Committee on Ways and Means, Subcommittee on Trade, 4-11-02 Testimony

Statement of Robert Liuzzi, President and Chief Executive Officer,
CF Industries, Long Grove, Illinois, and Chairman, Ad Hoc Committee of Domestic Nitrogen Producers

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing to Explore Permanent Normal Trade Relations for Russia

April 11, 2002

Mr. Chairman and Members of the Subcommittee -

My name is Robert Liuzzi and I am the President and CEO of CF Industries, a major U.S. farmer cooperative and producer of nitrogen and phosphate fertilizers headquartered in Long Grove, Illinois. CF supplies over 1 million farmers in 46 states with their fertilizer needs. I appear before you today in my capacity as Chairman of the Ad Hoc Committee of Domestic Nitrogen Producers, a group of U.S. producers of nitrogen fertilizers. The other members on the Committee are El Paso Corporation, Mississippi Chemical Corporation, PCS Nitrogen, Inc., and Terra Industries, Inc. This group of companies accounts for approximately 75 percent of total U.S. nitrogen fertilizer production.

I appreciate the opportunity to testify before the Subcommittee on the subject of U.S.-Russian trade relations. Russia is the world’s largest exporter of nitrogen fertilizers and a major competitor of the U.S. industry, particularly in the U.S. market. How the United States structures its trading relationship with Russia in legal terms, both domestically and internationally, has major implications for the economic well-being of U.S. nitrogen producers.

There are several important administrative, legislative, and negotiating processes underway that could dramatically alter the legal structure governing U.S.-Russian trade. Indeed, the outcomes of these processes will determine how Russian nitrogen fertilizers will be sold in the U.S. market in the future. These outcomes could have an extremely negative impact on U.S. producers. As a result, the U.S. nitrogen industry is following developments closely and is making its views and concerns known to U.S. officials in both the legislative and executive branches of the U.S. government.

In my testimony today, I will first provide you with a brief background on nitrogen fertilizer and its importance to U.S. agriculture. Then I will describe the current situation with respect to U.S.-Russian trade in nitrogen fertilizers and how current energy policies in Russia provide massive unfair advantages to Russian producers of nitrogen fertilizers. I will then briefly describe the administrative, legislative, and negotiating processes underway that will shape the future legal structure of U.S.-Russian trade, and our positions on each of these processes. I will conclude with several recommendations on the role the Subcommittee and the Congress could play to ensure that these processes do not lead to outcomes that will do grave damage to the domestic nitrogen industry.

Nitrogen Fertilizer and its Importance to U.S. Agriculture

Plants need adequate nutrients to germinate, grow and produce fruit and seed. Although all of these nutrients can be found in the soil, there are three primary nutrients – nitrogen (N), phosphate (P) and potash (K) – that are not supplied naturally in sufficient quantity to meet the needs of today’s high-yielding production agriculture. As a result, U.S. farmers spend $9-10 billion annually on commercial fertilizers.

Of the three primary nutrients, nitrogen is generally considered to be the most important. Commercial nitrogen fertilizers are produced through a catalytic reaction between elemental nitrogen derived from the air and hydrogen derived from natural gas. The primary product from this reaction is anhydrous ammonia (NH₃). Anhydrous ammonia can be used directly as a commercial fertilizer or can be used as the building block for producing other forms of nitrogen fertilizer such as urea, ammonium nitrate, or nitrogen solutions. For a typical U.S. producer, natural gas accounts for as much as 50-80 percent of the total cash cost of production for a ton of nitrogen fertilizer, depending on the product.

Historically, the domestic industry has supplied approximately 70-75 percent of the nitrogen fertilizers used by U.S. farmers with another 15 percent being supplied from nearby Canadian plants. The domestic industry and a large portion of the Canadian industry were constructed primarily to meet U.S. demand. Further, an extensive distribution and storage infrastructure has been developed over the years to ensure that American farmers would have adequate supplies at the right time. This system was specifically designed to move and handle large volumes of product from domestic production sites to the major consuming areas, particularly ammonia moving through pipelines. Consequently, without a strong domestic industry, there is no assurance that U.S. farmers would be able to secure adequate volumes of nitrogen fertilizer when they need it.

