers. [TEXT REDACTED].
Survey participants had sales of transformers in this size range of
about 1,700 units valued at $969 million in 2019. [TEXT REDACTED].
[[Page 64650]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.034
[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[[Page 64651]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.035
[GRAPHIC] [TIFF OMITTED] TN18NO21.036
[[Page 64652]]
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
A measure of the financial performance of the top firms in the
medium power transformer category is presented in Figure VIII-20. In
general, the market leaders are financially healthy based on the
Department's metrics, with the exception of Hyundai. [TEXT REDACTED].
In total, the ten companies with production of transformers in this
segment spent $45 million on R&D in 2019. Of this total, four
companies--[TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN18NO21.037
Aggregated capital expenditures for the ten companies are presented
below. [TEXT REDACTED].
[[Page 64653]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.038
1. Apparent Consumption and Import Penetration
Imports of transformers in the medium power handling capacity range
have increased over the past three years and are on track to exceed
$400 million in 2020, on the basis of data from the first six months of
the year. On a unit basis, imports show a similar trend, exceeding 600
units per year. Mexico and South Korea are by far the largest sources
of imported transformers in this subsector.
[[Page 64654]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.039
[[Page 64655]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.040
Based on production as reported on the Department's survey and Census
Bureau-based import statistics, import penetration in this industry
segment was 28 percent on both a unit and value basis.
As with other transformer categories, companies that produce
transformers between 10,000 and 100,000 kVA rely heavily on imports for
key components. The company snapshots show leading suppliers for the
essential items--GOES, laminations, and/or cores.
D. Dry-Type Transformers
Of all of the transformer categories covered by this investigation,
dry transformers had the greatest direct
[[Page 64656]]
usage in defense applications. This is because this type of transformer
is designed for safe usage indoors (including on ships and aircraft),
as it poses fewer environmental and fire risks than do oil-immersed
transformers. However, defense applications represent only a small
percentage of sales of these types of transformers, which are also used
extensively in the electrical grid, as well as in a multitude of
industrial and commercial applications.
The Department's survey data capture input from the predominant
players in the dry-type transformer category, but are less complete
than for other industry sub-segments. Particularly for the smallest
dry-type transformers (under <16kVA), production (and imports) is in
the millions of units, and the survey did not fully capture this.
Despite this, the survey provided useful information on industry trends
and competitiveness issues.
Twenty-one survey participants with just over 9,000 production
workers sold 1.8 million dry transformers of various power handling
capacities between 2015 and 2019. However, production in the United
States was about half of this unit total because most of the major
players have both domestic and overseas production facilities and
distribute the product from both in the United States. Total sales by
these respondents were about $700 million, with the average transformer
price about $13,000. In aggregate, about half of these dry-type
transformers require GOES in their cores, according to the survey
respondents; when it was used, it accounted for about 25 percent of the
cost of the transformer.
Six respondents represent about 97 percent of dry-type transformer
sales (of all capacities) by value from 2015-2019. [TEXT REDACTED].
Note that these sales values include transformers manufactured outside
the United States, as reported by several of the survey recipients.
[GRAPHIC] [TIFF OMITTED] TN18NO21.041
[[Page 64657]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.042
As indicated above, imports play a major role in the dry
transformer sector. Countries with low cost labor--including China,
Indonesia, and Mexico--are major sources of imported dry-type
transformers. On a unit basis, more than half of dry-type transformer
imports originate in China.
[[Page 64658]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.043
[[Page 64659]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.044
During the time period, dry-type transformers in the 1-16 kVA range
were both produced domestically and imported by the millions. Leading
domestic producers, including [TEXT REDACTED], together accounted for
over 80 percent of the production volume by survey participants in
2019. [TEXT REDACTED]. The average sales price was just $20. [TEXT
REDACTED]. The primary application for these transformers is in
industrial settings for power distribution.
[TEXT REDACTED].
While it was not possible to determine import penetration levels
due to lack of data on U.S. production, based on official trade
statistics, imports of dry-type transformers in the 1-16 kVA range have
a significant market presence. In this sector, Mexico and China are the
leading suppliers, with China accounting for much of the volume (over
million units) and Mexico
[[Page 64660]]
much of the value of total imports (due to varying sizes and prices of
transformers). As mentioned, a number of the U.S. companies in
participating this sector have overseas production facilities and
contribute to the import volume.
