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June 9, 2020To:Section 232 Electrical Steel InvestigationDockett Number BIS-2020-0015From: Phillip JamesGeneral Manager, WEG Transformers USA, Washington, MOThe following comments are in response to the Section 232 Electrical Steel Investigation thatwas initiated on May 11, 2020 to examine potential impacts on U.S. national security due to theimports of laminations for stacked cores for Incorporation into Transformers, Stacked Cores forIncorporation into Transformers, Wound Cores for Incorporation into Transformers, ElectricalTransformers, and Transformer Regulators. These comments provide data and WEG’sperspective to the questions directed to the criteria listed in 705.4 of the NSIBR as they affectnational security. In this document, WEG refers to Grain Oriented Electrical Steel as (GOES)WEG Transformers USA (WEG) is located in Washington, MO and is a producer of Power andDistribution Transformers to the Utility, Industrial and Renewable energy markets in the U.S.WEG has two factories (2) in Washington, MO producing Power and Distribution Transformers.WEG also has two (2) transformer manufacturing facilities in Mexico also producing Power andDistribution Transformers.Specific comments and information below are directed to the Department of Commerce tounderstand in holistic way the possible impact of Section 232 on WEG.Domestic production and productive capacity for the products needed to meet projectednational defense requirements: WEG has continually seen our business grow over the past three years due to significanteconomic growth, a very high demand for transformers to support renewable energygrowth in Wind and Solar and natural replacement of the U.S. electrical transformerinfrastructure due to the old age of the equipment. The average age of a powertransformer in the U.S. is over 40 years old and there is significant demand in normalreplacements to maintain the current infrastructure. In the U.S., there is not enough power transformer capacity to produce the full range ofelectrical transformer for the U.S. market. Specifically in the 200 MVA plus power range,345 kV, 550 kV and 765 KV range there is limited domestic capacity. As powertransformers grow in size beyond 230 kV, there is a significant gap in capacity that U.S.suppliers can provide. There is no transformer manufacture that can provide a 765kVWEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
stacked core design in the U.S. at the moment. That entire product category is importedfrom several countries around the world as well as from Mexico. Also, due to the strong demand for renewable energy, wind & solar, a significantamount of distribution transformers are imported from our facility in Mexico as the U.S.supply base can’t produce enough of these units to meet wind farm and solar farmdevelopment. In regards to Electrical steel, AK Steel is the only producer of GOES in the U.S. WEGestimates that AK Steel has 225,000 tons of a total U.S. market of 300,000 tons, or73% market share. The demand for U.S. transformer growth, which requires GOES inevery unit, is projected to increase by 7%-10% annually, driven heavily by renewableenergy development. Most States in the U.S. have significant renewable energy targetsin their generation estimates to provide clean energy. WEG firmly believes that AK Steelhas the capability to produce for this future demand in the operation. In addition, withAK Steel being the only supplier of GOES in the U.S., WEG sees significant risk to the U.S.Electrical infrastructure and security by having GOES sourced from one company. Theonly options U.S. transformer suppliers would have to acquire additional capacity,would be to source from external suppliers and pay higher prices, therefore driving uptransformer prices for Utility companies in the U.S. At this moment, WEG estimatestoday that transformer prices could go up by more than 15%.Existing and anticipated availability of human resources, products, raw material, productionequipment and facilities to produce products: WEG Transformers USA, as stated above, has seen significant growth in our business inWashington, MO. If WEG were forced to produce more stacked or wound corelaminations in our business, we would not be able to increase the workforce to do thatto support volume growth. Due to the very low unemployment numbers in the U.S.,WEG has to prioritize where we put our resources to grow our business. If we canprocure material, from a NAFTA (USMCA) supplier in Mexico, it may be the best overalldecision for WEG to do that so we can supply finished good products to U.S. Utility andRenewable customers as an economical price. This allows us to focus our resources,supply product to the critical infrastructure and continue to grow our business inMissouri. In addition to human capital, WEG would also need to spend capital money to expandour machine capability to produce these cores and laminations. WEG would like tocontinue to invest our resources in areas where we do not have a NAFTA (USMCA)supplier that can provide necessary products. WEG continually invests in both of ourWEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
factories in Washington, MO to maintain the capacity needed to support our customerbase.Growth requirements of products industries to meet national defense requirements: WEG estimates, from our business experience, that the normal growth rate onnonrenewable energy transformers is 4%-5%/year. In addition to the substantialgrowth from our Utility customers, renewable energy growth in Wind and Solar isgrowing over 10%/year as states are driving a significant amount of their new powergeneration needs to renewable energy. Recently, renewable energy generation passedcoal fired generation in the U.S. for MW generation. Attached below is a graph of Windenergy generation from AWEA, American Wind Energy Association, showing the MegaWatt growth in the U.S. over the past eight years. There is not enough capacity in theU.S. to supply transformers for this growth, much less the GOES that is used to buildeach of these transformers.WEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