The importance of nitrogen fertilizers to today’s high yielding agriculture is evidenced by the fact that it is applied on 98 percent of the corn, 88 percent of the wheat and 86 percent of the cotton acreage planted in the United States. Recent data from the University of Illinois indicates that, without nitrogen fertilizers, corn yields would drop by as much as 30-50 percent. It is clear that without nitrogen fertilizers and a strong domestic nitrogen industry, the U.S. would not be able to maintain its position as a reliable, low cost supplier of food and fiber products to the world market. In addition, nitrogen fertilizer’s contribution to low cost, efficient feed production has allowed the U.S. to also become a major exporter of meat products such as beef, pork and poultry. Similarly, without adequate nitrogen supplies these exports would also likely decline.

Russian Trade in Nitrogen Fertilizer

Russia is the world’s largest exporter of nitrogen fertilizers. The Russian industry is heavily export-oriented and accounts for over 20 percent of global exports in this sector. With the collapse of the Russian agricultural sector and the resultant drop in Russian consumption of nitrogen fertilizers, Russian producers have looked to overseas markets in recent years. In 2000, Russia accounted for about 20 percent of world anhydrous ammonia exports, 15 percent of world urea exports, 24 percent of world nitrogen solution exports, and 40 percent of world ammonium nitrate exports. Moreover, again in 2000, Russia exported 92 percent of its end-product ammonia, 96 percent of its urea, 86 percent of its nitrogen solutions, and 41 percent of its ammonium nitrate production.

Russian Energy Policies Provide An Artificial Advantage to Russian Nitrogen Fertilizer Producers

The major reason for Russia’s growing success as a nitrogen exporter is the artificially low price of natural gas feedstock provided to Russian producers. As previously noted, about 50-80 percent of the cost of producing nitrogen fertilizer (depending on the type) is the cost of the natural gas. In Russia, the government sets the price at which natural gas is supplied to industrial users. The price of the natural gas supplied to Russian nitrogen producers is best 20-25 percent of the price of that same gas sold for export from Russia, a price determined by market forces.

The artificially low, government set price at which natural gas is provided to Russian nitrogen fertilizer producers allows Russian nitrogen fertilizer to be the lowest priced product on the world market. Moreover, the setting of gas prices to Russian industry is not simply the type of “cost plus” rate regulation that is common in market economies. Indeed, according to the U.S. Department of Energy, the government established price for natural gas in Russia is below the cost of production. Given this low price for natural gas and extensive nitrogen capacity built up during the Soviet era, Russian nitrogen fertilizers are always priced well below nitrogen products from other countries.

It is also important to realize that the Russian government’s establishment of domestic natural gas prices that reflect neither production costs nor supply and demand has other effects.

These low, non-market prices mean that inefficient Russian nitrogen plants continue to operate and to export. They also mean that Gazprom, which does not make a profit on its domestic gas sales, often barters its gas for fertilizer and then exports it for hard currency. In the absence of profitable domestic natural gas prices, and given the availability of export markets for nitrogen fertilizer (the cost of which is comprised 50-80 percent of natural gas), Gazprom has taken, directly or indirectly, an interest in a substantial portion of the Russian nitrogen fertilizer industry. The result is that artificially low Russian gas prices have created a situation in which exporting large volumes of nitrogen fertilizer has become an imperative. The U.S. market is an obvious and repeated target for these exports.

While the U.S. nitrogen industry is modern, efficient, and well situated to serve U.S. agricultural customers, unfair trade in Russian nitrogen products has repeatedly done severe harm to U.S. producers. As a result, the U.S. industry has had no choice in the past but to seek and obtain antidumping relief from massive surges of Russian imports of urea and ammonium nitrate. In 1987 it obtained an antidumping order against Russian urea and in 2000 it obtained an antidumping suspension agreement against ammonium nitrate. The U.S. industry is now preparing to file an antidumping petition against Russian imports of urea-ammonium nitrate solutions (UAN), another form of nitrogen fertilizer.

Commerce Department Will Soon Decide Whether To Revoke Non-Market Economy (NME) Status for Russia Under the Antidumping Law – Revocation Would Have Serious Negative Implications for Domestic Nitrogen Producers

The U.S. industry has been able to obtain antidumping relief against Russian imports of nitrogen fertilizers in the past primarily because the Department of Commerce has, correctly, applied non-market economy (“NME”) methodologies to determine if Russian imports have been sold in the United States at dumped prices. NME treatment of Russia has been critical because it means that the government-set natural gas price is not used to determine fair pricing for the Russian imports. Rather, the Department uses costs and prices from third countries that operate as market economies and are at a similar stage of economic development as Russia (such as Poland).