[GRAPHIC] [TIFF OMITTED] TN18NO21.045
In the 16-500 kVA dry-type transformer category, the leading
domestic producers were [TEXT REDACTED]. These transformers were
produced domestically in the tens of thousands of units, are valued in
the $2,500 to $25,000 range, and are used in electric power
distribution for commercial and industrial customers. GOES is used in
almost all transformers in this range, and accounts for up to 50
percent of production costs.
Manufacturers in this industry sector manufacture distribution
transformers that are subject to the DOE Energy Efficiency Standards
that took effect in 2016. The new standards increased manufacturers'
demand for higher grades of GOES in order to remain competitive in the
bidding process. Business decisions to remain competitive after the
introduction of the DOE standards also increased demand for the
quantity of GOES, as well as laminations, and cores, from global
suppliers. For example, [TEXT REDACTED].
[TEXT REDACTED].
Statistics on imports of dry-type transformers between 16 and 500
kVA are presented in Table VIII-33 below. Once again, China and Mexico
are the major sources for imports, with India and France also supplying
substantial numbers. Based on survey data, it appears that transformers
in this broad category that are manufactured in the United States have
a higher unit value than imports.
[[Page 64661]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.046
In the largest dry-type transformer category (>500kVA), the
domestic industry leaders are [TEXT REDACTED].
The average value of Federal Pacific's transformers in this size
range was $23,000. They are used for electrical power delivery to
industrial, commercial, and residential customers. High-quality GOES is
required in order to meet DOE energy efficiency standards for this
product, and accounts for 50 percent of the cost of the transformers.
[TEXT REDACTED].
As with the other dry-type transformer categories, imports are
significant and the major sources are China, Mexico, and India. Imports
in 2015 were significantly greater than in other years, due to high
import levels that year reported from China and India. In 2019 and the
first six months of 2020, Mexico was by far the leading supplier.
[[Page 64662]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.047
E. Large Power Transformers
LPTs are the transformers most critical to the BPS and the critical
energy infrastructure of the United States. They are used to ``step-
up'' power at the power generation site for long-distance transmission,
and then to ``step-down'' the power to the levels that are needed for
industrial, commercial, military and household consumers. Because they
serve the greatest number of customers, the failure or destruction of
just a single LPT can have a large impact on U.S. economic, public
health, and security interests. Moreover, long procurement lead times
and limited availability of spare LPTs and the parts thereof have
serious implications for the resiliency of critical infrastructure.
[TEXT REDACTED].\86\ Power transformers fell into the highest
category for both criticality and supply chain vulnerability. In terms
of criticality, transformers are complex, vulnerable to failure, have a
significant impact on the BPS in the case of failure, and have a
lengthy replacement time. The Market Study also found transformers pose
a high risk in the supply chain, as suppliers are dominated by foreign-
owned companies, with a minimum of four years required to establish
domestic manufacturing capability.
---------------------------------------------------------------------------
\86\ [TEXT REDACTED].
---------------------------------------------------------------------------
The U.S. market for LPTs is less than 1,000 units per year; their
average lifespan is 30 to 40 years and relatively few are needed
because they serve large populations. Despite the relatively small
quantities produced and purchased annually, there is a sizable market
for LPTs because each has a value in the millions of dollars. Moreover,
because of their enormous size (up to 400 tons), these LPTs account for
a significant percentage of consumption of GOES by weight.
1. Domestic Production Capacity
The Department's survey gathered detailed industry data on all
domestic manufacturers of LPTs (here defined as those with greater than
100 MVA power handling capacity, HTS 8504.23.0080). While most of these
manufacturers of LPTs also make liquid transformers of lesser power
handling capacities, manufacturers of smaller power transformers cannot
easily produce larger units, as they typically do not have the
necessary equipment, such as large overhead cranes and annealing
equipment, to produce LPTs.
