National Post (National Edition)
Impact of tariffs on auto industry overblown, analyst says.
‘Dire impacts’ not seen here, analyst says
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,” Tyerman 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 ofatradedealatthetimebetween Canada, the U.S. and Mexico, Magna lowered its outlook to US$2.3 billion to US$2.5 billion, down from US$2.4 billion and US$2.6 billion.
Linamar CEO Linda Hasenfratz has been outspoken on the tariffs, going as far as to warn on Tuesday that the tariffs may result in a recession.
“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 Wednesday, Hasenfratz clarified during a third quarter earnings call that while the impact of the tariffs on the Guelph-based 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.
Her concern, she said during the call, was centered around what they could do to American companies such as Ford Motor Company.
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.
Both large cap and small cap companies are also likely to benefit from the price of aluminum plunging since Trump announced the tariffs. According to its U.k.-based LME benchmark, aluminum is priced at US$1950 per metric tonne — more than $350 cheaper than what it was on June 1.
The price of hot rolled coil steel, the U.S. benchmark, has declined nearly US$100 to US$817 per metric tonne since the tariffs were implemented. The price is still quite high for automakers, however, in comparison to the US$609 per metric tonne at which they could purchase it on Nov. 7, 2017. Hazenfratz said that higher commodities costs in the company’s industrial segment have already lead to price increases for customers.
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.