Evidence of meeting #26 for Industry, Science and Technology in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was energy.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Ron Watkins  President, Canadian Steel Producers Association
Stephen Sampson  Director, Canadian Steel Partnership Council, Canadian Steel Producers Association
Peter Frise  Chief Executive Officer and Scientific Director, AUTO21 Networks of Centres of Excellence, Auto 21 Inc.
Michael Raymont  President and Chief Executive Officer, Energy Innovation Network

3:30 p.m.

Conservative

The Chair Conservative James Rajotte

I call the 26th meeting of the Standing Committee on Industry, Science and Technology to order. Pursuant to Standing Order 108(2), we're continuing our study on the challenges facing the Canadian manufacturing sector.

We have two sessions today. In the first session we have before us the Canadian Steel Producers Association, represented by their president, Ron Watkins--welcome--and by their director, Stephen Sampson, of the Canadian Steel Partnership Council. Welcome, gentlemen.

I understand, Mr. Watkins, you'll be making the presentation. We encourage you to be as brief as possible, but you are allowed up to a maximum of 10 minutes, at which time we'll turn to questions from the members.

Mr. Watkins, you can begin now.

3:30 p.m.

Ron Watkins President, Canadian Steel Producers Association

Good afternoon, Mr. Chairman, and thank you very much. Good afternoon, members of the committee. Bonjour, mesdames et messieurs.

The Canadian Steel Producers Association welcomes this opportunity to add its voice to your deliberations. This is a much-needed and overdue inquiry. Far too many Canadians either take for granted the future of Canada's manufacturing sector or, worse, assume our economy can thrive without a competitive and diversified industrial base.

The steel industry has a direct stake in this issue, both in its own right as a major manufacturing sector and because our customer base includes other manufacturing and resource processing sectors. In turn, our industry is a major customer for many other sectors, from mining to transportation to engineering. Thus, our supply chain relationships extend in both directions.

The CSPA's member companies operate in five provinces, supporting customer needs in the industrial, commercial, residential, consumer, and public sectors across Canada.

With yearly sales of about 13.5 billion dollars, our members employ some 35,000 Canadians to produce 15 to 16 million metric tonnes of steel each year. More than a third of that production is exported, mainly to the US. In the end, however, Canada is a net importer of steel. Last year, we imported 9.3 million metric tonnes and exported 5.4 million tonnes.

The CSPA agrees with the challenges identified in the committee's interim report, notably the triple effect of rapid increases in the Canadian dollar, in energy prices, and in global competition. Our companies feel that every day. The industry itself has already made major strides, though the challenges remain serious.

Over the past several years our productivity performance has outstripped the manufacturing average considerably. There is an impressive rate of product innovation. Energy efficiency has been benchmarked at a very high level and we have reduced GHGs and pollutants significantly in absolute as well as intensity terms.

Future progress in all these areas depends on investment and reinvestment in plant and equipment, innovation, and people. It is under-appreciated, in our view, that globalization also means competing for investment as well as for markets. To win needed investment capital, whether that be among countries or within global enterprises, Canada simply needs to offer the conditions to compete against other investment options.

Consequently, the CSPA endorses the key investment measures that have been proposed already by several manufacturing industries to this committee. First, a two-year writeoff for investment in new productive machinery and equipment would accelerate capital stock turnover, leading to improved cost structures and productivity, energy efficiency, and environmental gains. Second is a further reduction in the corporate tax rate to 17% within five to six years. Third, improvements in the SR and ED system would enhance manufacturing innovation performance. And fourth is a tax credit for employer-financed workforce training to strengthen productivity of the existing workforce. This could take the form, for example, of a credit against EI premiums paid by employers.

I'm aware that this committee has been well briefed already on these issues, and you have also considered other issues important to us, including the entire question of energy pricing, availability and reliability, and the need for more rapid development of new and alternative energy sources. We could further discuss the broadly accepted need for improved border infrastructure and processes. Rather than repeat these points in detail, however, l thought I would speak to some topics that have received less attention up to this point.