In 2019, seven companies manufactured LPTs of 100 MVA or more in
the United States: [TEXT REDACTED]. In 2020, Mitsubishi sold its
Memphis transformer facility, and no longer manufactures LPTs (or any
transformers) in the United States. Hyosung (HICO) of Korea purchased
the facility and intends to manufacture transformers there, including
LPTs, but as of the date of this report had not begun production.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED] \87\
------------------------------------------------------------------------
Domestic production of LPTs has been fairly steady over the past
five years, albeit at a low level of about 130 units per year (see
Figure VIII-35). [TEXT REDACTED].
---------------------------------------------------------------------------
\87\ [TEXT REDACTED].
---------------------------------------------------------------------------
[[Page 64663]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.048
In 2019, [TEXT REDACTED]. Whereas most domestic producers of LPTs
also manufacture transformers of lesser power handling capacities in
the same facility, [TEXT REDACTED].
In terms of LPT sales, the trend is similar to production, with
total sales averaging around $250 million per year (Figure VIII-36).
[TEXT REDACTED]. Export sales of U.S.-produced large transformers are
negligible, with none reported in 2019 by the domestic manufacturers.
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
[[Page 64664]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.049
Overall domestic production capacity of LPTs remains inadequate to
meet domestic demand, particularly with regard to the extra high
voltage (EHV) transformers (those with >345 kV voltage rating) that are
vital for long distance electricity transmission. While accounting for
only a small percentage of units, EHV transformers are the most
critical to the security and reliability of the electrical grid,
because they handle over 60 percent of all electricity in the
country.\88\ The loss of Mitsubishi Electric Power (MEPPI) as a
domestic manufacturer is significant in this regard, as their facility
produced EVH transformers.
---------------------------------------------------------------------------
\88\ Public Comments submitted by the Government of Canada, July
2, 2020.
---------------------------------------------------------------------------
Only three companies--[TEXT REDACTED].
------------------------------------------------------------------------
-------------------------------------------------------------------------
[TEXT REDACTED]
------------------------------------------------------------------------
The domestic industry is in a constant state of flux--due to plant
closures, company exits and entrances, and acquisitions--that affects
production capacity. As noted above, Mitsubishi ceased production at
its facility in Memphis, with a loss of 200 jobs. HICO (Korea)
purchased this facility and plans to invest $103 million in the plant
and hire 131 workers by 2021, but at present the facility is not
operational. Another company that had briefly produced LPTs in the
United States, Portugal-based EFACEC, sold its plant in Rincon, Georgia
to Virginia Transformer in 2014.
In addition, ABB shuttered its St. Louis LPT manufacturing facility
in late 2018, with a loss of 250 jobs; it also laid off 177 workers at
its South Boston, VA plant that primarily produces smaller transformers
and has limited capacity to produce LPTs. Some of the production
formerly done in the United States will be performed at ABB's Varennes,
Quebec plant, which is reportedly Canada's largest LPT manufacturing
facility. ABB is also reportedly adding to its transformer production
capabilities in India and China.\89\
---------------------------------------------------------------------------
\89\ STLtoday. Nov. 6, 2017. <a href="https://www.stltoday.com/business/local/abb-to-discontinue-production-in-st-louis-120-jobs-lost/article_c18fe08f-ab76-5e02-87d7-e4ea49c1d358.html">https://www.stltoday.com/business/local/abb-to-discontinue-production-in-st-louis-120-jobs-lost/article_c18fe08f-ab76-5e02-87d7-e4ea49c1d358.html</a>.
---------------------------------------------------------------------------
Moreover, ABB's Power Grids business--including transformers--was
sold to Hitachi of Japan in 2018 for $11 billion (with the deal due to
close in mid-2020).\90\ Hitachi has not indicated its plans for ABB's
U.S. operations, which are substantial (including distribution
transformer production). If Hitachi decides not to continue operations
once it finalizes the purchase of ABB's U.S operations, the impact will
be significant; ABB claims that it was the manufacturer for 70 percent
of the power transformers installed in the U.S. electric grid
(including those made by Westinghouse's Transmission and Distribution
Division, which ABB acquired in 1989).
---------------------------------------------------------------------------
\90\ <a href="http://Powermag.com">Powermag.com</a>, Dec. 17, 2018. <a href="https://www.powermag.com/hitachi-acquires-abb-power-grids-business-in-11-billion-deal/">https://www.powermag.com/hitachi-acquires-abb-power-grids-business-in-11-billion-deal/</a>.
