Affirmative Statement of Michael Arena International Trade Commission Hearing

February 27, 2018 Tin Mill Steel Products from Japan (Sunset Review)

Commissioners, Good Afternoon. My name is Michael Arena and I am the

Vice President for Logistics and Operations Support for Silgan Containers. One of

my major responsibilities is supervising Silgan's purchases of tin mill steel, and

other manufacturing inputs such as aluminum. I have been responsible for tin mill

steel purchases for 12 years.

Silgan is the largest provider of metal food packaging in the United States.

Silgan and its sister companies have 55 manufacturing plants located throughout

the United States. Silgan and its sister companies employ more than 6,500

American workers in high paying manufacturing jobs throughout the United States,

including multiple facilities located in the so-called rust belt.

Although Silgan officially became a company in 1987, Silgan traces its

history back to 1899 when the Carnation Company began making its evaporated

milk cans. Today, Silgan is -- by far -- the largest manufacturer of tin cans in the

United States.

As the largest US manufacturer of tin cans in the United States, Silgan is the

largest U.S. purchaser of tin mill steel. Every year Silgan purchases around

850,000 - 900,000 tons of tin mill steel, which is probably about half of all steel

consumed in the United States for food cans.

My office is in Woodland Hills California, just outside Los Angeles. I have

come to Washington because you will make a decision that will affect my

company's business and therefore my company believes very strongly that you

should have correct information and correct facts when you make your decision.

Quite honestly, what the US mills have told you about the US market, what they

have stated in their legal briefs and what they have told you here today conveys an

impression that is simply not true from Silgan's standpoint. What follows will be

what Silgan believes to be an accurate depiction of the US tin mill steel market

today. It's a subject I am passionate about as are others in our industry. We are

bearing witness today in front of our key strategic suppliers because it is the right

thing to do for our industry in this very unique situation.

I note that, unlike before, I am the only purchaser to have come to

Washington. My understanding is that this reflects more about complicated

schedules than any disagreement with what I will have to say. Indeed, based on

my long knowledge of the market, I am quite confident that my description today

of the competitive dynamics are shared by the other US can companies.

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In a few minutes I will address what specifically the US mills have said that

Silgan believes not to be true. But right now I want make a few, very important

overarching points.

Silgan is 100% supportive of free and fair trade. We believe our current tin

mill suppliers reflect that philosophy. We are trying very hard to support the

domestic tin mill steel industry. It is in our business interests to have a vibrant

domestic supply base. It is not in our business interest to be heavily reliant on

imports and our track record 100% supports that philosophy. The domestic tin mill

steel industry, however, has let us down. Collectively the U.S. tin mill steel

industry has been becoming less and less reliable as suppliers. They are making it

harder and harder for us to source domestic steel to meet our business needs.

Trade cases against other steel products have hurt two domestic suppliers,

who now struggle to obtain quality feedstock. Trade restriction on hot rolled steel

imports have severely restricted the ability of both UPI (which needs to buy hot

rolled steel) and OCC (which needs to buy tin mill black-plate) to obtain both the

volume and/or quality of substrate necessary to effectively supply tin mill steel to

their customers.

Data that we have collected in the ordinary course of our business shows that

the availability and reliability of tin mill steel has decreased each and every year

over the last five years. Domestic suppliers just been unable to supply Silgan's

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needs on a consistent and reliable basis. These failures have resulted in significant

disruption in Silgan's operations and chaos in trying to secure steel while delivery

performance decreases and forecasted volume is unmet. In my experience, the

domestic tin plate industry just cannot execute or fulfill against its promises. I

understand from the public version of the Commission Staff's pre-hearing report

that other buyers of tin plate have shared similar frustrations.

For these reasons, we have had to increase our imports from our European

and Canadian supply partners. Silgan also manufactures cans and closures in

Europe much as it does in the United States, and for this reason we have supply

relationships with the major European producers of tin mill steel to serve our

European manufacturing operations. When we cannot obtain needed steel from

our U.S. suppliers, we have no choice but to turn to our European and Canadian

supply partners to maintain our operations and fulfill our obligations in our

customer contracts. The alternative would be catastrophic.

We need a vibrant domestic tin mill steel industry. But even more

importantly, we need to run our business. And we cannot do that without reliable

suppliers able to meet our volume needs.

As context, contrast Silgan's experience with manufacturing aluminum cans.

Silgan manufactures 15 billion food cans annually in the United States. Of this

total, about 5 billion are made from aluminum. For these aluminum cans, 99% of

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that aluminum is sourced domestically, despite the availability of quality suppliers

across the globe. Why is that? The domestic aluminum industry can and does

satisfy our manufacturing needs on a consistent and reliable basis.