The first is international trade, and in particular the rapid industrialization of countries such as China and India. For Canada, this is a two-sided coin. Clearly there is a rapidly growing opportunity in these markets, and we agree that Canada needs to pursue them more aggressively. The other side of the coin, however, is the deliberate policy of these countries to develop what they consider critical industries such as steel through direct and indirect subsidies, market protection, and other measures that support their export growth.

A less evident impact on our manufacturing base is the indirect subsidization of exports of steel-containing goods, such as appliances and equipment. These products displace domestic production in North America, both for these sectors and for supplier industries like our own.

China's steel industry is key in this regard. Even with double-digit internal growth, it has rapidly become a major net exporter of steel. This has been developed under a lengthy set of government measures to expand capacity and subsidize exports. The rapid build-up of excess capacity in China and other emerging economies, which invariably view steel as a strategic sector, will result inevitably in market distortions in Canada and elsewhere. These volumes of excess capacity, I would point out, are growing very substantially, as we speak.

Let me be clear, however, that we are not here to propose new forms of trade protection, nor do we seek production subsidies. We do, however, recommend that this committee recognize the importance of applying existing trade rules when unfair trade distorts markets for Canadian manufacturing. Better still would be to address these practices before bigger problems and trade frictions develop.

A second theme, quite different now, is to recognize and build on domestic industrial clusters and supply chain relationships. Although globalization has stretched supply chains geographically, our domestic competitiveness can be strengthened by local or regional clusters of related industries and infrastructure.

Industry sector clusters include suppliers and key customers. They create a broader pool for developing and retaining skilled workforces. They are transportation efficient and they collaborate to develop new technologies, products, and processes. Therefore, we should look for competitive, pragmatic ways to strengthen our industrial clusters within Canada and our domestic industrial and technological linkages. One such opportunity is through research infrastructure. Later today, you will hear the impressive story of AUTO21 when Dr. Frise appears before you.

An important opportunity for the steel industry is the move of the CANMET labs of Natural Resources Canada to Hamilton. This has the opportunity to bring together industry, university, and government technology capabilities to create new Canadian excellence in the areas of materials science and metallurgy.

A third topic I wish to cover is a well-trained adaptable workforce to meet the demanding needs of 21st century manufacturing. First, human resources programs, whether federal or provincial, could focus more directly on the advanced technical skills and sophisticated trades that will be in short supply. Second, as proposed earlier, a tax-based incentive for industrial training would stimulate continuous learning and skills upgrading of the existing workforce.

Third, action is needed at an earlier stage. Too many educators and students have an outdated image of manufacturing. Governments and industry need to work together with them to promote the attractiveness of manufacturing as a career choice for tomorrow's workforce, and we'd certainly be pleased if this committee recommended such actions take place.

Finally, there is the theme of how best to knit all these factors together in support of Canada's medium- and longer-term manufacturing interests. In a nutshell, the development of partnership mechanisms bring together key stakeholders to identify what can be achieved, what actions are needed, and what can improve the prospects for Canadian industrial success.

Industry sector partnerships can take many different forms. However structured, they offer a unique opportunity for Canada to take internal action as a basis for competing globally. Canada has a unique ability to work in this manner, and that can work to our competitive advantage.

The steel sector has been particularly active in this regard. For many years, we have worked with organized labour in the Canadian Steel Trades and Employment Council, which is now developing proposals related to skill needs for the industry. We have an aging workforce in a lot of industry sectors; over 50% of it is over 45.

Internationally, the NAFTA governments and their steel industries have formed the North American Steel Trade Committee, and under the security and prosperity partnership initiatives, we have developed a North American steel strategy, which the three governments have approved.

More recently, the CSPA, together with the federal and provincial governments, established the Canadian Steel Partnership Council, of which Mr. Sampson is the director. The CSPC includes high-level representatives of our governments, our customers, our suppliers, our workers, and academia. The next phase of this process will be to develop a shared long-term vision and initiatives on which stakeholders can act jointly to continue to advance the steel and steel-related industries in Canada.

Mr. Chairman, this concludes my opening remarks. As I said, I undertook to cover the areas I thought were getting less attention than some others. We thank the committee for its attention to our advice, and we look forward to the remainder of our discussion with you today.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, Mr. Watkins. It was a very substantive presentation. Thank you for that.

We'll now go to questions. Mr. McTeague for six minutes.

