Thank you, Mr. Chair.
Welded Tube is composed of two divisions—an energy division, which is OCTG, or oil country tubular goods; and industrial products for the mechanical product and also structural hulls, which is HSS. Our customer base is typically 50% Canadian and 50% U.S.A. At times, the U.S.A. market goes as high as 70%.
Given that our production facilities are located predominantly in Ontario, with one mill just over the border in Lackawanna, New York, the majority of our steel supply traditionally has been sourced by Canadian steelmakers in Ontario. Welded Tube also buys product from U.S. steel mills in Ohio and Michigan. Once the tariffs were imposed between the two countries, we rerouted all Canadian-destined products to be fully processed and produced in Canada to avoid all such tariffs.
With regard to the energy tubulars section of the plant, basically, prior to June 1, 2018, the date the U.S. tariffs went into effect, Welded Tube's entire energy tubulars production was manufactured at our casing mill in Lackawanna, New York, utilizing Canadian-produced steel from both Stelco and ArcelorMittal Dofasco. This facility produced what we call “unfinished green tube”, which was then routed to our Welland facilities and Port Colborne facilities in Ontario for further processing into the finished goods product prior to going to our customers, who reside in both Canada and the U.S.A.
Our customer base is basically looking to continue to produce in Lackawanna, but the cost of the tariff affected our costs and resulted in a loss of U.S. market share. Approximately 25% of the U.S. market share was lost to us when the tariffs were imposed.
When the U.S. tariffs were imposed on Canadian steel entering the U.S., we immediately had to reduce our Lackawanna facility from 75% to 50% capacity utilization, and 22 employees were laid off. The plant went down for four weeks between July and August. Our Welland facility basically went from 100% capacity utilization to 75%, and 45 employees were laid off, which represented 19% of the hourly workforce. In addition, we had to take out another one week of production for the same reasons.
To date, Welded Tube is having to absorb the tariffs as a cost to our U.S. business, destroying our margins and presenting a situation that is not sustainable to our U.S. market and customers. The continued existence of tariffs is eroding our customers' confidence in Welded Tube. Put simply, the longer-term viability of our business in OCTG, which is energy, is not possible in an environment of tariffs between Canada and the U.S.A.
Working with the CBSA, we have explored the feasibility of getting approval for duty relief and duty drawback. We received approval for duty relief on August 16. We are in the process of getting approval for duty drawback to cover the period before the duty relief of July 1 to August 16, when we received duty relief. The conundrum is that we are paying the Canadian government duty on Canadian steel processed by Canadian steelworkers. From July 1 to August 16, for the 1.5 months, we paid over $4 million to the Canadian government. Hopefully, we will be able to recover most of that when we receive duty drawback approvals.
In terms of the industrial side of our division, basically the market is unbelievably strong in 2018. It's at the strongest level it's been at in over 14 years. Despite that, we basically have lost 25% of our business to the shares...during this high rise in the market. The demand for U.S. tubular products is very strong. Typically, our mix between U.S. and Canada is fifty-fifty. Much of what we manufacture in the U.S. can be sourced within the U.S.A. Consequently, our shipments to the U.S.A. after June 1 are 38% lower than before June 1. Many of our commercial relationships are being strained, at best. Despite the strong market, since the U.S. tariffs on Canadian steel imposed on June 1, we have seen a 38% reduction.
In terms of the cost impact on the various tariffs to date, there have been millions of dollars in additional costs due solely to tariffs, with a 38% loss of the U.S. industrial tube business since the tariffs were imposed despite a strong demand in the market. There has been a 25% reduction of our U.S. customer base on the energy tubulars side for the same reasons. The tariffs have strained relationships with our U.S. customers that have lingering effects on long-term business. A lot of our business in the U.S. is on program work, for six months to a year on top of it, so when you lose it, you lose it.
In terms of section 232 and NAFTA, now USMCA, as you are aware, steel tariffs were not part of the USMCA. As a result, they are now being addressed by both the Canadian and U.S. governments. The hope is that the tariffs will be removed and will be replaced by some sort of quota system yet to be determined. We believe the removal of the tariffs on the part of the U.S. should be immediate as they pertain to Canada. Given that Canadian steel exports have never posed a threat to national security, the integrated nature of the U.S. and Canadian markets clearly warrants a return to the free cross-border trade of steel, pipe, and tube.
In the event that the U.S. government is unwilling to return to free trade of pipe and tube, we reluctantly support a fair quota system. Our recommendations are as follows: First, we respectfully request that constituents such as Welded Tube be invited to the table to discuss such a quota system before it's implemented.
Second, we would like to see separate quotas for the pipe and tube sectors, broken down into four subset groups: OCTG, line pipe, structural and, of course, mechanical.
The quota level for each subset should be set based on a tonnage that each producing company—not brokers or service centres—generates over a set period of time. In our particular case, we propose that it would be the first five months of 2018, before the tariffs, and that's been annualized. Setting quotas such as those for South Korea—based on the last three-year average—would not represent fairness to us. Our industry—the oil and gas market—crashed in 2015 and 2016 and as a result a number of companies were severely affected. Going back to a three-year average would not be feasible for us.
Only as an alternative to the previous recommendation would we recommend using 2017's shipments, based on what I just said about 2015 and 2016.
In the event that the quotas are imposed, we recommend that they not be hard quotas. Exceedances should be permitted, which in turn would attract a modest tariff.
Finally, we believe the Canadian government must retaliate in kind against any quotas that the U.S. invokes. Respectfully, Canadian pipe and tube producers need to be consulted prior to the Canadian government taking a stand.
Thank you, Mr. Chair.