Please understand that my critique of the US mills is done out of frustration,

not malice. Love not hate if you will. Silgan will continue to emphasize and

support the domestic tin mill steel industry. We have rewarded domestic suppliers

with quantities of volume that surpass logic given those suppliers performance and

contract execution. To dollarize we have given the domestic steel industry close to

$3.5 billion dollars of business since I was last in front of this commission. We will

do that amount and hopefully more over the next six years. We recognize the need

for these entities to remain viable. We also continue to reward the domestic

industry with fair prices relative to the global market. Prices in Europe from the

same supply sources are below what we pay in the US. The domestic tin plate

buyers have done their part in supporting the domestic tin mills. But we

collectively cannot be held accountable for the reported financial performance of

the domestic tin plate industry.

At the same time, Silgan just desperately needs to ensure supply options.

Silgan needs concrete and practical alternatives to keep our business running when

the domestic steel suppliers drop the ball and cannot meet their supply obligations.

I will now turn to more specific discussion of the market, including Silgan's

experience in the market and most importantly what changes have occurred over

the last six years since the Commission last examined this market.

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First Discussion Point: U.S. Can Companies Need To Buy from U.S. Mills

In the legal briefs that the US mills submitted to you and in their testimony

to you this morning, the US mills attempted to convey the impression that if you

allowed the Japanese mills back in the U.S. market, can companies like Silgan

would not purchase any more tin mill steel from US mills. Indeed, Arcelor Mittal

USA goes as far as saying that, given this fact, the US mills would be "devastated"

— "devastated", that is a quote.

Commissioners, such hysteria is a bit hyperbole. It is a bit hyperbole

because, given the demands of our business, Silgan has no choice but to purchase

the overwhelming majority of our needs from North American mills.

I have been involved in purchasing tin mill steel for Silgan for more than 12

years. Until recently, in each of those years more than 85 percent of the tin mill

steel that we purchased came from U.S. steel mills and the other North American

producer, Arcelor Mittal Dofasco. Until recently Silgan had rarely purchased more

than 10 percent of its needs from off-shore suppliers outside North America.

We have relied on North American suppliers by design. Silgan purposefully

limits the types and quantities of tin mill steel that we will source from off-shore

suppliers. Please refer to Silgan's confidential declaration for the various reasons

why domestic supply is preferred and required. In summary it should be much

easier and less complicated to manage a wide portfolio of specifications with

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domestic suppliers. Domestic lead times should theoretically be less than importers

and the risk of having the wrong material produced and on a boat is real given the

potential for change in customer requirements impacting the steel specifications

required.

This is a critical point in understanding the potential impacts of importers

replacing domestic producers in the US market. We simply cannot take this risk of

having the wrong steel at the wrong time. Therefore, we chose carefully any

specifications that we will purchase from off-shore suppliers. It is for precisely

this reason that the overwhelming majority of steel specifications are essentially

dedicated to domestic mills. In fact, in a typical year Silgan will buy over 400

different specifications of tin mill steel, but only a handful will come from off-

shore suppliers. That is why historically more than 85 percent of our steel ends up

coming from the North American suppliers who can react quickly to our changing

needs.

This is a market fact and this will not change no matter whether the Japanese mills

are allowed back in the market or not. It is a fact that, given the vagaries of the

harvest, food can companies like Silgan must purchase the overwhelming majority

of their tin mill steel needs from US mills. And so, demand for North American

tin mill steel will remain. From Silgan's perspective, off-shore suppliers and North

American suppliers are not largely substitutable. To think otherwise would be

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inaccurate. Indeed, as I will address in a minute over the lasts few years Silgan has

purchased every possible ton that it could from U.S. mills.

Second Discussion Point: Why Did Silgan Recently Increase Its Purchases from Off-Shore Suppliers

Given the fact that our own customer business needs require that we source

from North American mills, a fair question is why did Silgan increase its purchases

from imports over the past couple of years. There are two reasons.

The first reason is a change in customer requirements have resulted in a

movement to specifications that the domestic steel industry has not yet been

capable of supplying. Our only supply sources for this metal exist outside of the

US at this moment. And the second, and more important reason, is the increasing

difficulties that US mills have in supplying promised quantities of defect free steel

has forced Silgan to purchase more from import sources.

Let me unpack both of these. Let's take the first. Tin mill steel is not a

fungible commodity product. Rather, there are multiple different types and

specifications that Silgan requires. Only "qualified" suppliers can sell tin mill

steel to Silgan. And given the varied specifications that exist, qualification is

necessary for each type of steel, not by supplier. And so, it is quite possible that

certain suppliers will be qualified for some types of steel, but not others. Certain

suppliers may qualify for some of our manufacturing sites, but not for others.