3:40 p.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

Thank you, Mr. Chair.

Mr. Watkins and Mr. Sampson, thank you for appearing here and being so concise in setting out the views of your industry.

I have a couple of questions that are really overarching concerns. You talked about issues of capacity and what may lie in wait for the industry down the road. To be sure, there have been a number of changes in the industry itself, both in terms of the players and production, what they're producing, and of course valuation in your industry, in which, fortunately for all of us, we're happy to see there has been an appreciation in value of product.

I'm interested in getting your comments in some strategic areas. Within the steel industry, though, it seems to me that we've seen an exit from the market. For instance, Canadians are no longer producing stainless steel. I'd be hard pressed to find a single production, I realize, at the primary level, the base level of producing steel. This tends to be a bit more of a refined section, but it seems to me to be surprising in a nation that has both an abundance of ability....

The last stainless steel company, I believe, was taken over. It was bought out. Now, of course, we're seeing the price of stainless steel going through the roof.

We're also noticing the wider impact this has on other forms of manufacturing. The committee may very well be in touch with one of the many stainless steel aftermarket producers, and they are complaining about the fact that because there is no presence in Canada, that they are subject to the whims of an international market and often Canada is sort of an afterthought with respect to consumption. I'd like to get a little comment on that.

I'm interested as well in the change in the industry itself. Has there been a concern with respect to the change in the ownership of many of the companies? I know we're past the point of Minmetals, but I'm thinking, for instance, of Arcelor's takeover of one of our steel industries in Hamilton.

Perhaps, finally, I'd like just a comment as to whether or not—and I say so without reference to being tongue-in-cheek—the October 31 announcements on income trusts will have a negative or a neutral impact on your industry as a whole.

3:45 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Thank you, Mr. McTeague.

On the first question, not just on stainless but the whole product mix and who makes what, of course, as with a lot of industries, there has been a combination of consolidation and specialization that has developed across the industry. As I pointed out in my remarks, we do compete within North America, and in fact I would contend that we probably have, in some respects, the most open steel market in the world. Certainly we face import competition from other countries, as well as from the U.S.; and equally in the United States, we need to compete with very big companies. None of our steel companies are in the top 50 globally in terms of size, so there's a specialization factor that certainly comes into play there.

Your second question related to the ownership changes in the industry. It continues to be, in some respects, an incomplete novel, frankly. There has indeed been major ownership change in the Canadian steel industry, and it's not just ownership. We did, of course, have the CCAA proceedings with respect to Stelco, and Algoma before that. The Dofasco situation now sits in kind of an interesting legal situation within the Arcelor framework, broadly defined, but not part of a Mittal-Arcelor combination. So there is no question that we have companies that are under both new ownership and to some extent new management, and we continue to see that develop.

Your final question was with respect to the income trust issue. Frankly, I'm not aware of any particular impact I'd identify today. I certainly haven't had any opportunity to discuss it with any of our members.

3:45 p.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

Thank you for that.

In terms of the facilities you have in Sault Ste. Marie, how precarious is that situation specifically? We've had members of Parliament raise this in the House of Commons now, and it would appear that the facility there is on very shaky terms. Can you describe for this committee why that might be the case? Is it the result of the kinds of subsidies you were referring to earlier, or state overproduction, excess volume and capacity being produced in countries like China?

3:45 p.m.

President, Canadian Steel Producers Association

Ron Watkins

We don't typically go into the details on any particular company's financial performance, but I would say that they have been operating since emerging from CCAA protection. I think they've actually made pretty good progress. The new president, Denis Turcotte, has made quite a good impact. They just released their quarterly results. We received them this morning. They were quite positive.

That said, this is an industry that is constantly globally in transition. I think we're going to see a lot more change. I wouldn't speculate on any particular outcome for any particular company, but they are certainly part of a very dynamic and fluid industry.

3:45 p.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

I have a further question. If we proceed to a two-year accelerated depreciation as requested, would that put us in line with other nations or ahead of other nations?

3:50 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Again, I think the issue becomes in part, where do you stand on effective tax rates for foreign investment? Secondly, our major competitor for investment of course is the United States. As I think you know, it has certainly employed super-depreciation provisions in the past, and this is an attempt to put Canada into a position where we can compete better for those investments.

