Canadian steel tariffs have created a moving target when it comes to pricing for suppliers and project builders as they find it increasingly difficult to peg steel prices on long-range projects after a disastrous 2018 year.
“Last year we lost half a million (dollars) because of the tariff disputes. We were advised of the (232) tariff on the U.S. material and Canada’s emergency tariff on (seven) imports and quota and we had a hell of time. Prices went through the sky and we had a fixed price with contractors. Last year, we were lucky to survive,” said Anoop Khosla, managing director of Midvalley Rebar Ltd., a major supplier to the construction industry.
Suppliers can write in clauses that cover unexpected costs such as tariffs but if there is a dispute, it can be costly and time-consuming going to court to prove a tariff is unexpected. “You lose money (if you deliver at the contract price) but you stand to lose more money if you don’t perform under the contract,” he said. “Your hands are tied behind your back.”
Last year was tough year for tariff issues with three on the table: the North American Free Trade Agreement (NAFTA), which eliminates steel tariffs between Mexico, the U.S., and Mexico; the Section 232 tariffs imposed by Canada and the U.S. on each other’s steel; and, a Canadian-imposed emergency tariff on steel aimed at anti-dumping.
Khosla said that such tariffs mainly protect steel mills in Quebec and Ontario, as western Canadian construction projects rely upon three main sources for construction steel: mills in Washington, offshore suppliers, and Western Canada’s only mill in Alberta. “Eastern mills can’t compete out here with a freight factor of around $170-$180 a ton,” he said. The Alberta steel mill can only supply 10-20 per cent of Western Canada’s needs leaving the region highly reliant upon imports and hard hit when protectionist tariffs are imposed upon imports.
Caroline Andrewes, president and CEO of the Association of Consulting Engineering Companies-B.C. said that for any large project, steel is one of several commodities considered in terms of long-range planning. She said that on large-scale projects where commodity price volatility is a concern, it will cause buyers to move towards commodity purchase agreements that include a fixed price.
“It makes it difficult for projects that have a long planning period and there are a lot of things that can happen over a long term,” she said, but steel prices can also be influenced by a number of large projects occurring at the same time.
Steel prices also hit large projects. The B.C. Ministry of Transportation and Infrastructure has issued a statement that said it is aware of increased costs of labour and construction materials, particular steel. “These have been factored into the project budgets for the Broadway Subway and Pattullo Bridge (projects),” the ministry said.
Khosla said large projects can be up to 24 months in planning and development and the threat of tariffs put suppliers in a risky position. Seasoned buyers know the world market upon which steel is traded and are shrewd at hedging as a world glut of steel exists today and steel prices are returning to almost pre-tariff levels.
If the NAFTA is not signed, then we are in the same boat,
— Anoop Khosla
Midvalley Rebar Ltd.
“What we are telling the general contractor is that if you give us a commitment we will go buy,” he said as he can look six months downstream. “The only thing we can’t and don’t have control of is the tariff.”
Emergency tariffs and NAFTA still loom as threats as in May Canada and the United States reached accord on Section 232 tariffs on steel and aluminum, eliminating the 25 per cent and 10 per cent respectively that each country had imposed on the other’s metals.
“When the 232 tariff came off, we are okay and we have the North American market back on board, but if the NAFTA (which remains unsigned in Canada and the U.S.) is not signed, then we are in the same boat,” said Khosla.
He was part of an alliance that spent $1.25 million challenging Canada’s imposed emergency tariff before the Canadian International Trade Tribunal (CITT). Last year, Canada’s Finance Minister Bill Morneau imposed a 25-per-cent surcharge on steel imports aimed at protecting Canada’s steel mills. The emergency surcharge was placed on seven types of steel: heavy plate, concrete reinforcing bar, energy tubular products, hot-rolled sheet, pre-painted steel, stainless steel wire and wire rod.
The CITT ruled that the only threat to steel makers came from imports of heavy plate and stainless steel wire. Canada removed tariffs on the other five in April and said tariffs collected would be refunded. The two other items remain under a three-year tariff rate quota.
Khalso said that the government’s ability to place such immediate tariffs on imports has left suppliers like him nervous. Under provisions set out by signatories to the World Trade Organization, there is a 90-day review period on tariffs, which Canada is bypassing. “It has always been a commodity market for steel and it is traded on the world market,” he said. “Now that we have protectionism in North America, it is totally out of sync with the world market.”
He said in the past decade there have been four tariff battles adversely impacted western Canadian suppliers. “We can’t afford to keep doing that,” he said.
“We lost money last year,” said Peter Steunenberg, president of Solid Rock Steel, a company known for its custom steel fabrication work. Steunenberg won’t disclose how much his company lost but describes 2018 as a tough year. “When there is a tariff you have to pass it on to the (project) owners,” he said. “But, they will not always accept those charges. They either point to a contracted price or simply don’t have the funds.”
Even as prices are returning to pre-tariff levels, Steunenberg said stockpiling in inventory isn’t an option for his company as it does custom fabrication work that is often subject to last-minute design changes.
Steunenberg is also one of the many Canadian fabricators unhappy with the government’s decision to exempt imported fabricated steel modules (large platforms used in LNG plant construction) from any tariffs as these jobs now go offshore. The exemptions make it difficult for smaller fabricators like his firm to grow their business, Steunenberg said, pointing to a number of B.C. fabricators who have closed up in the province.
Supreme Steel (formerly Canron) is moving its fabrication plant from Vancouver to Edmonton. “We are the fifth company to close here,” said Scott Critchley, chief estimator. However, while the plant will move, the sales, engineering, detailing and estimating departments will remain in B.C.
Critchley blames large contracts such as the LNG modules going off shore, but also last year’s tariffs as a as factors in the closure as the company lost out on jobs. “You try to find the cheapest price for a client and then overnight, you have to add 25 per cent. You can go back to the client and say — sorry for that — but most of the time, you just can’t pass it on,” said Critchley. The tough business picture is further aggravated by the Lower Mainland’s high land prices and the growing skills gap.
David Harvey, president of the Structural Engineers Association of B.C., said that when steel prices rise there are different outcomes by project owners. “They can continue with the project. If it is an important project and funded by multiple agencies, abandoning a project may mean that funding may not be available again. Regardless of the price, the project goes ahead. Or, you see clients scaling back or delaying part of the work.”
Said Khosla: “That is what is happening today (as tariffs spike steel prices). If developers are already deep into a project it goes ahead, but if they have a choice, it is put on the shelf.”