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Indeed, this is the very situation we have with respect to our domestic

suppliers. Some are qualified to supply many, but not all of our tin can production

lines and facilities. And others are only qualified to supply a much smaller number

of specifications at our facilities.

This fact is important because, over the past few years, Silgan's customers

have changed their requirements requiring Silgan to utilize different assets and

manufacture with different specifications to produce the performance necessary for

our customers use. For example

Our customers are more and more migrating to convenience ends (ends with

pull open tab affixed). The type of steel used for these ends is a lower gauge, with

high elongation attributes currently not qualified by the domestic mills. This

situation has nothing to do with price of the steel. The migration of this volume to

importers more reflects the changing markets demands and Silgan's response to its

customer's needs. Indeed, Silgan often ends up paying a higher price and carrying

more inventory for this imported steel because it has more advanced technical

specifications.

The second, and quite honestly the most troubling reason, is the increasing

difficulties that US mills have had in supplying promised quantities of defect free

steel - forcing Silgan to purchase more from import sources to satisfy its operating

and customer's needs. The obligations we have to supply our customer's

requirements cannot be understated in this dialogue. I trust that you have seen the

confidential declaration that has been submitted on this subject. This declaration

provides comprehensive details about difficulties that we have had and our having

with our US tin mill suppliers. Suffice to say, we have hard data and records that

US based mills had increasing difficulties with both on-time delivery and quality

claims. And it is absolutely a true statement that Silgan could have and would

have purchased much more tin mill steel from US mills absent these difficulties. In

fact, it was our intention to do so. In each of the three last year's Silgan's forecasts

provided to our domestic mill partners was far greater than was eventually supplied

forcing Silgan to move to other supply sources to meet it and its customer's needs.

Third Discussion Point: ArcelorMittal's Ownership of Weirton and Dofasco

I now want to make an important point in changing market dynamics that

very much affects the quantity of tin mill steel sold by U.S. mills. Arcelor Mittal

North America has two tin mill operations, Dofasco Canada and Weirton, USA. By

way of observation, how tin mill customers are supplied out of those two facilities

seems to be managed based on legacy customer relationships and technology

capabilities and perhaps the balancing of optimal workload between the two

facilities. Silgan has consistently told Arcelor Mittal that we are indifferent on

supply point as long as quality and technical standards can be met. We are not

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looking to change the decisions made on how Silgan is supplied I might add. It is

simply an observation.

My understanding is that US mills have argued that they have considerable

excess capacity to supply the entire US market. It is an odd point to me in

evaluating how Arcelor Mittal North America balances its supply to its US

customers. The import volumes from Canada have continued to grow while there

appears be the potential for considerable harm to the US market if protections

against Japanese tin plate were not sustained. I'm having trouble reconciling those

two concepts.

It should be noted that Silgan has been told broadly there isn't any further

volumes available this year out of the US. My understanding is this message is

consistent across the industry. It is another element that I am having trouble

reconciling in this process. For those of us who manage the Sourcing functions at

our respective companies, access to quality steel day in, day out is a persistent

problem.

Fourth Discussion Point: Japanese Suppliers Will Not Offer the Lowest Prices

In their briefs US Steel and Arcelor Mittal assert that if Japanese suppliers

resume shipping subject tin mill steel to the United States they will do so at prices

lower than all other market participants, including U.S. mills and all other foreign

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suppliers. Based on my experience, this assertion is simply wrong, and

demonstrably wrong.

First at Silgan we have a long experience buying laminated tin mill steel

from Japanese suppliers. Although laminated tin mill steel is not subject to the AD

duties, it still is very much a tin mill steel product. The only difference is that a

protective coating has been added to the tin free (chromium coated) steel before

being shipped to can companies like us. Although several foreign suppliers offer

laminated tin mill steel, none of the North American mills offer laminated steel.

We have been purchasing laminated steel from Japanese suppliers for nearly

20 years. And we can confirm that Japanese suppliers are not aggressively trying

to increase shipments by lowering their selling price, even though it would be easy

for them to do so.

It is important to understand this dynamic. As long as the economics can

work, Silgan actually has a preference for laminated steel. The reasons are that

doing so allows a cleaner and safer operation than having Silgan apply the organic

liquid coating (paint) at our plants. Indeed, having can companies purchase

laminated tin mill steel is the preferred global regulatory solution. Certainly,

increasing our laminated tin mill steel purchases would allow us to optimize our

footprint if we didn't require the current coating operations.