As you can see in the table below, renewable generation (Wind Power) continues to growsignificantly and is a very large contributor to individual states total Kw generating capacity.Many individual states in the U.S. have renewable energy generation targets of 35% to 75% oftheir total electrical generating forecast over the next 10-15 years. This significant growth can’tbe supported with current state transformer core manufacturing or finished goods transformermanufacturing in the U.S.The impact of foreign competition on the economic welfare of the products industries: In WEG’s opinion, foreign competition is not a significant issue related to GOES. AKSteel already has 70% market share of the current industry and they are not able tosupport the significant growth and changes to the U.S. electrical grid that renewableenergy is driving. If WEG were to buy all core steel from AK Steel, our prices to U.S.customers would certainly be higher, thereby causing these customers to look evenfurther for additional off shore suppliers to meet their needs. WEG buys a significantamount of our core steel from AK Steel already, but limiting WEG to one supplier, willcause harm to our own business and our customers. This natural move of customers toseek other products from global suppliers will harm our revenue, tax and employee basein our community.WEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
The displacement of any domestic production of the products causing unemployment,decrease in revenue of the government, loss of investment or specialized skills andproductive capacity:WEG’s position in regards to this question is significant in our opinion. Two factors drive ouropinion here. First, WEG sees the actions by AK Steel as an opportunity to use the umbrella of “U.S.National Security” to improve their own business. AK Steel has a significant marketshare in the U.S., 70% in our estimation of GOES. By imposing tariffs on GOES andfinished goods transformers, AK Steel is trying to push their market share to 90% inWEG’s opinion and drive their own financial performance. Next, WEG questions why a manufacture of steel is petitioning the U.S. government toapply tariffs to finished good transformers (Electrical Transformers and Transformerregulators). AK Steel does not produce transformers or related products and they haverequested this under the evaluation of GOES, not finished goods products. WEG Transformers USA in Washington, MO has a project that has just been approved byour Board of Directors to build a new factory in Washington, MO to produce electricaltransformers. This is a clear commitment and investment plan by WEG to build productfor the U.S. market. As stated earlier, our business continues to grow very well and weneed to provide additional capacity to our customers and the expanding renewablemarket. However, our company is evaluating the actions by AK Steel and how thataffects our investment and make the correct decisions for WEG . We see thesepotential tariffs as significant negative headwinds to our growth plans and if these tariffsare implemented, WEG will seriously consider locating this production to anothercountry. WEG has obtained a full incentive package from the City of Washington, MOand the State of MO. However, there are already 25% tariffs in place on the rawmaterial (GOES), from 2018, and if tariffs are now placed on processed material, WEGsees this as an action that could possibly cause us to use other locations in the worldto meet our customer demands.Relevant factors that are causing or will cause a weakening of our national economy:Several factors will harm U.S. Electrical grid security if these tariffs are imposed. As statedearlier, there are already tariffs in place of 25% on raw GOES material that U.S. suppliers areworking with. AK Steel is the only supplier of GOES in the U.S.o What happens if a natural disaster destroys their business?o What if there is a labor issue causing significant downtime due to a strike?WEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
o What if they incur a significant production issue caused by equipmentdowntime? There are many questions related to this topic of their only being one source for GOES inthe U.S. If an average consumer in the U.S. only had one location to buy a new car from,unless they paid a significant tariff to buy another one, the U.S. government would notallow that to happen. WEG sees this issue in a similar viewpoint. U.S. transformer suppliers need alternateand additional GOES capacity to support the U.S. market in, for the consumer, acompetitive way. Placing tariffs on finished good transformers will harm the supply of product to the U.S.and/or cause a significant price increase to Utility Companies. The U.S. relies onproducers around the world to supply transformers as there is not only limited capacityin the U.S. to produce these transformers, but in many cases, there are no suppliers inthe U.S. to supply these. A company like WEG has a significant physical presence in theU.S. manufacturing transformers. However, even a company as WEG bringstransformers into the U.S. from other WEG factories around the world. WEG is fullycommitted to the U.S. by growing our physical presence here, but the high cost ofcapital requires some products to be imported due to limited transformer capacity inthe U.S.Summary of WEG Transformer USA position on this case:WEG would like to thank the Department of Commerce for allowing our comments to beprovided and considered. As stated, WEG is not only committed to being in the U.S., but we aregrowing our business significantly in Washington, MO. WEG views potential tariffs on processed GOES as a significant risk to U.S. security.AK Steel is the only supplier in the U.S. of GOES and if something were to happen to thatbusiness, it would significantly harm not only the U.S. electrical grid, but also WEG andother transformer suppliers in the U.S. GOES is supplied on long-term contracts and adisruption in supply from the only U.S. supplier would make it impossible to procurematerial globally to support the requirements of U.S. needs.WEG’s position is that additional capacity and competition is needed to support ahealthy market to sully the critical needs of the U.S. Electrical infrastructureWEG is requesting additional time to respond as finished good transformers have alsobeen identified as a potential cause for tariffs. WEG is requesting more time to provideadequate data regarding this very complex supply chain which supports the U.S.electrical power gridWEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
WEG continues to make significant investments in our business, but our own GOESsupply risks and cost increases, driven by these potential tariffs, will cause WEG toconsider if our approved growth project should be executed in the U.S.If there are any further questions or clarification of data that I can provide, please email me atpjames@weg.netWEG Transformers USA IncOne Pauwels Drive, Washington Missouri 63090, USAwww.weg.net/us - 1-636-239-9300
finished goods transformers, AK Steel is trying to push their market share to 90% in WEG’s opinion and drive their own financial performance. Next, WEG questions why a manufacture of steel is petitioning the U.S. government to apply tariffs to finished good transformers (Elec
