International Trade Committee on Oct. 16th, 2018

[The Chair, Liberal, Mark Eyking]

Thank you.

We're way over time, but it was good commentary.

We're going to wrap this up with Ms. Ramsey for three minutes.

Go ahead.

[Tracey Ramsey, NDP, Essex, ON]

I think we've heard really clearly at this committee that we're in an emergency situation that requires action in a non-partisan way. The program and the things that have been rolled out are not working on the ground. They are not helping small and medium-sized enterprises, and they're not protecting Canadian jobs. We're in a position where, if we don't act urgently and quickly, the devastation is going to be widespread, certainly in my riding of Essex, in Windsor, and also in Quebec and other regions of our country. I think the entire viability of our manufacturing sector is under threat with these tariffs. We can't pat ourselves on the back about what we've achieved with the U.S. when we are still under this dire threat.

I thank you for raising the issue of a long-term manufacturing and auto strategy. We desperately need this in our country. We can't control what's happening south of the border, but we can control what's happening in our own country, and it's time we take ownership of that and go to all of you to create the solutions.

In the summer the NDP called for a national tariff task force, not to be partisan, but to say this is an emergency situation that requires all of our attention in a way that is different from what we're doing, because what we're doing isn't working.

Last, I would like to ask you about the impact on jobs. We've talked a lot about your businesses but, obviously, there are people who work in all of your shops.

Can you mould makers speak to the impact on jobs in our region and what you've seen over this difficult period of instability?

[Michael Bilton]

Again, to be automotive-specific, we have an FCA plant in Windsor. If anything were to ever happen to that plant.... We've done the numbers on it, and every one part that gets shipped into that building is touched by four or five people in our region locally, within a 50-kilometre stretch. That means that there are 20,000 to 25,000 potential losses because of that. That's the number that's been floating around our region. Our economic development office has taken that data in and distributed it. I wanted to make that comment to make sure that everyone understands that there's an awful lot at risk here. We've got a lot of hard-working, proud folks in our region, and we want to do what's best for everyone.

I'll end it there.

[The Chair, Liberal, Mark Eyking]

Be quick with your answers, because we're almost wrapped up here.

[Jonathon Azzopardi]

Quickly, what I believe you're not seeing that is transpiring right now is that you're going to have great Canadian manufacturers in companies that are going to go on sale. There will be great merchandise that will be sold out to foreign investment. We are questioning right now whether that foreign investment will have good intentions to continue to employ Canadians or transplant that technology and import their steel and their products into Canada, land it in our region, and then export it to the United States and Mexico.

This is a very real possibility. We've been monitoring it for some time. We believe right now that in low-cost countries similar to China, there's approximately $37 billion worth of investment that's waiting to find a home. It could find its way into Canada, which could be a good thing, but it could also be a bad thing. If they start to take those jobs and start to move them overseas, then this becomes nothing more than a landing zone.

[The Chair, Liberal, Mark Eyking]

Thank you, gentlemen, for coming and doing a presentation. These are very challenging times for your companies and your employees.

We're going to suspend for only five minutes now. We have another group of witnesses coming in. Thank you.

[The Chair, Liberal, Mark Eyking]

We're going to start the second round of our meeting.

As everyone knows, I think, we are doing our study on the impacts of the tariffs on Canadians and companies.

Welcome, folks, to our committee.

If anybody is here for the first time, we try to keep it under five minutes so we can have lots of dialogue with MPs.

Without further ado, we're going to go with ASW Steel and Mr. Clutterbuck.

Go ahead, sir. You have the floor.

[Tim Clutterbuck, President, ASW Steel Inc.]

Mr. Chairman, members of the committee, thank you for the invitation to testify before you today.

ASW Steel Inc. is a specialty steel manufacturer located in Welland, Ontario. We are a wholly owned subsidiary of U.S.-based Union Electric Steel, a division of the publicly traded Ampco-Pittsburgh Corporation.

ASW provides 125 full-time, high-quality jobs in the Niagara Region, where manufacturing jobs are scarce and unemployment rates are the third-highest in the country, running 25% above both the national and provincial averages. These good jobs and the commerce they deliver bring fourfold downstream economic benefits to Canadians.

ASW is the only stainless steel-producing melt shop in Canada and one of only three such shops supplying stainless steel ingots throughout North America.

Commencing operations in 2012 on the site of the former Atlas Specialty Steels, ASW produces specialty steel primary products for forge shops and rolling mills. Of note, ASW will supply the stainless steel required for the production of nuclear end fittings on the Bruce Power nuclear refurbishment project. Also, we have partnered to run prototypes for the production of corrosion-resistant stainless rebar for use in bridge construction throughout Canada. Prior to ASW, these products had all been imported from abroad.

Since inception, ASW has experienced exceptional growth, reaching annual sales of $100 million in less than five years. Unfortunately, the bulk of that growth has come through the U.S. market.

With that as a backdrop, it would be an understatement to say that the imposition of 25% tariffs on Canadian steel under section 232 of the Trade Expansion Act is having a significant and adverse impact on ASW's business. Our U.S. customers cannot afford to pay outlandish tariffs on steel that was priced fairly to begin with, and margins are too thin for us to absorb such sums. Consequently, orders have been cancelled and inquiries have slowed.