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In addition, it is very easy to substitute laminated steel in our production

facilities. Only a few modifications would be required. What this means is that if

the selling price made it economical to do so, Silgan would in fact utilize and

review laminated steel for a more meaningful portion of its needs. Silgan would

readily switch certain applications to laminated steel if the economics work.

However, the economics do not work because the price of laminated steel remains

too high relative to the price of non-laminated steel.

And so, for many years, Japanese tin mill steel suppliers have known that

they could significantly increase the volume of their US exports of laminated steel

to the United States if they simply lowered their selling price to make the

economics of using laminated steel work. But Japanese suppliers have not done

so. This fact is direct evidence that the Japanese suppliers will not export

significant quantities of tin mill without regard to price. They have not been doing

so, even though they could have.

Second, Silgan has data demonstrating that Japanese selling prices for

subject tin mill steel do not undercut US mills or other import suppliers. As noted

above, "laminated" tin mill steel is simply tin free steel with a special coating

applied after the tin free steel was produced. And so, by definition, the price of the

laminated steel equals the combined cost of tin free steel phts the protective

coating. If one subtracts the cost of the protective coating from the purchase price

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of the laminated steel, you can derive a very accurate estimate of what the Japanese

mills believe the price of the tin free steel should be.

In Attachment D of my confidential sworn declaration submitted to you I

present this very analysis using Silgan's actual data. This worksheet shows our

prices for (1) non-laminated tin free steel from U.S. suppliers, and (2) the

comparable laminate steel from Japanese suppliers. We selected specification that

had the same underlying physical dimensions of the tin-free steel, so the

comparison would be apples to apples. We used data obtained from a commercial

third party of what it would cost to apply the lamination coating to the bare tin free

steel.

What this comparison shows is after backing out the cost of the lamination,

the Japanese prices are higher than the U.S. supplier price. For these examples, the

price premium of Japanese steel over domestic steel ranges from 1 percent to 8

percent. This evidence provides quantitative confirmation of my qualitative

assessment the Japanese mills are not likely to offer the lowest prices.

Finally, by virtue of our numerous can-making production plants outside the

United States, Silgan has bona fide experience with purchasing those types of tin

mill steel subject to the AD order. For its production plants located outside the

United States, Silgan purchases tin mill steel through two central purchasing

offices.

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As the Head of Strategic Sourcing for all of Silgan's U.S. plant needs, I have

regular communications with those offices in charge of purchasing tin mill steel for

Silgan's foreign plants. And based on these discussions, I can state that the

suggestions by the domestic mills that Nippon Steel and JFE Steel are aggressive

suppliers that will sell at any price, are simply not true. Indeed, my European

counterparts have reported to me that Japanese mills have reduced their

participation in the European market in recent years because the market prices

(determined by European mills) had fallen too low.

While our direct experiences are reflective of Silgan's expectations on how

Japanese tin mill suppliers would approach the US market, I think it is also import

to note the changed dynamics since this subject was last reviewed. Imports are up

significantly. Pricing relative to other markets is up significantly. New entrants

have come into the import market and were able to grow their volume at these

higher prices. Silgan's experiences and data reflect that imports are not cheaper

and we don't ask them to be. My opinion is that the US market has a supply and

technology void and importers have been able to fill the void on both fronts. I

cannot make the connection that this is an opportunity for the Japanese tin plate

suppliers to disrupt this on-going dynamic either logically or based on Silgan's

direct experience with them in other commercial areas.

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Fifth Discussion Point: Japanese Imports Will Simply Replace Other Import Supply Sources

Any future purchases that Silgan undertakes from Japanese suppliers will

simply replace other import supply sources. I can state this unequivocally because

Silgan is already purchasing every single ton possible from U.S. mills. And Silgan

would purchase more, if US mills could supply the additional quantity.

The only reason, beyond technology, that Silgan has increased its import

purchases over the past few years is because Silgan has been forced to do so by the

inability of US mills to supply the quantities desired when the steel is needed.

The tin plate market in the US can be broken down regionally. The West

Coast is predominantly supplied by UPI. Historical patterns in that region are easy

to follow. There are very few bigger volume buyers and very few supply options.

In fact, Silgan has not received an offer to supply any of its west coast operations

by a North American producer in at least a decade. USS has an obvious conflict

and others probably are freight prohibited. Silgan sources nearly all of its

requirements from UPI. It would be my guess that the rest of the canmakers either

split their buy between UPI and imports or are utilizing technology that UPI cannot

support. In any event, the import volumes for use on the west coast for non-

excluded products that UPI could supply today are relatively de minimus. And this

dynamic will not change. I am confident in that.