---------------------------------------------------------------------------
2. Apparent Consumption and Import Penetration
As noted above, domestic demand for the mature LPTs market is
relatively stable from year to year and is largely based on the
replacement and modernization of aging equipment. Given the limited
production and capacity of domestic manufacturers, the majority of
demand is met through imports.
[[Page 64665]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.050
[[Page 64666]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.051
BILLING CODE 3510-33-C
Consistent with stable demand, the level of imports of LPTs was
been relatively steady between 2015-2019 at between 500 and 700 units
annually. Total value of U.S. imports of these items in 2019 was $617
million. The leading sources for LPTs (>100 MVA) into the United States
in 2019 (by unit) were Mexico, where several global transformer
manufacturers have manufacturing facilities (202 units); Austria, where
[TEXT REDACTED]. These four countries accounted for 70 percent of U.S.
imports by unit in 2019. On a value basis, the leading supplier was
Austria with $188 million out of total U.S. imports of $620 million,
which implies that the LPTs from Austria are on average more expensive
than those from Mexico.
One notable trend is that imports from Korea fell from a high of
128 units in 2016 to 67 in 2019, replaced by
[[Page 64667]]
production at Hyundai's U.S. facilities, which was not subject to
tariffs. In addition, while not among the top five sources in 2019,
China also supplied some LPTs for the U.S. electric grid. Although
imports from China have declined from high of 47 units in 2015, 31
units were imported from China in the first six months of 2020, a
number only behind Mexico and Austria. This is significant, as the
President's emergency declaration and Bulk Power Executive Order is
particularly concerned with possible vulnerabilities in the critical
energy infrastructure due to sourcing from potential adversaries such
as Russia and China.
Based on the level of imports compared to domestic production, it
is clear that the U.S. BPS is heavily dependent on imported LPTs, which
are among the most critical elements in the BPS. The U.S. dependency on
foreign sources for LPTs has persisted for at least a decade; there has
been little net change in total U.S. production capacity during this
timeframe, with new investments offset by plant closures.
U.S. apparent consumption of LPTs was 750 units in 2019 (domestic
production of 137 + imports of 617 - exports of 4 units). Thus, the
import penetration level is over 82 percent. On a value basis, import
penetration is slightly lower--about 73 percent based on apparent
consumption of $851 million (domestic sales of $234 million, plus
imports of $620 million, less exports of $2.6 million). The dependence
of the U.S. electric grid on imported LPTs negatively affects the
domestic GOES industry because imported transformers most often utilize
foreign-origin GOES.
In contrast to the inadequate domestic production capacity for LPTs
in the United States, China has abundant production capabilities. With
Chinese demand for LPTs comparable to that of the United States, China
has at least 30 LPT manufacturers. China's top three manufacturers can
each produce double the total U.S. production capacity.\91\
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\91\ DOE LPT Report, 2014.
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As noted above, the grim state of domestic manufacturing capability
for LPTs has persisted for more than a decade. In 2011, the ITC
completed its antidumping investigation into imports of LPT from Korea.
The investigation presented a detailed analysis of the state of the
domestic industry at that time.\92\ In 2010, there were six domestic
manufacturers of LPTs, who were operating at an average capacity
utilization rate of just 39.9 percent. Imports accounted for 85 percent
of apparent consumption (based on the total power handling capacity of
units sold) or 81 percent of apparent consumption (value basis). The
ITC found that the domestic industry was materially injured by the
imports of LPTs from Korea that were being sold at less than fair
value, which led to the imposition of tariffs.
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\92\ <a href="https://www.usitc.gov/publications/701_731/Pub4256.pdf">https://www.usitc.gov/publications/701_731/Pub4256.pdf</a>.
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In 2012, with an update in 2014, DOE also issued reports
highlighting the deficiencies in domestic LPT industry. DOE's reports
drew upon on ITC's industry data, but analyzed the information from the
perspective of the implications for the nation's critical energy
infrastructure rather than unfair trade practice issues. In its
reports, DOE expressed concern over the lack of domestic production
capabilities for large power transformers. DOE's 2014 update noted that
some foreign investment in U.S. manufacturing facilities (e.g., by
EFACEC, Hyundai, and Mitsubishi), as well as expansions by U.S. firms
(SPX), contributed to a slight increase in domestic production capacity
in the mid 2010's but that production still fell far short of domestic
demand). Of the three foreign companies noted in DOE's report, only
Hyundai still manufactures domestically and overall domestic production
capacity has not increased.