In an administrative proceeding currently underway, the Department of Commerce will soon decide whether to revoke Russia’s status as an NME country under U.S. antidumping law. This is a decision to be made solely by the Department based on its evaluation of six criteria set forth in U.S. antidumping law, namely: 1) the degree of currency convertibility; 2) free wage rate determination; 3) foreign investment; 4) government ownership or control of production; 5) government control over the allocation of resources and prices; and 6) other appropriate factors. While there is no statutory deadline for Commerce to make this decision, it is widely expected that the decision will be made before the next Bush-Putin summit in late May.

Revocation of Russia’s NME status would have serious negative consequences for the U.S. nitrogen industry, which has relied on U.S. antidumping law to address unfairly priced Russian nitrogen imports that have been dumped on the U.S. market. If NME status for Russia were revoked, Commerce in the future would determine whether Russian export prices are “fair” by examining the actual prices in Russia for natural gas (and the derived prices for nitrogen fertilizer) despite the fact that these are state-determined costs that are not market-driven prices. If the government-determined natural gar prices are used, or the resulting domestic prices are referenced, we believe that there will not be a meaningful dumping analysis.

Revocation of Russia’s NME status under the antidumping law will, in effect, allow Russia to dump nitrogen fertilizers into the United States with impunity. Russia has huge excess nitrogen capacity and, as it has already proven, will be able to flood the U.S. market with nitrogen imports, causing further harm to a U.S. nitrogen industry that is currently struggling financially and has faced repeated waves of Russian imports.

Given Russia’s continuing central control over its key energy sectors, we do not believe that Russia has transitioned sufficiently to be considered a market economy country. It is clear, in any event, that the energy and natural gas sectors do not operate as a market economy in Russia. The Commerce Department has the authority to provide market economy status individually to “market-oriented industries (MOIs)” within a non-market economy country, even if the rest of that country’s economy operates as a non-market economy. This would suggest that the converse would also be true, namely, that a country’s NME status could be revoked (i.e., most industries declared to be MOIs), with exceptions being made for non-market oriented industries. We have urged the Commerce Department, if it intends to graduate Russia to market economy status, to use this approach with respect to Russia. Specifically, we have advocated to Commerce that, if it decides (incorrectly in our view) to revoke NME status for Russia, it should nonetheless retain NME status for the nitrogen fertilizer industry and other industries that still do not operate on a market economy basis in Russia.

Congress May Soon Decide To Provide the President with Authority to Terminate Applicability to Russia of Title IV of the Trade Act of 1974 (“Jackson-Vanik”) – Possible Adverse Consequences for Domestic Nitrogen Producers

Last year, the Bush Administration requested that Congress pass legislation that would terminate the applicability of Title IV of the Trade Act of 1974 to Russia. In popular terms, this is referred to as granting Permanent Normal Trade Relations status (“PNTR”) to Russia. Supporters of such legislation argue that Title IV (also known as “Jackson-Vanik” in honor of its lead sponsors) is a relic of the Cold War and should no longer applicable to Russia since Russia now accords its citizens the right to emigrate, travel freely, and return to Russia without restriction; has committed itself to ensuring freedom of religion; has made progress toward democratic reforms and creating a free market system; and has generally taken positive steps to correct the abuses against which the original passage of Title IV was intended to provide leverage.

In response to the Bush Administration’s request, Chairman Thomas and Chairman Crane introduced H.R. 3553 on December 20, 2001. H.R. 3553 would authorize the President to determine that Title IV should no longer apply to Russia and then to proclaim normal trade relations treatment to the products of Russia. On the date of such proclamation, Title IV would cease to apply to Russia.

We take no position at this time on whether the President should be authorized to grant PNTR to Russia. We understand that there is a debate on this point among those who believe such authorization should be granted at once to the President and others who have suggested that such authority be contingent upon Russia’s accession to the World Trade Organization (WTO).

On the other hand, if this Committee and the Congress do go forward with legislation granting PNTR to Russia, we strongly urge that the legislation provide that Section 406 of Title IV, or some similar provision, would remain in effect with respect to Russia at least until such time as Russia accedes to the WTO. Section 406 provides for a remedy under U.S. law against imports from a non-market economy country that cause market disruption.

It is interesting to note that legislation granting PNTR for China contains a market disruption provision applicable to Chinese imports that is patterned after Section 406. This market disruption provision for China (Chapter 2 of Title IV of the Trade Act of 1974, as amended) is to remain in effect for twelve years from the date that China entered into the WTO.