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If Silgan were interested in imports to the west coast, we would have already

done so. This would be the primary opportunity for import growth. It is not in

Silgan's best interest to jeopardize UPI's financial stability. Historically, the two

parties have agreed on fair pricing given all elements in play in the market. UPI

has been granted the majority of Silgan's volume (approx.. 200k tons). A few years

ago, UPI's supply was best in class both from a quality and delivery standpoint. At

the time, there was no reason to envision this changing. At the time, neither party

was interested in this changing. We are not interested in changing it today but UPI

and its suppliers will help determine that and we have had recent challenges

making west coast tin plate supply more difficult for all can makers.

The ITC report summarizing the respective questionnaires highlights the

deteriorating quality and supply issues tin plate buyers are facing. In certain cases,

trade actions have contributed to the changing quality situation as new substrate

suppliers enter the equation. The tin plate buyers are catching the "foul ball" of

some of these actions. Silgan highlights some of the impacts to its business in its

confidential declaration.

I was asked what the impact of a decreasing quality means to a can maker

and potentially a tin plate supplier so would offer this opinion. Quality manifests

itself in many ways. In its simplest form it's a distraction that our plant folks work

hard to navigate around in conjunction with the supplier. There is little in the way

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of hard costs associated but our plants readily see the value of steel that runs

seamlessly in our operations. In its extreme it results in a claim back to the steel

mill. Basically, this means the steel was sufficiently out of specification that it

could not be used in can making for its intended use. In this case, the canmaker

claims back the full value of the steel it could not use plus any processing costs

incurred. I'm led to believe based on declarations that US tin mills operate under

very thin margins. That being the case, the cost of quality claims for a steel mill

would be meaningful and would certainly highlight a challenged financial

performance. As an example, let's say US mills make $100/ton on $1000/ton coil

and a can maker processed the coil and added $100 / ton in cost to it. The can

maker would charge the steel company $1100/ton lets say after scrapping the steel.

To get back to break-even, the steel maker would need to sell 10 more coils. So

when claim rates or quality performance deteriorates it can dramatically reduce

financial performance. And if margins are tighter than this simple example, the

problem compounds. The point is, the bigger concern should be on internal

improvements for our domestic tin plate industry. Can customers should not be

asked to subsidize these inefficiencies. More volume doesn't solve this inherent

issue.

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Sixth Discussion Point: Silgan Does Not Use Import Prices To Lower Prices Paid To US Mills

In their briefs submitted to the Commission, US Steel and Arcelor Mittal

USA argue that removing the AD duties will allow customers like Silgan to use the

Japanese price to force US mills to offer a lower price. Such allegation is not

accurate, and more so, unfair.

I don't know where the facts are that support this declaration by the US tin

mills. The presence of imports, whether they are from Canada, Europe or Asia are

now a given market condition. Silgan maintains the US tin mill industry was the

primary contributor to allowing this dynamic. As we reiterate, US can makers offer

US tin plate manufacturers the highest prices in the world. I think the ITC is now

well aware of the overall dissatisfaction with domestic supply despite these prices

that should incent volume and operational execution. The concept that can makers

are going to get a Japanese quote and leverage it for volume that the domestic

industry hasn't proven to be able to supply doesn't really make a whole lot of sense

to me. This hasn't occurred as other suppliers have entered the market to fill the

supply void. Silgan will continue procuring tin plate as it does today. I don't expect

any tin mill supplier will suggest using Silgan as an example of using foreign

imports to drive down domestic prices. If they do, it's unfortunate and inaccurate.

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Final Discussion Point: Why Silgan Wants To Buy Japanese Steel

Given that Silgan only intends to import quantities it cannot source from US

mills, and Silgan is currently happy with our foreign suppliers, a fair question is

why does Silgan want to have the ability to purchase from Japan? It is not about

the price. As I just explained, Silgan fully anticipates having to pay a price to

Japanese mills that is likely higher than what we pay US mills and certainly higher

than certain other import sources.

It is not about getting a low price. Rather, it is about ensuring adequate

supply. Commissioners, the real world in which I live is not static. Supply

sources can change, they can become scarce. On this topic, I ask you to examine

paragraph 76 of my confidential declaration.

ReCap

In closing, I want to echo something that Dan Porter said. 18 years is a long time.

The US tin mill market today is very different now. In fact, I am not sure what is

similar beyond the product itself. Today it is simply not credible to maintain that

imports from Japan will harm US tin mill suppliers.

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