In September 2018, five years after the imposition of antidumping
duties on imports from Korea, the ITC reassessed the status of the
domestic industry.\93\ Since its initial report in 2011, the ITC noted
a number of changes, both positive and negative, in domestic capacity/
production (e.g., facilities closed, bought by other companies,
opened). The ITC also examined the health of the domestic LPT industry
compared to five years earlier (in 2013) and found that on all
measures, the industry had deteriorated. Although the ITC withheld
specific data from the public report, the report stated that
employment, wages, sales, shipments, market share, and financial
performance had all declined.
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\93\ ITC, ``Large Power Transformers from Korea,'' Investigation
No. 731-TA-1189, September, 2018, pp. 30-31. See Appendix F for
additional information.
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3. Reliance on Imported Key Components
Lack of domestic production capability for LPTs is exacerbated by
the fact that most domestic manufacturers rely on imports for key
transformer components, including electrical steel, laminations, and
cores. In fact, none of the remaining domestic LPT manufacturers source
laminations or cores from U.S. suppliers, which highlights the lack of
domestic capability in this area. Imported laminations and cores rely
on almost exclusively non-U.S. GOES, which is significant because GOES,
along with the copper used in the windings, accounts for a significant
percentage of the cost of an LPT (up to 25 percent). GOES also accounts
for between 75 percent and 90 percent of the cost of laminations, and
50-60 percent of the cost of transformer cores, based on the
Department's survey data. As a result, price volatility and global
market conditions for GOES continue to have an impact on the
manufacturing and procurement strategies of LPT producers.
Specific company sourcing decisions, based on company responses
detailed in the Department's survey, are as follows:
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
4. Other Issues Affecting LPT Manufacturers
Most of the domestic manufacturers of LPTs reported difficulty in
hiring qualified workers, with more than 90 days required to source and
train new employees. The companies reported experiencing a shortage of
skilled production workers (e.g., testers, welders, and winders), field
technicians, and design engineers. In addition, the workforce is aging,
and it is difficult to attract younger workers to this industry and to
the geographical regions in which the companies are located.
Several of the companies also reported being negatively impacted by
foreign competition, particularly from South Korea and Mexico. Despite
the successful antidumping investigation that resulted in the
imposition of import duties, domestic transformer manufacturers stated
that they continue to be disadvantaged due to the protection/
subsidization of South Korean manufacturers by their government.
Specific to Mexico, domestic producers cited the low cost labor there
as to their detriment. In addition, some domestic transformer companies
that make laminations and cores in-house reported adverse effects vis-
[agrave]-vis their foreign competitors as a result of the Section 232
tariffs on GOES.
F. Voltage Regulators
Six companies responding to the Department's survey indicated
domestic
[[Page 64668]]
production of voltage regulators; most of these companies also produce
liquid dielectric transformers in the United States. [TEXT REDACTED].
It is a major player in many of the other transformer categories, but
the production of these products takes place in at offshore locations.
[TEXT REDACTED].
The top four companies, which accounted for over 95 percent of
reported production, were [TEXT REDACTED]. Imports of voltage
regulators have fallen slightly in recent years, to $81 million in
2019. The leading sources of imports were Canada, Germany, the United
Kingdom, and Mexico.
------------------------------------------------------------------------
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[TEXT REDACTED]
------------------------------------------------------------------------
Import statistics do not appear to represent the voltage regulator
segment of this investigation well. The large volume of imports (with
low average unit values) captured by the Harmonized Tariff Schedule
category under which voltage regulators fall (HTS 9032.89.4000 \94\)
includes many products unrelated to this investigation. Therefore,
import penetration levels cannot be calculated. However, as mentioned,
the manufacturers of voltage regulators are all major players in the
other transformer categories that are addressed in this report.