While ASW has been proactive in finding new Canadian opportunities, customer approval processes take time to mature. Countermeasures are a welcome buffer. However, duty relief and drawback programs have provided temporary relief for steel users while adding little near-term benefit for ASW. The remission process is complex, and as capable government staff work hard to satisfy the conflicting needs of steel producers and users alike, supply chains are disrupted and our businesses are suffering. The steel boom being boasted south of the border is not evident at home.

In this difficult period of adjustment, we seek access to appropriate government support to prevent layoffs and other long-term consequences. While a speedy resolution to the trade impasse is the ideal solution, at this point in time our only recourse is to redirect all attention into the Canadian and international markets. To do that, we need time and our government's help.

Specifically, ASW recommends the following measures to help mitigate losses, encourage domestic consumption, and offer the time needed to adapt.

First, provide direction to all government procurement agencies to source only Canadian melted steel.

Second, provide "buy Canadian" incentives for steel melted in Canada.

Third, redistribute tariff funds to injured companies in the form of settlements for losses brought on by this illegal trade action.

Finally, provide grants to allow small and medium enterprises to adjust their product offering to satisfy Canadian needs not currently supported with domestic production.

On the last point, ASW has looked into the government's strategic innovation fund, but we fail to meet the thresholds prescribed in the program. We are preparing applications anyway and are hoping to erase these barriers to participation.

We're encouraged by the USMCA agreement. However, we fear that the U.S. trade representative favours quotas in lieu of removing tariffs. Restrictive quotas will limit growth and inhibit investment in Canadian companies. It is our opinion that any North American company prepared to invest in facilities on this continent should be rewarded with unfettered access to all of its markets. ASW strongly suggests that the government work diligently to secure a complete exclusion from the 232 actions for North American-owned entities. This must be a priority.

To conclude, Mr. Chairman, we thank the government for acting swiftly on the U.S. tariffs on steel, and we applaud the implementation of retaliatory tariffs and safeguards preventing an influx of redirected foreign steel. These have been critical and effective actions in the short term.

In the long run, however, the U.S. remains an important export market for Canadian steel producers. As tariffs continue into 2019, we will find ourselves in increasing difficulty. ASW has had the support of patient owners, but that patience is not without limits. The potential for Canada to lose a business like ASW, the only one of its kind, is real. With its 125 jobs and fourfold downstream benefits, such an eventuality would be a serious blow to an already beleaguered Niagara Region.

Thank you very much for your time. I would be pleased to take any questions you may have.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

You mentioned you had 125 employees.

[Tim Clutterbuck]

Yes.

[The Chair, Liberal, Mark Eyking]

Where's your operation?

[Tim Clutterbuck]

It's in Welland, Ontario.

[The Chair, Liberal, Mark Eyking]

Thank you.

We're going to move over to Boart Longyear. We have two witnesses with us, Mr. Closner and Mr. Humphrey.

You have the floor. Go ahead.

[Robert Closner, Vice-President and General Counsel, Boart Longyear]

I'm going to begin and just give you a brief overview of what we do, and then I'll ask Mr. Humphrey, who's our global director of sourcing, to talk more specifically about the financial impacts to our plants.

[Eric Humphrey, Director, Global Sourcing, Boart Longyear]

We will be speaking to a handout that you have in front of you.

[Robert Closner]

Boart Longyear has been around since the late 1800s. It's one of the world's leading providers of drilling services, drilling equipment and performance tooling to the mining and drilling companies.

Currently, the company is a subsidiary of an Australian parent company, but we're actually in the process of trying to re-domicile the company to Canada. The global drilling services division operates in 30 countries across the globe with a diverse mining customer base that includes copper, gold, nickel, zinc and other metals and minerals. We also sell our products to 100 countries across the globe. There are six manufacturing plants in our company, two of which are located in Canada. One of them is in Mississauga, and the other one is in North Bay. These two plants are key to our global supply force.

Boart Longyear has had a strong presence in Canada, in particular on the manufacturing side, and we've been manufacturing under these plants since the 1950s.

In Canada, we operate in seven locations, with approximately 1,000 employees across the country. This includes operations from the east to west coast: Calgary; Haileybury and a number of other locations throughout Ontario, including Sturgeon Falls and Sudbury; and Val-d'Or. Two plants are of key importance to us, given that the plant in North Bay manufactures 90% of our global supply for coring rods that are sold throughout the world. Our plant in Mississauga is the sole source for the long hole production rods that are manufactured in that facility.

We have about 71 employees in the Mississauga plant, which also includes some corporate office space. We have everything from engineering to legal finance and IT in that plant. We currently have only 46 employees dedicated to the manufacturing, given that the impact of the tariffs has reduced demand for our product. As noted on the slide, the 2018 projected use of steel is 2.8 thousand tons, whereas the capacity is 10 thousand. We are at one-third of what our total possible production is out of that plant.

