Foreign Trade Zones open up savings opportunity for M-I SWACO

Traveling to the M-I SWACO Galveston or Amelia grinding mills might not seem like a trip beyond America’s borders, but for the business of grinding barite, it very much is. Aside from a few signs posted around the perimeter, obscure federal register notices and the knowledge of M-I SWACO employees and government, the fact that each plant is a Foreign Trade Zone goes otherwise unnoticed.

M-I SWACO applied for and received authority for operating the world’s largest barite grinding mills as special purpose Foreign Trade Zone (FTZ) in 2007. The designation solved a subtle but expensive problem long associated with importing the critical barite from abroad.

As travelers returning to America will recall, items brought in from overseas are potentially taxable—there’s the small matter of Customs duties which are calculated and paid as you disembark from your plane or ship. They are not negotiable. How much you owe is determined by a look at what you are importing and at what tariff rate applies to the items. The same is true for the commodities M-I SWACO imports, barite being the most important.

For some background on barite and this business best practice, it is important to know a few things:

• barite is the primary weighting agent used in drilling fluids
• the naturally occurring mineral must be ground to a fine powder meeting strict specific gravity measurements for use in drilling fluids
• 80% of the world’s identified barite reserves are in Asia

The strange thing about the expensive tariff on barite is that it applies to the mineral in its crude state, but affords free entry to barite that has already been ground in a foreign country. This sets up an undesirable dilemma: doing the value-added grinding work overseas to win free tariff treatment displaces domestic US jobs, which surely was not the intent of the US tariff.

The solution is one of timing: to get the barite to the mills and grind it before it “enters” the United States, becoming subject to the tariff. Foreign Trade Zones are area designations considered outside of the Customs territory of the United States. The fences, waterways and railroads around the M-I SWACO grinding mills are like little borders, within which no taxes apply. Once items are removed from the FTZ, the tax rates in effect are imposed on the finished products. So by changing crude barite into ground barite before duties apply, the company reduces its import duty burden from $1.25 per metric ton to zero. Barite being barite, M-I SWACO imports tons of tons, so this savings is substantial.

Benefits afforded to users of FTZs come with heightened security and recordkeeping requirements. Furthermore, the Zone designations are only granted after careful reviews in Washington, D.C., inspections by local Customs and Border Protection officers and input from the communities in which they would operate. Even the company’s competition was asked to voice its comments, and as was expected, they not only were open to the idea, but eventually followed the M-I SWACO example for the betterment of the industry as a whole.

The procedures in place to maintain these privileges are executed with great attention to detail by the staff at Amelia, in Galveston and at corporate headquarters in Houston. The relationship with Customs and the community stakeholders, including the Port Authorities and, in Galveston, the Independent School District, is a positive one of mutual respect and benefit.