---------------------------------------------------------------------------
\94\ Automatic voltage and voltage-current regulators, other
than designed for use in a, 12, or 24 V system.
---------------------------------------------------------------------------
BILLING CODE 3510-33-P
[GRAPHIC] [TIFF OMITTED] TN18NO21.052
[[Page 64669]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.053
[[Page 64670]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.054
IX. Competitiveness and Labor Issues
A. Competitiveness
Recipients of the Department's survey were asked to identify and
rank the top five challenges or issues affecting their global
competitiveness position from a list of more than thirty options. In
general, there was little difference in responses among the respondents
by specific transformer-related product sector. The most commonly
identified primary challenge to their competitiveness reported was
either trade disputes/tariffs or foreign competition. Seventy-six
percent of respondents identified trade disputes/tariffs as a
challenge, including 24 percent of respondents that noted it as the
number one issue affecting their company's competitiveness. Similarly,
72 percent of respondents identified foreign competition as a
challenge. Labor availability/cost was the third most commonly
identified challenge and will be addressed in more detail in section B
of this chapter.
[[Page 64671]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.055
1. Transformer Components
While mentioned by a majority of survey recipients across product
categories, foreign competition is a particularly significant problem
for the transformer cores and laminations sector. Of the survey
respondents who produce laminations and cores for incorporation into
transformers, 91 percent indicated that foreign competition is a major
challenge. These responses are consistent with import data which show
that imports of laminations increased 57 percent and imports of cores
increased 61 percent between 2018 and 2019.\95\
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\95\ [TEXT REDACTED].
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Almost all of the domestic transformer lamination and core
producers participating the in Department's survey took the opportunity
to provide specific commentary on competitiveness issues. In
particular, they were asked to describe how their competitiveness has
been affected and to provide any recommendations specific to the U.S.
Government's response, including steps to mitigate the challenges that
they face (Survey question 10 D). All the respondents in this sector
presented similar information on the issues affecting their
competitiveness but had different approaches and suggestions to address
them. While many recommended imposing tariffs on downstream transformer
components and finished transformers, others recommended removing the
tariffs on imported GOES.
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED].
<bullet> [TEXT REDACTED] to preserve what is left of the U.S.
transformer industry.
While the domestic manufacturers of laminations and cores have been
negatively affected by imports, some transformer companies that
purchase these components for incorporation into transformers
benefitted during the same time period. In particular, increased
competition in the lamination and core sector was beneficial to their
competitiveness, as it led to reduced costs for these items.
2. Distribution, Small & Medium Power Transformers and Dry-Type
Transformers
As compared to survey respondents from the transformer core and
laminations sector, while increasing foreign competition was also a
significant challenge for distribution, small and medium power, and
dry-type transformer producers, a larger number of this group of survey
respondents indicated labor-related issues as their number one concern.
Labor challenges were listed by 17 out of the 19 distribution and
small-power transformer manufacturers, and by nine out of ten medium-
power transformer manufacturers. With regard to dry-type transformers,
seventy percent of manufacturers indicated trade disputes/tariffs were
challenges. Similarly, 60 percent and 55 percent of respondents in this
group regarded foreign competition and labor availability/costs as
challenges, respectively.
With regard to competitiveness issues, several of the transformer
companies expressed strong opposition to the expansion of tariffs to
downstream
[[Page 64672]]
products because such an expansion would harm their competitiveness by
increasing their costs and disrupting their supply chain.) Instead,
they recommended the elimination of existing tariffs on GOES [TEXT
REDACTED]. However, other transformer companies, facing the same
competitive pressures due to rising material costs, recommended
extending the tariffs to include complete transformers [TEXT REDACTED].
3. Large Power Transformers
For the manufacturers of LPTs, foreign competition was again the
leading problem. All seven survey participants in this industry sector
expressed this concern. The domestic producers were particularly
concerned about competition from South Korea, where companies benefit
from subsidies and protection by the South Korean Government. Increased
competition from Mexico was also identified as a challenge. Other
frequently mentioned issues affecting the competitiveness of large
power transformer manufacturers were trade disputes/tariffs
(specifically the increased production costs due to GOES tariffs),
labor availability/costs, and aging equipment, facilities, or
infrastructure.