From the standpoint of the U.S. nitrogen industry, retention in U.S. law of Section 406, or a similar provision like the one in effect for China, is absolutely essential for Russia at least until Russia accedes to the WTO or operates its natural gas sector on a market basis. This is particularly the case if the Commerce Department revokes Russia’s NME status under the antidumping law and leaves the U.S. nitrogen industry no effective remedy under that statute. Retention of Section 406 or a similar provision is also entirely appropriate to continue to give effect to Article XI (“Market Disruption Safeguards”) of the Agreement on Trade Relations Between the United States and Russia of June 17, 1992. Revocation of Section 406, without the passage of a similar replacement provision, would mean that there would no longer exist under U.S. law any statutory provision to give domestic legal effect to Article XI of the bilateral trade agreement.

Negotiations on Russian Accession to the WTO – Possibilities and Prospects for Moving Russia to A Market Economy in the Natural Gas (and Nitrogen Fertilizer) Sectors

In the last year, Russia has intensified its negotiations with other WTO members, including the United States, on its terms of accession to the WTO. The Russian government under President Putin has decided that Russian accession to the WTO will help to extend and solidify Russia’s economic reforms in the direction of a more market-oriented economy with a more open and liberal trading regime. With the accelerated pace of negotiations, many believe that it will be possible to conclude Russian accession negotiations as early as the beginning of 2004.

Last year, the Ad Hoc Committee of Domestic Nitrogen Producers began working with USTR to develop an appropriate approach for addressing Russia’s gas pricing policy as part of Russia’s accession to the WTO. In the view of the Ad Hoc Committee, these negotiations represent the most favorable opportunity for the international community to obtain Russian agreement to eliminate state control of domestic industrial gas pricing and to subject such pricing to market forces. Unless this is accomplished, either as part of Russia’s accession to the WTO or autonomously, the specter of massive, unfairly priced Russian imports of nitrogen fertilizers will continue to hang over the U.S. domestic nitrogen industry for the indefinite future.

It is too early to tell whether USTR will be able to negotiate a market-oriented outcome on Russian industrial gas pricing as part of the Russian WTO accession talks. However, they have continued to raise the issue with the Russians and have pledged to continue to work with the U.S. industry to find a long-term solution to this problem.

In the meantime, however, it is imperative that the U.S. nitrogen fertilizer industry be able to address effectively under U.S. trade remedy laws (especially the antidumping and market disruption laws) the recurring problems caused by state-controlled natural gas pricing in Russia. As long as Russia refuses to allow market forces to determine the economics of Russian nitrogen fertilizer production, exports and pricing, the NME provisions of U.S. antidumping law and Section 406 of Title IV (or some appropriate variation thereof) must continue to apply to Russian imports into the United States of nitrogen fertilizers.

Conclusion

The manner in which the United States structures its trading relationship with Russia from a legal standpoint, both domestically and internationally, has huge consequences for the economic well being of the U.S. nitrogen fertilizer industry. This in turn has important consequences for the well-being of U.S. agriculture. For that reason, there is no more important public policy issue facing our industry today than the legal structure of our trading relationship with Russia.

In my testimony, I have discussed three interrelated and overlapping administrative, legislative, and negotiating developments that will likely have a profound impact on this legal structure. From the standpoint of the domestic nitrogen industry, decisions made in these areas will determine whether we keep plants open or close them, whether we continue to employ people or lay them off, and whether we continue to supply nitrogen fertilizers to the U.S. agricultural community or totally cede that business to offshore suppliers.

In light of my testimony, I would ask the Trade Subcommittee to assist us with respect to the following:

1)     Congress should encourage Commerce not to revoke NME status under the antidumping law for countries where important sectors of the economy have not yet transitioned to market economy status and where production economics for major exported products remains distorted. Certainly, those sectors that remain subject to significant state control should not be graduated. This is clearly the case with respect to the Russian nitrogen industry.

2)     Legislation granting the President authority to terminate Section 406 of Title IV with respect to Russia should not be passed at least until such time as Russia joins the WTO or the bilateral trade agreement with Russia terminates, whichever is later. If such authority is granted, the Congress should at the same time enact legislation providing for a market disruption safeguard against Russian imports similar to that which it enacted with respect to China.

3)     USTR should be directed by Congress not to agree to terms of accession to the WTO for Russia unless they include a requirement that Russia reform its natural gas sector, permitting industrial pricing for natural gas to be determined according to market principles. If USTR cannot achieve this, Russia’s terms of accession should include appropriate safeguards to allow appropriate defenses by other countries against Russia’s unfairly priced energy-derivative products, particularly nitrogen fertilizers.

I again thank the Trade Subcommittee for allowing me to testify and look forward to working with the Subcommittee on these important matters.