3:50 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

We'll go to Monsieur Vincent.

3:50 p.m.

Bloc

Robert Vincent Bloc Shefford, QC

We've heard the Canadian Steel Producers Association say that some brokers who import steel violate regularly the spirit of Canadian rules relating to countervailing duties and antidumping. Is that still the situation? Are they still operating in this manner?

3:50 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Thank you.

The short answer is that trade remedy and trade actions do remain a significant factor in this business, both in Canada and in other countries. It is the case that within Canada there has been less action of that nature than in, for example, the United States, but there continue to be trade actions brought against countervailing and anti-dumping cases. We just completed this past summer, for example, a review of the hot rolled steel. The review was undertaken by the Canadian International Trade Tribunal, which in this case found in favour of the Canadian companies. It found potential injury and maintained the order.

There are both short- and long-term issues. There are the immediate markets with the pressures from some countries and they continue to be found, either in Canada or other jurisdictions, to be in violation of the trade laws. The long-term issue is the one I referenced in my opening remark, which is this tremendous buildup in global capacity.

China this year will produce over 400 million tonnes of steel and it will have excess capacity of 40 to 50 million tonnes perhaps, probably larger at some point. Again, by comparison, our total production is 15 or 16 million tonnes. It's a growing concern to countries generally that we're on this surge, not just with China but with India and some other emerging economies that are rapidly building capacity at a faster rate than they need. That extra steel always, of course, ends up on the global markets. There is concern certainly continuous in the short term, but there is also the concern that over the long term this capacity buildup will just create more trade pressure.

3:50 p.m.

Bloc

Robert Vincent Bloc Shefford, QC

According to our steel processors, their supply problem is to find steel at prices that are reasonable enough for them to be competitive. The problem is that China is able to purchase what it wants and to have its full supply of steel. Here, however, we're not able to buy steel anymore because prices are already too high, and our steel processors keep saying that their raw material is too expensive, that they can't make any profit and that they will have to shut down. Is that the situation today?

3:50 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Again, with the situation of Canada versus China, for example, I think it's important to bear in mind that a lot of the basic inputs to steelmaking are established on more or less a global basis. For example, strap steel is shipped to China, but it's purchased on open markets. Sources of energy and other inputs of production are commodity prices by and large that China also faces.

Obviously there's the question that their labour rates must be a lot cheaper than our own. That's true, but the labour content in a tonne of steel is pretty small. It's probably less than a person-day on average in a tonne of steel. They have certain cost advantages in factors like that, but then they face both internal and external transportation costs. Our companies are very much of the view that on a fair basis we can compete in North America in the steel business against China and other countries.

3:50 p.m.

Bloc

Marcel Lussier Bloc Brossard—La Prairie, QC

Mr. Watkins, as far as your competitiveness goes, I would like to know how much of this competitiveness is influenced by the environment? Do you have any data relating to the reduction of greenhouse gases by your companies between 1990 and today? In the future, do you believe that regulations relating to greenhouse gases and pollutants will be a major stress on the competitiveness of our companies?

3:55 p.m.

President, Canadian Steel Producers Association

Ron Watkins

On stress or pressure, we recognize that an important part of the sustainability equation is the environmental performance of the industry. You referred to comparisons since 1990. If I could just give you some data for our industry, for greenhouse gases total emissions are down 17%, and on an intensity basis it's 29%. That's to the year 2003, which was the last measure I have.

With respect to pollutants, we are down. Benzene is reduced by 75%, NOx by 31%, and sulphur dioxide by 76%. We've gone through this period and we continue to compete while making the investments necessary to make those reductions. Overall energy efficiency has improved over 25%, so for quite some time the industry has actually taken very seriously the need to address these problems.

We recognize that obviously there would be a point at which regulatory requirements, depending on what they were, could become a problem, but we've developed an MOU with the federal and Ontario governments with respect to GHGs, and we'll now be into discussions with the government on the provisions under the Clean Air Act to see where that goes.

I think you've heard this from other industry groups as well, Mr. Chairman. There's a much better story on environmental performance across the manufacturing sector than most people might appreciate, and we're certainly a part of that.