4. Changes in Competition
In addition to identifying specific factors affecting them, survey
respondents were asked to indicate whether or not there had been a
significant change since 2018 with regard to foreign competition in any
of the product categories subject to this investigation and whether the
change was positive, negative, or neutral. Not surprisingly,
respondents reported that significant increases in import competition
are most prevalent in the wound cores, stacked laminations, and stacked
cores product categories (i.e., the product categories of which GOES is
the primary input).
[GRAPHIC] [TIFF OMITTED] TN18NO21.056
An overwhelming majority of the respondents that indicated an
increase in import competition also indicated that the increase in
competition had a negative effect on their organizations. However, as
mentioned above, some transformer manufacturers have benefitted from
increased competition, specifically in the component sector from which
they source.
[[Page 64673]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.057
The countries most often listed as the source of increased foreign
competition were Canada, China, Japan, and Mexico. For wound cores,
Japan was mentioned most frequently, followed by Canada and Mexico. In
contrast, Japan was not mentioned as a source of competition for
laminations; Canada was most often mentioned, followed by China and
Mexico. For stacked cores, import competition was identified as coming
from Canada, China, Mexico, and Japan.
[[Page 64674]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.058
[[Page 64675]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.059
B. Labor
In addition to questions about the labor-related issues affecting
competitiveness, survey recipients were asked specific questions
related to their workforce. On average, survey respondents that
manufactured transformers or transformer components in the United
States indicated that labor accounted for 36 percent of their costs,
with a range between 1 percent and 83 percent.
Eighty-nine percent of survey respondents reported having had
difficulties in finding qualified or experienced workers, including 66
percent that identified the problem as an ongoing issue. This is
significant, as transformer manufacturing requires specialized skills
including welding, coil winding, and transformer testing. Survey
respondents indicated that U.S. high schools do not offer programs that
train young people for skills such as these. Transformer manufacturers
also experienced difficulties in hiring employees with certain
educational backgrounds or training, including manufacturing engineers,
power electrical engineers, quality control, and electrical design
engineers. Several respondents mentioned that few universities offer
training in these areas.
Survey respondents reported an aging workforce and trouble
attracting and retaining younger workers. Seventy-eight percent of
respondents that identified anticipated future workforce issues
regarded the possibility of a significant portion of their workforce
retiring as a challenge affecting their company. The location of the
production facilities in remote and/or less desirable/economically
challenged areas was cited by nearly 80 percent of survey respondents
as a factor inhibiting attracting qualified labor.
[[Page 64676]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.060
[[Page 64677]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.061
[[Page 64678]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.062
[[Page 64679]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.063
C. COVID-19 Impact
This investigation and the industry survey associated with it were
conducted during the time of the COVID-19 pandemic in the United
States. The Department included questions on the survey related to
COVID-19, as situations such as a global pandemic can disrupt supply
chains and production. If they persist, these disruptions may have
implications on the ability of the industry to support critical
national security and energy infrastructure needs.
Survey respondents were queried on specific ways the pandemic
impacted their organization and their responses are listed in the
tables below (note that respondents could list multiple impacts/
responses). Only three respondents indicated that they experienced no
impact from COVID-19. Of the remaining respondents, 79 percent
indicated that the pandemic reduced their organization's sales,
including 38 percent that noted reduced sales as the primary
coronavirus-related impact. Similarly, 63 percent and 58 percent of
respondents, respectively, experienced foreign and domestic supplier
manufacturing delays.
[[Page 64680]]
[GRAPHIC] [TIFF OMITTED] TN18NO21.064
As reported, foreign supplier delays as a result of the Covid-19
pandemic were most prevalent among transformer manufacturers. Of the
transformer manufactures that experienced foreign supplier delays, 50
percent manufacture dry-type/other transformers 1-16 KVA. An additional
43 percent and 40 percent of respondents that experienced foreign
supplier delays manufacture liquid-dielectric transformers 650-
10,000KVA and dry-type/other Transformers 16-500KVA, respectively.
However, only one wound core manufacturer reported that COVID-19
resulted in foreign supplier manufacturing delays; such delays were not
reported by any lamination or stacked core manufacturers. These
percenta
[…truncated; see source link]Indexed from Federal Register on November 18, 2021.
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