Finance Committee on March 12th, 2015

[Flavio Volpe]

Sure.

I think there's a contrast that has to be made in manufacturing in the primary industries and the secondary industries. If you're deriving goods from primary industries in market and you're dealing in Canadian currency, it's one thing. On the secondary industries we're assembling subproducts and inputs from not just the U.S., but from European, Asian, and South American origins. There really is a complex matrix of what goes into the product.

With the customers in my business, we don't deal with the retail customer; we deal with a couple of dozen final assemblers. Their footprints are all over the world. They're certainly in three different countries on this continent. We're dealing in a whole bunch of different currencies, both for input and for output. Some of the most important people on their teams for us are their modellers, their futurists, and their program planners. They don't worry about the price of oil in the short term.

[The Chair, Conservative, James Rajotte]

In terms of your suppliers, you're dealing with at least three currencies.

[Flavio Volpe]

That's right.

[The Chair, Conservative, James Rajotte]

In terms of your customers, are you dealing with three currencies as well?

[Flavio Volpe]

On a declining scale I'd replace three with dozens, but in terms of important currencies, the North American ones are the ones we're primarily dealing with, that is, with the addition of the euro.

[The Chair, Conservative, James Rajotte]

Okay.

Overall, though, is the declining dollar a net benefit?

[Flavio Volpe]

Inasmuch as you're exposed to an American customer dealing in their currency, there is a momentary capture, but those customers also then turn around. What we talk about is that customers will look at what we sold them this year and then ask for give-backs. Then when they price the next program, they like the lower dollar as much as you do. The problem is we buy our goods in U.S. dollars so we have to push back.

[The Chair, Conservative, James Rajotte]

I assume your members hedge.

[Flavio Volpe]

Yes. They've learned to hedge over the years, but there were structural differences up until maybe 10 years ago. We were dealing with a 62¢ to 65¢ Canadian dollar and lots of Canadian final assembly production. Then the world fell apart. Now everybody understands that if you're going to survive, you have to hedge. It's not just hedging on currency, but also hedging on footprint. There are a lot of strong Canadian companies that supply their customers from U.S. plants and Mexican plants, so they have all their other input costs like labour in that domestic currency.

[The Chair, Conservative, James Rajotte]

You said you hedge not only on currency....

[Flavio Volpe]

You also hedge with your production, geographically, and hedge on currency from your operation within Canada, both on buying and on selling.

[The Chair, Conservative, James Rajotte]

You hedge in terms of how much you allocate here, depending on currency or depending on a host of factors?

[Flavio Volpe]

There are a host of factors. If I wanted to serve a customer that assembles in Tennessee, I might decide to set up a plant in Tennessee and serve that customer there as a Canadian company but with a Tennessee footprint. The same could be said for Coahuila. That helps buffer the currency that our customers are already hedging just on a transactional basis.

[The Chair, Conservative, James Rajotte]

Okay. That's fascinating. I appreciate that.

Mr. Watkins, you talked about something that I believe in very passionately. We set up these false dichotomies between west and east, between manufacturing and energy, as you know, because you've been to Nisku in my area. You have a member there, Tenaris. You have other members in the area who very much are linked to the energy sector. When people say, “Here's energy and here's manufacturing, and they're two halves of a dichotomy and they don't meet”, you know very well that in fact they're integrated. In fact, the other panels have said that manufacturing and energy are much more directly linked than they have been in the past.

I know that was in your closing, but could you expand on that?

[Ron Watkins]

Thank you, Chair.

It's very important to understand that connection. I tried to explain earlier. I know you're talking about Tenaris in your own riding, but again, the products they are supplying through there originate with steel made somewhere else. We think this supply chain effect across the country is very important to showing how manufacturing and energy are not just compatible with each other but are interdependent.

As I explained earlier, we can trace the pipes in Nisku or in the ground in Wood Buffalo back to an iron mine in Quebec as the starting point, to a steel mill in Ontario or Quebec, or Regina or Calgary, as the processing point, and onward.

It's not just that material is moving; there's a value-added at each one of those steps. This is a value-added chain across the country whereby we get Canadian steel into the oil and gas segment. That's why we're so keen on that development. We're equally supportive of the efforts to spur LNG investment in British Columbia. That's a very steel-intensive business, not just at the port but back into the gas fields as well and in transporting the gas to port. These are essential relationships.

What's really changed in our industry over the years is the proportional importance of that in terms of our production.

We grew up as an industry based largely on automotive and construction. The energy sector is kind of in the ballpark with automotive as an end use of our steel products. That's energy broadly defined. It's a very important set of relationships.

The key point to your question is that it doesn't all happen in Alberta. A lot of what's happening in Alberta is actually causing things to happen in provinces east of there.

[The Chair, Conservative, James Rajotte]

I appreciate that very much.

Thank you, all.

This has been a fascinating panel.

Mr. Cullen.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Ms. Cobden, you talked about trade to China. Do you have a value ratio for value-added versus raw export to China?

That's been a curiosity of mine. Is that something you could provide? I don't necessarily mean now.

[Catherine Cobden]

Absolutely.

I would just say that only a very small component is made up of raw logs. I know that question continues to be raised by this committee, but the value components are pulp, lumber, and paper. We'll get all of that to you.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

That would be helpful. Thank you.

[The Chair, Conservative, James Rajotte]

If you can provide that to the clerk, we'll ensure all the members of the committee get it.

If there's anything further that any one of you wishes the committee to consider, please do provide that and we'll ensure all the members get it.

I know there are some other questions, but I think we'll have some conversations offline after the meeting.

Thank you so much for being with us and responding to our questions.

The meeting is adjourned.