3:55 p.m.

Conservative

The Chair Conservative James Rajotte

We'll go to Mr. Carrie.

3:55 p.m.

Conservative

Colin Carrie Conservative Oshawa, ON

Thanks very much, Mr. Chair.

I'd like to thank you for coming here today.

I'd like to carry on a bit with the questioning about free trade and about NAFTA, and how well we're doing in North America and in other markets. There's a lot of discussion now about free trade agreements that Canada's entering. One in particular is the Korean free trade agreement.

Do you have a position on the Canadian negotiations with Korea free trade?

3:55 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Let me answer that and deal with a couple of dimensions to that question, Mr. Carrie.

First of all, from the point of view of the steel producers in Canada, the markets they serve, and the new products they make in the markets we serve, it's almost exclusively Canada and the U.S. I think over 90% of our exports go to the U.S. We're not going to sell much steel into Korea, which is the world's fifth largest steel-producing country already.

I think the concern on the Korea free trade deal was with respect to areas like market access for Canadian consumers of our steel products, so to speak. I know, for example, the auto parts sector has a specific interest to reduce barriers into Korea, and a more successful auto parts production out of Canada in turn creates the demand opportunity for Canadian steel.

Generally speaking, we would share a lot of the industry's view. We've looked, clearly, for a deal that balanced our industrial interests in a positive way. From a steel customer point of view, it could be quite an important factor for us because, again, the steel that our producers make is seldom used directly by households, for example; it always goes into some other product or into other industries, and that's where the impacts, I think, could be felt.

3:55 p.m.

Conservative

Colin Carrie Conservative Oshawa, ON

Okay. Very good.

Coming from Oshawa, I was very impressed with the automotive industry, the CAPC--

3:55 p.m.

President, Canadian Steel Producers Association

3:55 p.m.

Conservative

Colin Carrie Conservative Oshawa, ON

--organization, and I noticed that you have the Canadian Steel Partnership Council. Could you tell me a little bit about how unique that group, that partnership, is or how it can be utilized or involved to help the government in making policies that would be beneficial to your industry?

3:55 p.m.

President, Canadian Steel Producers Association

Ron Watkins

Absolutely, and I'll turn in a moment to Mr. Sampson to give part of that answer.

As I mentioned in my opening remarks, I believe the partnership council model is a very constructive way, and as I said, I genuinely think it's something Canadians actually can do quite well--bringing together industry, organized labour, governments of course at senior levels, and academia to try to define and develop a perspective on what needs to be done and some practical steps that can be taken with it.

I'm personally very familiar with the CAPC process and I think it has achieved a lot in that regard, not simply what it worked on, but the way it brought the community together. And it goes to that cluster idea that we introduced.

Steve, could you perhaps speak to the subject areas we're looking at within the CSPC. We did just have a meeting with Minister Bernier back in September and we're now very much into the detailed work plan .

4 p.m.

Stephen Sampson Director, Canadian Steel Partnership Council, Canadian Steel Producers Association

Thank you, Ron.

That's right, we have had two meetings as a council. It's been in existence for just about a year. As you know, in terms of other councils, I think it's just in automotive and aerospace, so we're one of three.

Really, the overall goal is to set out a longer-term competitiveness and sustainability vision. We're trying to get away from that sort of short-term focus. From time to time pressures will arise or there will be a crisis issue. Instead, we're trying to go on a long-term basis. What can we do, given that unique group of stakeholders around the table that we all think have an interest in a strong steel industry in Canada? What can we do together to set out a series of policies that will allow us to really be put on a stronger, almost growth footing to really be able to improve our competitiveness?

So we have working groups, for instance, in human resources, in innovation, market development opportunities, international trends, and investment issues. It's a way to really draw in some of those unique perspectives. And then what we're hoping to do is lay out a series of actually very specific recommendations for not only governments, provincial and federal, but even steps for the industry itself to take so that we can meet some of those targets.

4 p.m.

Conservative

Colin Carrie Conservative Oshawa, ON

Excellent, very good.

We mentioned a little bit about greenhouse gas emissions. If the government moves forward with, for instance, implementing the ideas of Kyoto or the carbon trading situation, how would that affect the competitiveness of your industry over the long term?