Trade wars a boon to steelmakers, but a burden to manufacturers
Tariff-driven price hike boosts results above estimates for Stelco, ArcelorMittal
TORONTO Stelco Holdings Inc. is poised to benefit from Canada’s trade war with the United States, gaining from the hefty steel tariffs and rising prices that are bedevilling many manufacturers.
The steelmaker beat analyst expectations to post second-quarter earnings of $175 million before interest, taxes depreciation and amortization (EBITDA). Revenue jumped 48 per cent compared to the first three months of the year on higher than expected shipments and rising prices.
“We believe we remain well positioned to react to all market conditions including U.S. tariffs on Canadian steel,” said chief executive Alan Kestenbaum, chair of Bedrock Industries Group, which bought the Hamilton, Ont., firm out of creditor protection last summer. “That includes potentially benefiting from demand created by declining sales of U.S.-produced steel into Canada and Canada’s recently implemented 25-per-cent import tariffs against U.S.-made steel.”
Given more steel is shipped to Canada from the United States than the other way around — sales that will now be deterred by tariffs — “net-net the market expands for us,” Kestenbaum said.
Stelco makes up 85 per cent of its sales in Canada and will continue to focus on the domestic market, he added.
Stelco stock ended the day 5.7 per cent higher to $24.58.
Positive sentiments are also emerging from steel producers operating south of the border where trade restrictions are limiting supply and driving up prices. ArcelorMittal — the world’s largest steelmaker — also beat analyst forecasts Wednesday, posting its best quarterly results in seven years. Though tariffs had hurt U.S. bound shipments from operations in Canada and Brazil, the firm said it had nevertheless benefited from the tariff-driven boost in prices.
“We have a strong U.S. exposure,” chief financial officer Aditya Mittal said on a call with investors. “Clearly we are a net beneficiary of the trade actions.”
While a boon to steelmakers, rising prices are proving a burden to many manufacturers and downstream producers who rely on steel as a raw material and who are already absorbing hefty tariffs on products sent to U.S. customers.
“The cost of steel has gone up tremendously and now we have no competitive edge in the United States. Both of those problems are because of the tariffs,” said Al Schutten, president of Stoney Creek, Ont.-based Janco Steel Ltd. “We’re managing in the short term, but what happens in the fall could be a different story.”
U.S. President Donald Trump levied global tariffs of 25 per cent on steel and 10 per cent on aluminum in March. Exemptions for Canada, Mexico and Europe expired June 1, prompting Canada to hit back with tariffs on $16.6 billion worth of U.S. steel, aluminum and other goods.
The restrictions have sent steel prices soaring, with the benchmark price for hot rolled steel rising to US$911 a tonne in July — a 52-percent increase since November.
They’ve also left manufacturers on both sides of the border grappling with confusing regulatory requirements and mounting tariff payments that often hit twice, first when raw materials cross the border to Canadian factories and again when they are sent back over the border to American customers.
In some cases, Canadian manufacturers are absorbing both blows, depleting cash reserves in an effort to maintain customers until a NAFTA agreement is forged — one they hope will come swiftly and allow them to return to business as usual.
“Some companies have the ability to take on the costs, others have said to their U.S. companies, ‘where there’s a tariff cost, it’s on you’,” said Matthew Wilson, senior vice-president of the Canadian Manufacturers and Exporters. “There will be some who feel they have to do it and our concern is that many Canadian companies are smaller and only have so much cash. They could very quickly find themselves unable to operate.”
Though Schutten has absorbed the lion’s share of the U.S. tariffs on his products, his orders from U.S. customers — who account for 30 per cent of Janco’s overall business — have fallen by 60 per cent over the past couple of months, he said. He has asked some of his customers to apply for tariff waivers, but with more than 20,000 applications lodged with the U.S. Commerce Department, the process has been plagued by backlogs. They have also balked at a requirement to post their waiver applications online.
“A lot of them would rather keep their business close to their chest. They don’t want their filing open to the whole world,” he said.
Toronto-based Venture Steel has petitioned the Canadian government for waivers on roughly 150 steel products it ships from the United States, said Tony Kafato, the firm’s president. He has yet to receive a response.
“These are products made in the U.S. that have specifications that Canadian producers can’t make and we’ve already spent millions on tariffs,” Kafato said, adding that he has had no choice but to pass the tariffs on to his customers in the auto, construction and energy sectors. “This is creating havoc and commotion and a lot of work for all kinds of people.”
In addition to the tariffs, the Canadian government has said it is considering potential safeguards intended to prevent the diversion of steel into the Canadian market, a measure Kestenbaum said would create “a supply-demand balance in Canada that remains healthy.”
“We also see opportunities created by the very recently successful initiation of trade cases against China and others on cold rolled steel and cases against China, South Korea and others on coated steel such as galvanized steel.”
These are products made in the U.S. that have specifications that Canadian producers can’t make and we’ve already spent millions on tariffs. This is creating havoc and commotion and a lot of work for all kinds of people.