Prior to the tariffs being put in place, we sourced the material for the Mississauga plant from suppliers that had distribution points in the United States. We used to receive daily truck deliveries that were just in time from these locations, which allowed us to keep low levels of inventory and reduce our cost base. Because of the tariffs, we've had to modify our flow of materials, and we are now getting these directly from Europe. They are coming directly by sea and land transportation to our plant in Mississauga. This, however, has created the need to have significant, additional inventory on hand at our Mississauga location at a significant cost, which impacts the cost of our product.

[Eric Humphrey]

North Bay is the plant that is most greatly impacted, both by the U.S. steel tariffs that have driven the market prices in North America, as well as by the Canadian import tariff on steel from the U.S. In this plant, we manufacture 90% of the coring rod that we produce globally. Thirty per cent of the product stays and is consumed within Canada, and 70% is exported globally from Canada.

We have about 172 employees at our North Bay facility. It's a diverse workforce that includes functions of human resources, engineering, sales, finance, and manufacturing. We also have a centre for product repairs and service. In this plant, we operate multiple shifts, on eight-hour and 10-hour schedules, and our workers there are members of the International Association of Machinists and Aerospace Workers. The average time of service is 12 years.

The steel that we consume and purchase in this plant has a country of origin in the U.S. I'll explain our supply chain in a little bit. Talking about our projected—

[The Chair, Liberal, Mark Eyking]

Excuse me, but your time is getting up there, so you'll have to tighten up a bit.

[Eric Humphrey]

All right. I'm going to consolidate, then.

The steel we purchase comes from the United States. It's in a hot roll form. It is then transformed by our steel tube suppliers. We have one supplier that does this in the United States, and one supplier that does this in Canada. Both of them source the material in the U.S., because they're able to hold tolerances specific to our products that are not normal in the industry. They run specific batches for us and transform.

We've worked with the tube suppliers developing product for over 12 years. Again, that is not globally common. It's very specific to our products and process. We then import the material into Canada. It's subject to the higher cost of raw materials in the U.S. and Canada that we are seeing, because of the U.S. tariffs and the duty we pay to Canada.

So far this year, we've paid $800,000 in duties to Canada for the importation of these products. We have submitted duty drawback claims for this, and those are in process now. It's a large impact to our business. Annualized at a normal production rate, this would have a $12 million-per-year impact on us in duties.

We've seen our demand for products go down since July of this year, caused by both the raw material cost increases for the materials we buy in the U.S. and the increase in costs we have based on the tariffs we have to pass to our customers. As a result, we started three-shift production this year, which was an increase of one shift from last year. We started with the view that in 2018 we would have a 20% increase in sales volume. Once we saw these tariffs, we reduced our outlook to a one-shift production level, with potentially many weeks of idling our manufacturing plant.

It's very significant to us. The panel that spoke before talked about the flow of material coming from the U.S. and the stockpile of raw material. We are also burning through that level of material, and as we begin next year, we are unclear on the impact of tariffs, and our customers' ability to accept these cost pressures.

We've reviewed the most recent provisional safeguard measures, which will be in effect on October 25. We reviewed the materials that were identified in this process, and it appears that 94% of the tariffed material coming into Canada would be removed or we could possibly avoid the tariff. A remaining 6% of items that are currently under tariff were not listed on that safeguard measure attachment. The remaining impact to us would be about $720,000 a year. It still has some impact on us.

The most important point to leave you with is that our competitors, who also produce similar product in the world market, don't manufacture in Canada. They manufacture on other continents, and they purchase raw materials from other continents, either Europe, Asia or Latin America. When they do that, they're purchasing raw materials at a lower cost than the North American level, and they are also not subject to tariffs when they import those products into Canada or when they sell globally, where we also compete.

We are at a competitive disadvantage. We're trying to understand how long these tariff impacts will last, and we're making our decisions on where we invest, and where we recapitalize our business. Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you.

We are going to move over to Welded Tube of Canada.

Mr. Young, you have the floor.

[John Young, Executive Vice-President and Chief Operating Officer, Welded Tube of Canada Corp.]

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.

[The Chair, Liberal, Mark Eyking]

Thank you, gentlemen.

We're quite a bit over time here on presentations, but I think the information you are giving us is very important.

We have time for one round, and I'm going to ask members to take just four minutes. Get your questions in quickly so we can have good dialogue. You have four minutes each, and we are going to start with the Conservatives.

Mr. Carrie, you have four minutes.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I will do one quick question, and then my colleague will do a question.

Have you calculated how much your cost of doing business has increased since the tariffs have been set? Anybody may answer.

[John Young]

If I translate that to profit—using that language—we've been inundated. If you look at our profitability, or basically what we get, it's been eroded for a number of reasons.

Number one is that transportation costs in Canada and the U.S.A. have gone up significantly, for both rail and truck. Steel prices in the U.S. went up extremely fast and high when the tariffs were imposed. Then, of course, you have the tariffs themselves. Virtually, if you look at a four-prong approach, we're left with only a very small part of what we used to have in terms of profitability.

[Colin Carrie, Conservative, Oshawa, ON]

Go ahead, Randy.