Impact of U.S. tariffs on auto industry overblown: analyst

U.S. steel and aluminum tariffs aren’t having “the dire impacts” predicted for the Canadian auto sector, an analyst said, suggesting losses, if any, are minimal and are being overblown.

Cormark Securities analyst David Tyerman, who covers the two largest manufacturers of auto parts in Canada — Magna International and Linamar Corporation — said the sector’s largest companies haven’t seen a significant impact to their bottom lines since U.S. President Donald Trump imposed tariffs of 25 per cent and 10 per cent on steel and aluminum respectively on May 31.

The real danger, Tyerman said, was that Trump would make good on his threat to impose auto tariffs of 25 per cent on the sector. The threat led to uncertainty, but the USMCA trade deal that the U.S. and Canada signed in September eliminated that risk. “It just doesn’t make that much of a difference,” he said. “It would be good if they weren’t there. It might bring the price (of the commodities) down a little bit, but the reality is it doesn’t gigantically change the equation of the overall economy.”

The main reason, Tyerman said, is because companies like Linamar and Magna receive rebates that cover as much as 100 per cent of the tariff charges from the federal government if they import steel and aluminum from the U.S. and export it back out.

In their second-quarter earnings report, released after Trump imposed the tariffs, Magna estimated that the company would lose US$60 million per year because of the tariffs. “It might sound like a lot to you and me,” Tyerman said, “but it’s not to Magna who makes US$34 billion in sales a year.”

Due to the uncertainty over the tariffs and the lack of a trade deal at the time between Canada, the U.S. and Mexico, Magna lowered its outlook to between US$2.3 billion and US$2.5 billion, down from a range of US$2.4 billion to US$2.6 billion.

Linamar CEO Linda Hasenfratz has been outspoken on the tariffs, going as far as to warn that the tariffs may result in a recession on Monday.

“This is taking a toll,” Hasenfratz said at a conference in Montreal. “We may be past the point of no return of being able to stop the ramifications.”

But on Tuesday, Hasenfratz clarified during a third-quarter earnings call that while the impact of the tariffs on the Guelphbased company is “not zero, it’s certainly not close to material for us.” Hasenfratz said there was no impact to Linamar’s U.S. facilities and any impact to its Canadian facilities is reimbursed by the government.

Smaller companies in the field such as the Markham, Ont.-based Exco Technologies Ltd are also reporting minimal effects. The company reported “a modest drag on profitability” due to the tariffs in a third-quarter earnings report in August. The company’s net income grew nearly three per cent in comparison to the third quarter of 2017.

While these companies haven’t seen significant losses, Veritas Investments analyst Dan Fong said that any additional costs — however small — will eventually fall down to consumers — the customers going into dealerships to buy cars, Fong said.

“If you think about the second order effect on what these tariffs will do to the cost of a car if you have to pass the whole thing on to the consumer ... depending on the car, the increase in cost will be several thousand dollars in magnitude,” he said.