Tariff turbulence hits Canada as U.S. flip-flops on trade policy

B.C. companies get tentative reprieve but could suffer if U.S. follows through on threat to slap penalties on steel and aluminum

A steep rise in steel prices could hurt companies like Langley’s Sonic Steel, whose projects include a new middle school in Port Moody, if they are bound by contracts based on lower prices for the commodity | Sonic Steel

Months before U.S. President Donald Trump announced the U.S. would slap tariffs on steel and aluminum imports, steel prices had been on the rise.

That is partly due to demand, since the global economy is firing on all cylinders. But China, which produces about half of the world’s steel, has also been slashing output by shutting down some of its more polluting steel plants.

In the last five months, structural steel prices have risen 10% to 20%, according to one local supplier. The World Steel Association predicted an 8% rise in steel prices in 2018, even without tariffs.

Now that Trump has set in motion a 25% tariff on steel imports and a 10% tariff on aluminum, steel prices can be expected to increase even more.

Though B.C. is not a big steel producer, it does produce aluminum, and certain industries, such as shipbuilding, aerospace and construction, could all potentially be affected by a rise in steel prices.

Last week, when signing the tariffs into law, Trump said Canada and Mexico would get an indefinite exemption, but only if the U.S. gets the deal it wants in the renegotiation of the North American Free Trade Agreement (NAFTA).

“If we’re making the deal on NAFTA, this will figure into the deal and we won’t have the tariffs on Canada or Mexico,” Trump said.

If the U.S. can’t get the deal Trump wants, he said it will be terminated, “and we’ll start all over again or we’ll just do it a different way.

“But I have feeling we’re going to make a deal on NAFTA ... and if we do there won’t be any tariffs on Canada and there won’t be any tariffs on Mexico.”

Even if Canada does get an exemption, however, it is feared that China, frozen out of the American market, will simply ratchet up the dumping of cheap steel and aluminum elsewhere, including in Canada.

“If … the U.S. market becomes shut to [China], where else are they going to put it?” asked Andrew Wynn-Williams, divisional vice-president of Canadian Manufacturers & Exporters. “They’re going to put it here. So, we would see a massive increase in steel dumping into Canada, which would decimate our primary industry.”

If NAFTA talks fail, and the tariffs are applied, Canadian steel and aluminum producers will be punished even more. The cost to Canada from U.S. tariffs has been estimated at more than $3 billion.

Should U.S. tariffs push up the price of steel, Jeff Snowdon, project manager for Sonic Steel, a structural steel fabricator based in Langley, said companies like Sonic could be locked into contracts signed when steel prices were lower.

They would be forced to deliver on contracts that do not reflect the rising costs of steel.

“The hurt for us, as a fabricator, will be that we’re already locked into contracts, and prices are already sliding and there’s no escalation usually built into those projects,” Snowdon said.

Last week, the price for steel tubing had already gone up $0.05 to $0.80 per pound from $0.75, Snowdon said.

“It’s going to go to $1,” he said. “It’s going to slide up.”

One sector in B.C. that uses a lot of steel is shipbuilding. But a spokesperson for Seaspan’s Vancouver Shipyards said the company uses a distributor that sources steel mostly from the U.K., so the company does not expect any major impacts.

Dynamic Attractions – the Port Coquitlam manufacturer of theme park rides and subsidiary of Empire Industries Ltd. (TSX-V:EIL) – is a major steel fabricator that does not expect to be affected by the tariffs, as it sources most of its steel from the U.S.

As for metallurgical coal (met coal) – B.C.’s second most important export – Jim Truman, director for global metallurgical coal markets for Wood Mackenzie, does not expect much of an impact in Canadian met coal exports or prices.

Met coal is an essential ingredient for making steel. But B.C. does not export a lot of it to the U.S. In fact, many Canadian steel producers get much of their met coal from American producers.

“We’ve always covered our needs in the past, and I think there’s enough latent capacity there that we’d be able to cover whatever rise was necessary,” Truman said.

One other sector in B.C. that could be affected by steel and aluminum prices is aerospace. Asked how the tariffs might affect B.C.’s aerospace sector, the Aerospace Industries Association of Canada had no clue.

Other industry associations were likewise scrambling last week to grasp the full implications of Trump’s tariffs – should they ever be implemented without a Canadian exemption.

Steel and aluminum manufacturing employs 70,000 Canadians directly and accounts for 5% to 6% of Canadian exports to the U.S.

About 40% of U.S. imports of aluminum and 16% of its steel imports come from Canada. It is a highly integrated supply chain.

“There are a lot more jobs in the U.S. dependent on businesses that make use of steel and aluminum than actually make steel and aluminum,” said Michael Burt, director of industrial economic trends for the Conference Board of Canada.

“Whether we put reciprocating tariffs in or not, prices are likely to rise here as well because it’s an integrated market,” Burt said.

“We could see Canadian jobs lost because [plants] are either shut down or operate at a reduced capacity. You could see countries that were selling into the U.S. and can’t anymore start trying to sell into the Canadian market, so that leads to more competitive pressure on our market.

“So there’s definitely going to be cost implications for businesses and consumers.”

According to the Canadian Steel Producers Association, the $14 billion in trade between Canada and the U.S. in steel is pretty much evenly matched – with $7 billion of Canadian steel going south and an equal amount flowing north.

Eastern and Atlantic Canada would be hardest hit by steel tariffs, and Quebec would be hardest hit by aluminum tariffs.

About 66% of all the aluminum produced in Canada is exported to the U.S., according to a presentation made last year by the Aluminum Association of Canada. Rio Tinto Alcan’s (NYSE:RIO) Kitimat smelter exports $600 million worth of aluminum annually to the U.S. (see story below). Steel exports from B.C. to the U.S. are relatively small – $78 million.